Does Selling RSUs Instead Of ESPP Shares Have a Material Effect On The 25K Contribution Limit For ESPP Shares?

Question

I am at a company with an ESPP program that allows you to purchase up to 25K in shares at a 15% discount every calendar year. The 15% discount applies to the lowest share price within the past 6 months. There are two purchases per year and they occur in May and November. Each of these purchases has a look back provision to when the last ESPP purchase occurred.

My goal is to hold onto the total number of shares awarded to me via RSUs and always sell the number of shares purchased via the ESPP. This is straightforward if I always sell the ESPP shares and hold onto the RSU shares.

I recently learned that the 25K ESPP limit is not really a hard limit, but rather a number that's calculated depending on the market discount you're receiving and also on the timing of the calendar year vs the ESPP purchases in May and November. I was informed by our stock admin department that I hit my 25K limit even though the total deductions used to purchase shares was something like $17K.

In this scenario, would it ever be advantageous for me to sell my RSU shares instead of my ESPP shares (the number of shares sold would be the same as if I sold my ESPP shares rather than my RSU shares)? If I shift the selling from the RSU shares to the ESPP shares, would it in certain circumstances, allow me to more fully take advantage of my max ESPP contribution limits (ie. I contribute and buy $21K in discounted ESPP shares instead of the $17K I was limited to this year).

I read and reread several documents on ESPP and how share basis is calculated but haven't been able to come to a conclusion based on what I've seen.

Answer 1

Selling RSUs instead of ESPP shares will have no effect on the $25k annual contribution limit for qualified ESPPs.

The $25k annual limit for ESPP purchases is based on the price at the start of the offering period. As an example, if the price of your company's stock is $20 at the start of the offering period and $15 on the purchase date (let's assume an annual plan instead of every 6 months), you're only able to purchase 1,250 shares ($25,000 / $20), even though you'd be buying them at $12.75 (0.85 * $15). That would be $15,937.50 for the year, and it's why you aren't able to buy more shares even though the amount you paid is less than $25,000.

Also, note that the lookback provision will apply the 15% discount to the price 1) at the start of the offering period or 2) on the purchase date, whichever is lower. It won't apply the discount to the lowest price between those two dates.

From a tax perspective, you may (or may not) benefit from selling different sets of shares, but it wouldn't have any impact on how many shares you can purchase through your ESPP that year.