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).
The GESPP is offered as part of Shell's effort to tie its employee's financial success to the company's, but what is most 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 a lot of money. In addition to the 15% discount, there are tax benefits to the GESPP that most employees are unaware 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 factors you should consider.
Unlike many of Shell's other benefit plans, any employee who wishes to participate in the GESPP can do so at any time during their employment.
If you want to participate in the GESPP for 2024, you must re-enroll even if you were enrolled previously. Generally, you need to re-enroll by the 15th of the month before wanting to start contributions.
All contributions to the GESPP are deducted from your payroll—similar to how it works for your Shell Provident Fund. You can contribute to the GESPP for 11 months of the year, from January to November. No contributions are allowed in December. For those who participated in the GESPP before 2019, this 11-month contribution window requires adjusting how we think about the tax ramifications of liquidating vested stock from the GESPP in the future. More on that topic is below.
Annual contribution limits for the GESPP are based on EUR 6,000. The amount that U.S. employees can contribute to the GESPP has gone up for the year 2024 as the euro strengthened against the dollar in 2023. The 2024 GESPP maximum contribution for US Shell employees is $6.335.
The U.S. dollar equivalent is set as of November 1st from the prior year. Because the dollar strengthened in value compared to the Euro last year, U.S.-based Shell employees saw an increase in contribution limits for the GESPP. For 2023, EUR 6,000 was worth $5,984 as of November 1st, 2022. For 2024, that number increased to $6,335 (as of November 1st, 2023).
Additionally, the GESPP gives 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 the fair market value
2) A look-back provision
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 Fidelity Individual account 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. The tax implications of participation in the GESPP will vary according to your unique circumstances.
You do not receive the benefit of dividends from the Shell stock before vesting (unlike Performance Shares). Still, you do receive dividends in the future once the shares have been vested in your Fidelity account. Once the shares are 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.
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. Let's consider an example that shows the price advantage we discussed above:
The GESPP offers a 15% discount from the market price, so you're already getting a great benefit by participating in the plan. For example, if the price of Shell stock is $65.39, the GESPP allows for the purchase of shares at $55.58 per share—a 15% discount!
A look-back provision allows Shell to look at two dates, the offer, and the purchase date, and apply the discount to whichever date has the lower price.
Let us look at 2023 as an example. In 2023, Shell stock was valued at $55.98/share on the first trading day of the plan year (closing price on the offer date, 1/3/2023), and $65.90/share on the first trading day after the end of the plan year (closing price on the purchase date, 1/3/2024). The 15% discount is applied to the purchase date price since it is the lower of the two.
Because Shell stock increased in value throughout 2023, $55.98 is already a low price to buy Shell stock. By participating in the GESPP, using the lower of the two prices, and adding the 15% discount, your discounted price for SHEL is only $47.58 — a steal! The ability to look back in time and apply the discount to the lower of two price points is tremendous for participants in added value!
When oil prices drop, we see many Shell employees worrying about the effectiveness of their GESPP and other Shell benefits; however, the benefit of the GESPP compounds in years like 2023.
In 2023, Shell's stock prices increased by almost 15%, so Shell employees get an additional increase in the value of the stock they purchase in the GESPP. Even in low-priced years, Shell employees still get an additional 15% discount on SHEL and can get a significant number of shares at that price.
Let's consider what it may have looked like for Shell employees who chose to max out their GESPP (contributing $5,954) in 2023.
Closing Price for SHEL on 1/3/2023: $55.98
Closing Price for SHEL on 1/3/2024: $65.39
Discounted Price for 2023 GESPP Shares: $47.58
If you maxed out your GESPP contributions in 2023, you could get 125 Shell shares through your GESPP. Suppose we hypothesize that Shell stock increases in value to $70 a share in 2024. In that case, your 125 shares would increase to $8,760 in value, offering you an added value of almost $3,000!
There are numerous ways Shell executives can accumulate company stock. While these programs allow you to maximize your purchasing power, they can also over-concentrate your portfolio. With an overconcentration in company stock, you may be exposed to more risk than you desire.
Suppose you are taking advantage of the GESPP. In that case, you should ensure that you do not end up being over-concentrated in Shell stock. Paying attention to this over-concentration risk is even more critical if you are a Shell Performance Shares recipient. 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.
Many Shell employees believe the savings offered by the GESPP are the most significant benefit of the plan. While the initial savings on the stock purchases are a significant benefit on their own, there are financial planning opportunities that can offer tax savings over time as well.
When you buy Shell stock through the GESPP, you use after-tax dollars to make the purchase. It naturally seems that 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.
For those who qualify, you can sell the stocks purchased through the GESPP at a discount at tax-preferential capital gains rates instead of ordinary income rates.
Shell's plan's contribution window is only 11 months. You must hold the stock for 13 months from when it vests (becomes available within your Fidelity account) before you can sell it if you want to receive preferential capital gains tax rates.
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.
What Is a Qualified 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) You must have held the stock for at least one year from the original purchase date.
2) You must have held the stock for at least two years from the original offer date.
If a person meets these criteria, your received discount will be taxed as ordinary income. The gain over the discount will be taxed as capital gains.
What Is a Disqualifying Disposition?
A disqualifying disposition is anything that is not a qualified disposition. All gains from the purchase price of the Shell stock will be taxed as ordinary income instead of a portion taxed at preferential long-term capital gains rates. Depending on the gain and your tax bracket's size, this could be a big tax hit or a small tax hit.
Consider this: the max investment ordinary income rate is 40.8% (including the 3.8% Medicare surtax on investment income). The maximum long-term capital gains tax rate is 23.8%. That is a 17% difference!
In years when the price of Shell stock dips, there can be an opportunity for significant tax savings through a strategy known as Tax Loss Harvesting. This strategy allows you to "harvest" investment losses against your income, using the loss to bring valuable tax savings on your tax return. Let's suppose you have vested company shares at a loss that you're reluctant to sell at the current market price. If you sold some shares this year, you could realize those losses to offset realized gains from future sales. While this strategy can yield great opportunities for savings and allows you to de-concentrate from the stock holding, it can also be complicated and challenging to implement correctly. To ensure the proper timing and implementation of tax-loss harvesting opportunities for our clients, our team of financial advisors and on-staff CPAs looks at clients' portfolios regularly.
There are a few situations where it may not make sense for an employee to participate in the GESPP, primarily due to cash flow concerns. For most employees at Shell, the GESPP is a benefit you should plan to take advantage of. To implement the strategies we discussed above, or if you have questions about leveraging your Shell GESPP within your portfolio, reach out to one of our Shell benefits specialists.