Employee Share Savings Program is a unique offering by some companies to their employees to save and invest money while enjoying potential tax benefits.
What is an ESSP?
ESSP stands for Employee Share Savings Program, and it's a unique offering by some companies to their employees. Simply put, it's a program that empowers you to save and invest money while enjoying potential benefits.
What are potential benefits with an ESSP?
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Tax Benefits: One of the most attractive aspects of ESSPs is the potential for tax savings. In many countries, your contributions to an ESSP are made on a pre-tax or tax-deferred basis. This means the money you contribute isn't immediately subject to income tax, effectively lowering your tax bill.
For instance, in Norway, Sweden and Demark, ESSP contributions are often tax-deferred, meaning that employees pay less income tax on the portion of their salary that goes into the ESSP. The investment gains earned within the ESSP account are typically tax-deferred which means that employees only need to pay capital gains tax on the investment profits when they withdraw the investment gains. - Convenient Savings: Automatic payroll deductions make saving and investing simple. The contribution gets deducted directly from your salaries once you decide how much you want to contribute.
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Employer Matching: Companies usually offer matching contributions as employee benefit.
Ownership and Portability: Shares acquired through an ESSP are typically owned by the employees, giving them control over their contributions and investments. If employees leave the company, they can often transfer or rollover their ESSP accounts to another financial institution or retirement plan.
How Does an ESSP Work? (in Norway)
- Enrollment: To get started, you need to enroll in your company's ESSP. Eligibility criteria might apply, so check with your employer.
- Contribution Selection: Decide how much money you want to contribute to your ESSP, usually as a percentage or fixed amount of your salary.
- Payroll Deductions: Your contributions are automatically deducted from your paycheck and placed into your ESSP account.
- Investment Choices: Your money will typically be used to buy company shares.
- Potential Tax Benefits: The tax benefits depend on your country's laws, but generally, contributions and investment gains are tax deferred. Capital gains tax need to be paid when you withdraw the funds.
- Holding Period: To qualify for the tax benefits, there may be a minimum holding period requirement for the ESSP investments. If shares are sold before that, they may not be eligible for the tax-deferred treatment.
- Withdrawal Flexibility: The timing of withdrawals is up to you. Keep in mind that there may be tax implications when you withdraw the money.