December 23, 2018
An Employee Stock Purchase Plan is a benefit that allows employees to purchase company stock at a discount from fair market value.
U.S. tax law allows the discount to be as high as 15%. Shell Oil’s employee stock purchase plan is called the Global Employee Share Purchase Plan (GESPP).
What is the Shell General Employee Share Purchase Plan?
The GESPP is offered as part of the effort for Shell to tie its employee’s financial success to the company’s, but what is really valuable is the discount that goes along with the GESPP plan. Over time, being able to consistently purchase stock year after year at a 15% discount can add up to be a lot of money. In addition to the 15% discount, there are tax benefits to GESPP that most employees are not aware of, which I will explore in more detail below. For most, this is a plan you do not want to miss when you include the value of the discount and the tax benefits.
Let us dive further into how Shell’s General Employee Share Purchase Plan works, what the benefits may be, and what tax considerations need to be taken into account.
How to Re-enroll in the Shell General Employee Share Purchase Plan
Historically, most employees at Shell enrolled once in the GESPP and then they were re-enrolled each and every year—but that’s not the way it’s going to work for 2019. Shell has changed the structure of the GESPP, which means if you want to participate, you must re-enroll.
Let me say that one more time. If you want to participate in the GESPP for 2019, even if you have been enrolled previously, you must re-enroll.
How soon do you need to re-enroll? Generally you need to re-enroll by the 15th of the month prior to wanting to start contributions. Remember all contributions to the GESPP are deducted from your payroll—similar to how it works for your Provident Fund.
To re-enroll (or sign up for the first time) go to ComputerShare. After enrolling for 2019, Shell should automatically re-enroll you for future years…well…as long as they don’t make any other changes to how the GESPP works.
What has Changed in the Shell General Employee Share Purchase Plan?
Wait the GESPP changed? How so?
The major change is that the contribution period has decreased from 12 months, January to December, to only 11 months, January to November, starting in the 2019 year. Overall, this is not a big deal, but it does require an adjustment to how we think about the tax ramifications of liquidating vested stock from the GESPP going forward. More on that topic below.
The other change is the contribution amount, which has historically been adjusted every year. Annual contributions are based on EUR 6,000. The U.S. dollar equivalent is set as of November 1 from the prior year. So, for 2019, EUR 6,000 is worth $6,827 as of November 1st, 2018.
Well, guess how that compares to last year…
Yup, the dollar has strengthened in value to the Euro compared to last year, which means– for U.S.-based employees– the amount they can contribute to the GESPP for 2019 has declined compared to what they could contribute in 2018.
The Price Advantage of the Shell General Employee Share Purchase Plan
The GESPP will likely give employees a discount on the purchase price compared to buying Shell stock on the open market. Specifically, the price advantage comes in two forms:
1) A discount from fair market value
2) A look-back provision
The GESPP offers a discount of 15% from the market price.
For example, if the price of Shell stock is $55.22, the GESPP allows for the purchase of shares at $46.94 per share—a 15% discount
The other price advantage is the lookback provision.
A look-back provision allows Shell to look at two dates, the offer, and the purchase date, and apply the discount to whichever is less.
Let us look at 2017 as an example. In 2017, Shell stock was valued at $55.22/share on the first trading day of the plan year (offer date), and $68.04/share on the first trading day after the end of the plan year (purchase date). The 15% discount is applied to the offer date price since it is the lower of the two.
Even though Shell stock declined intra-year beneath the $55.22 share price, it never neared the discount price of $46.94. The ability to look back in time and apply the discount to the lower of two price points is huge for participants in value add!
Receiving the Shares – Your Fidelity Individual Account
For US-based employees and residents, the vested shares are deposited into a Fidelity Individual account in your name at the end of January. (This is the same account you will receive Shell Performance Shares in if you are eligible.) Taxes are withheld by selling an appropriate amount of shares based on your supplemental tax rate to cover the GESPP discount. For most employees, the supplemental tax rate is 22%. You do not receive the benefit of dividend from the Shell stock prior to vesting (unlike Performance Shares), but you do receive dividends going forward once the shares have vested in your Fidelity account.
Once the shares have been deposited into your Fidelity Individual account, you can sell them at any point in time. But before you do, make sure you understand the tax ramifications!
The Tax Advantage of the Shell General Employee Share Purchase Plan – A Qualifying Disposition
When you buy Shell stock through the GESPP, you use the after-tax dollar to make the purchase. So it naturally seems as if when you receive the Shell stock it should be tax-free, right? Wrong. The IRS views the 15% discount that you receive as a form of compensation. So, Shell will withhold taxes on the effective discount in stock from the purchase price.
Upon selling the stock, you may owe taxes on the difference between the purchase price and the sale price. The tax rate you pay may be ordinary income, long-term capital gains, or a combination depending on whether you receive a qualified disposition or disqualifying disposition.
To receive preferential tax rates on the sale of proceeds from your GESPP, you must have a qualified disposition. To do so, you must meet the following rules:
1) The stock must have been held for at least one year from the original purchase date.
2) The stock must have been held for at least two years from the original offer date.
If a person meets these criteria, the discount received will be taxed as ordinary income, and the gain in excess of the discount will be capital gains.
For Shell, since the plan year changed from 12 months to 11 months, this now means you must hold the stock for 13 months from when the stock vests (shows up in your Fidelity account) before you can sell it if you want to receive preferential tax rates.
What Is a Disqualifying Disposition?
A disqualifying disposition is anything that is not a qualified disposition. All gains from the purchase price on the Shell stock will be taxed as ordinary income as opposed to a portion taxed at preferential long-term capital gains rates.
Depending on the size of the gain and your tax bracket, this could be a big tax hit or a small tax hit. To give some perspective the max investment ordinary income rate is 40.8% (including the 3.8% Medicare surtax on investment income) and the max long-term capital gains tax rate is 23.8%. That is a 17% difference!
Should Everyone Take Advantage of the GESPP?
We believe that most employees should plan on taking advantage of the GESPP. To some extent the discount and the ability to purchase at the lower of the two prices is similar to a company’s match to a 401(k)–it is like free money. Of course, there are always certain years and situations where the GESPP discount may not work out to due Shell stock movement, but we think that is unlikely.
There are situations where it may not make sense for an employee to participate in the GESPP, primarily due to cash flow concerns, but for most, it is a benefit you should plan to take advantage of.
If you are taking advantage of the GESPP you should make sure that you do not end up being over-concentrated in Shell stock. This is even more important if you are a recipient of Shell Performance Shares. If you have your job, your investments, your bonus, and your benefits all tied up in the success of one company, you may have a higher concentration of risk than you intended. Make sure you have a tax-efficient company stock diversification plan in place.
If you have further questions concerning your Shell GESPP, contact your advisor, or reach out to one of our Shell benefits specialists.
Nick Johnson, CFA®, CFP®
Nick Johnson believes that financial planning is more than numbers on a balance sheet and a standardized process. People are unique and should be treated as such.
As Vice President and Wealth Manager at Willis Johnson & Associates, his goal is to really get to know his clients, all the while providing a proactive approach to comprehensive wealth management.
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