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Allowing participants of an Employee Stock Purchase Plan (ESPP) to purchase fractional shares seems financially preferable to ESPP participants than not allowing them to do so, since purchasing fractional shares allows participants to always reach the yearly maximum of 25,000 USD set by the IRS (maximum in 2021).

Example if not allowing ESPP participants to purchase fractional shares:

  • $25,000 USD contributed
  • $900 USD purchase price (stock price)
  • 27 shares would be purchased ($25,000 / $900=27.77)
  • $700 (= $25,000 – (27 shares X $900)) won't be used toward the stock purchase: only 24,300 USD (=25,000-700) is used for purchasing stocks within the ESPP.

Why don't some ESPPs allow participants to purchase fractional shares?

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    Preferable to whom? Maybe to the employee, but perhaps not to the employer who has to track fractional shares.
    – chepner
    Apr 28, 2021 at 20:42
  • @chepner financially preferable to ESPP participants. I thought the broker would handle fractional shares. Apr 28, 2021 at 20:46
  • It's probably a legacy infrastructure issue. A lot of finance computer systems are old.
    – quid
    Apr 28, 2021 at 21:09
  • What happens if you are over the maximum? Do you lose the tax benefits, or do things become worse? 28 shares would be $25200. If $25000 do have a tax benefit and $200 don't, that won't be spoiled money, it's still yours. (Idk how these types of accounts work.) Or will the $700 be left in the account and can be used in the next year?
    – glglgl
    Apr 29, 2021 at 10:21

1 Answer 1

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wild_b_cat gave the following explanation (mirror):

Fractional shares require special handling on the part of the brokerage, and ESPP shares are weird because they're not purchased on the open market but rather released from a company-wide share pool. So the logic around figuring out partial shares is gnarly.

In other words, brokers need to purchase whole shares from the market, then manage fractional shares across their customers, hence some ESPPs don't allow participants of to purchase fractional shares to keep things easier to manage.

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