Help understanding ESPP $25k limit

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
HEDGEFUNDIE
Posts: 3283
Joined: Sun Oct 22, 2017 2:06 pm

Help understanding ESPP $25k limit

Post by HEDGEFUNDIE » Wed Aug 14, 2019 12:56 am

My understanding is that the IRS limits ESPP purchases to $25k per year. And that the 25k is defined by the fair market value of the stock on the purchase dates.

Let’s assume the rules of my ESPP are I get to purchase shares twice a year (Jun 30 and Dec 31), at 15% off the lower of (1) the purchase date price or (2) the price six months prior.

Let’s say my company’s stock goes into full rocket ship mode over the course of the year. I’m talking 5x increase over 12 months, $20 on Jan 1, to $60 on Jun 30, to $100 on Dec 31.

Let’s assume on Jan 1, I intend to contribute $10k during the first offering period and $10k during the second offering period.

On Jun 30, I have accumulated $10,000 in paycheck contributions. The purchase price is $20 - 15% = $17, so I get $10,000 / $17 = 588 shares. I now get to sell those shares at $60 for a total amount of $35,280. But this would exceed the IRS limit of $25k. So what happens next?

Iridium
Posts: 502
Joined: Thu May 19, 2016 10:49 am

Re: Help understanding ESPP $25k limit

Post by Iridium » Wed Aug 14, 2019 1:09 am

Worst thing that might happen is that the ESPP will buy as many shares as it can for you and then refund the rest of your contribution to your paycheck. The best case is that your plan interprets the IRS's rules as saying that the limit is based on fair market value at the date of grant (the beginning of the purchase period) in which case, the stock growth doesn't count.

HawkeyePierce
Posts: 630
Joined: Tue Mar 05, 2019 10:29 pm
Location: Colorado

Re: Help understanding ESPP $25k limit

Post by HawkeyePierce » Wed Aug 14, 2019 1:19 am

In 2018 I was in this exact scenario and wound up with more than $25k in ESPP purchases.

Our stock almost doubled during the year. Our ESPP rules are the same as yours regarding purchase price. The total bought based on the discounted purchase price was only $14k but the total FMV at the purchase dates was $27k.

So, either Schwab and my employer goofed and violated the IRS limit, or the limit is based on the FMV at grant date (or actual purchase price?) and not FMV at purchase date.

DarkHelmetII
Posts: 386
Joined: Mon Jul 24, 2017 12:25 pm

Re: Help understanding ESPP $25k limit

Post by DarkHelmetII » Wed Aug 14, 2019 1:21 am

In my experience across 2 employers, each with two different administrators / custodians, where I hit the $25k limit, the custodian automatically capped me. So I would follow along the paperwork to make sure everything is done correctly, but historically I have not had to proactively do anything.

Topic Author
HEDGEFUNDIE
Posts: 3283
Joined: Sun Oct 22, 2017 2:06 pm

Re: Help understanding ESPP $25k limit

Post by HEDGEFUNDIE » Wed Aug 14, 2019 8:50 am

So the $25k limit is actually fair market value at grant, not purchase.

So in my example, in the first offering period, $10k would count against the $25k.

Thanks everyone

Post Reply