Say you’re shopping and when you’re at the counter the cashier says, “Thanks for paying $150 for those shoes. Would you like to take with you an extra $40 as a thank-you for buying them?” Would you say no?
Let’s be real, your jaw would drop, you’d film the incident and it’d go viral because that doesn’t actually happen. Right? Actually, if one of the benefits you’re offered at work is an Employee Share Accumulation Plan (ESAP) that kind of does happen. That’s right, your employer is likely offering you free money and if you’re not enrolled in that plan, you’re missing out majorly. (The big money is in getting stock options but that comes later when you climb the ranks into top executive positions.)
When I got my first full-time job (benefits, the whole shebang) all of my more seasoned co-workers said the same thing. Join the ESAP. I was lucky enough to have their encouragement and didn’t end up wasting too much time before signing up for what my new employer was offering me. So how does this so-called promise of ‘free money’ work, exactly? Here’s what you need to know:
HOW DO STOCK PLANS WORK?
Here’s how it works if you work at a publicly-traded company (that’s when the company’s shares are available for anyone to purchase because it trades on the stock market): most employers let you enrol after a required number of months. You enrol and depending on what you can afford, choose to contribute a certain percentage of your paycheque.
Depending on your employer, you’re usually given the option of contributing anywhere between 1% and 10% of your gross pay. What most employers do is match a certain percentage of your contribution. As in, give you free money. Usually their contribution starts off as not a whole lot, matching maybe 25% of what you are putting in. But many companies boost their contribution to 50% after a certain period of time and to even 100% (though that type of generosity is pretty rare these days.) My fellow broke young folk—that should be your incentive to join your company’s ESAP ASAP! Even if you can’t afford to max out your contributions right now, you can work towards that goal and eventually get a lot of free money from your employer.
WATCH: How can I start saving money?
WHAT IS VESTING?
If you like the sound of an employee stock plan and have dreams of cashing out those sweet employer contributions in six months, think again. Generally, ESAPs have a required vesting period. As in you have to wait a certain number of months or years before the stock that your employer has purchased for you is ‘mature’ enough for you to withdraw. Then you can do with it what you will. That said, you may be able to cash out the shares you’ve purchased with your own contributions whenever you want, depending on your plan. So if you had $2,500 in total in your ESAP (including the 25% employer contributions) you’d be able to withdraw everything but that 25%, so $2,000.
HOW IS IT TAXED?
Well, your contributions to the plan aren’t tax deductible and if you decide to cash out the stocks you purchased with your own money, you’ll be taxed on the capital gains you make. Meanwhile, the employer match is usually considered taxable income and is included in your gross earnings on your paycheque, from which tax is then deducted. Even free money has a bit of a cost, I guess. But remember, the stock market is normally risky, but knowing your employer’s contribution means a guaranteed return of 25% to 50%, you can handle a little of tax to the government.
Keep in mind, if your company offers an RRSP or TFSA option, you could transfer the ESAP to those tax shelters so your future gains are protected or tax-deferred over the longer term. However, the act of transferring the shares will trigger capital gains so you’d have to pay taxes before seeing any benefit of going this route.
FINAL WORD (OF WARNING)
If your employer offers one, join that stock plan now. Like, right now. If you don’t have any other investments at all though, beware. As with any investment, there are risks. Employer matching may be a plum deal but regardless, you need to diversify. You can’t have all your eggs in one basket (i.e. your employers’ shares) because if they go down, you’re going down with them.
Be sure to check back for regular updates as Prajakta leads us on a journey as she learns what it takes to invest her own money.
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