She works hard for the money, so you’d better … help her afford to buy company stock

by Beth Nedrow and Kevin Selzer

Employee Stock Purchase Plans (ESPPs) are a program offered by many companies (particularly those with publicly traded stock) as a way for all of their employees to buy company stock. In their most robust format, employees can buy stock at a discount. You’d think employees would jump at the chance to capitalize on this immediate value opportunity. Not so! Employee participation rates are typically fairly low (often below 50%). Employers who offer ESPPs strive for ways to engage employees to appreciate and participate in this valuable benefit. Those employers may be interested to hear that a startup company is making headlines for its product aimed at boosting ESPP participation.

In an ESPP, the employee must agree to reduce take-home pay over a specified period of time. The employer keeps track of the set aside money, and at the end of the period will purchase company stock for the employee, often at a discount. The purchased stock is not subject to forfeiture or any other restrictions. With this simple structure and virtually certain financial benefit, why don’t more employees participate? If our years of experience with 401(k) plans have taught us anything, we know that workers are reluctant to elect to reduce take-home pay. A startup company named Carver Edison has proposed a simple solution – it offers loans to employees to participate in an ESPP, to cushion the impact of reducing take-home pay. Nothing in ESPP rules would prevent an employee from borrowing on their own in this situation. But what is unique about Carver Edison’s product is that the startup won’t make money on the loan the old-fashioned way, via interest. Instead Carver Edison will participate in gains above a threshold level so that the risk of the loan to the employee is low. 

In December of last year, a client of Carver Edison received a private letter ruling from the IRS blessing the arrangement under the ESPP tax rules (PLR 201911002). The ruling, albeit only applicable to the taxpayer who requested it, opens a window of possibilities for other ESPP sponsors. Companies who are seeking to boost their ESPP participation rates through this type of employee loan option will still need to take into account other tax considerations, such as rules relating to employee loans. If nothing else, however, this development may shine a spotlight on ESPPs as a benefit offering and may spark other new products or educational materials that will help the industry.

For more information on ESPPs or questions on this type of employee loan arrangement, please contact a member of Holland & Hart’s Benefits Law Group.