Warning: benefit-related post

Since djb brought up DRIPs and stuff like that, I wanted to put this out there and see what kind of response I got. One of the programs at my company is a stock purchase plan (SPP) that full-time employees can participate in. Basically you can elect to have up to ten percent of your gross pay withheld for stock purchase. Purchase periods run six months each. At the end of the six month period, you receive a stock certificate for the shares bought with the withheld earnings, although your acquisition price is 0.85 of the market price at the close of the period. The company is apparently funding that 15% difference, your benefit for participating in the program.

Curiously, the company has less than one-third participation in this program (one can tell from certain email distribution lists), and most that do participate do so at withholding levels lower than ten percent. I was one of those persons too until a coworker and I sat down and crunched some numbers. We had been both been in the plan long enough that we had a fair number of shares we'd been holding for years. Given that, we thought, why not go to full ten percent participation for each period and at the end of each six months just sell the extra shares that we don't care to hold long-term?

Consider my coworker's situation: He had been participating to the tune of only two percent of his gross. I don't know what he earns -- let's suppose it's 75k per annum -- in which case he was buying $750 worth of stock every six months and holding it. If the stock is trading at $10/share at the close of the six months, then he acquires at $8.50/share and receives 88 shares and a couple bucks remainder. Now suppose instead he were to partipate at the maximum level, but at the end of the six months sells the difference in shares between ten percent and his usual two percent. In that case he has $3750 withheld, receiving 441 shares at the end of which he immediately sells 353 so he has his customary 88 left over to retain long-term. He receives about $3530 on the sale of the increment. Of course, he did have to make do without $3000 of his usual take home pay for the six months, but nets an extra $530 for his trouble in the end, better than a 17% return on his money in half a year.

Tax-wise, if my coworker has a large number of shares he's been holding from past participation in the program, his 353 shares could be sold from his long-term holdings, which I'm pretty sure get nicer tax treatment. Otherwise he calls it a short-term capital gain, and may have to report the sale to the company for additional tax (W-2) withholding. Regardless, from what I described here is there some big downside that I'm just missing? Because when I think of the SPP this way, it starts to resemble employer 401(k) matching in the sense that there's "free money" there for the taking. Granted, 401(k)'s are often not fully subscribed either, but the psychology there is a little easier to understand because people are walking away from money that they wouldn't have until 2030 or some such year. With the SPP, you can have the extra money in your hands in six months.

It gets spookier. Next quarter, if all employees were to suddenly experience an epiphany and we saw 100% enrollment in the 401(k), that's no skin off my teeth. I'm pretty sure the company would still put up their paltry match for everyone. With the SPP it's different though. The company's obligation to supply shares for the SPP program is finite. If the plan is oversubscribed in terms of shares, everyone's participation gets prorated and curtailed. This strikes me as an unstable situation: while it would seem to be to everyone's advantage to participate to the full extent of the SPP, the SPP as written will not support that! The only way my coworker and I get to enjoy the status quo ante is if most employees continue to not participate, so the prudent course of action (I suppose) is to not talk about the SPP with coworkers!