CVS ESPP drops to 10%

[mentos]

I just found out that the CVS ESPP discount is dropping to 10% in January. Do you guys think it is still worth it to invest? I am currently contributing 15% of my paycheck to it, not sure if I should reduce it or not.

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[MindGeek]

I am currently contributing 15% of my paycheck to it

This seems too high. And are you putting 15% of your paycheck to your 401k too?
I've heard some say that post-Enron, post-Worldcom, post-Sunbeam you shouldn't put more than 2% of your paycheck toward your employers stock, but the average employee stock holding in their employer in a 401k is at 16%, down from 19%. Note that is in a retirement account.

Just because you can buy a max of $21,250 every year in the ESPP doesn't mean that you necessarily should. Not sure about CVS 401k matching but this may be a source of confusion. ESPP gives a 10% built in return. 401k matching gives a 100% built in return. If CVS says they match 401k contribtions up to $X, that gives you 100% built in return on you first $X amount of dollars. Basically don't even think about ESPP until you're set to reach their 401k match minimum. Hopefully you're at the 401k maximum and the ESPP is just a way for investing 'fun money' instead of an ordinary brokerage account, though being locked in for 2 years is less fun.

 

[Dr Wario]

I have been maxing the ESPP for 5 years now but have always sold the instant that I could and reinvested the money, this has netted me a very nice profit without taking on the risk of having significant investments in your place of employment.

 

[mentos]

This seems too high. And are you putting 15% of your paycheck to your 401k too?
I've heard some say that post-Enron, post-Worldcom, post-Sunbeam you shouldn't put more than 2% of your paycheck toward your employers stock, but the average employee stock holding in their employer in a 401k is at 16%, down from 19%. Note that is in a retirement account.

Just because you can buy a max of $21,250 every year in the ESPP doesn't mean that you necessarily should. Not sure about CVS 401k matching but this may be a source of confusion. ESPP gives a 10% built in return. 401k matching gives a 100% built in return. If CVS says they match 401k contribtions up to $X, that gives you 100% built in return on you first $X amount of dollars. Basically don't even think about ESPP until you're set to reach their 401k match minimum. Hopefully you're at the 401k maximum and the ESPP is just a way for investing 'fun money' instead of an ordinary brokerage account, though being locked in for 2 years is less fun.

I contribute up to the match for 401k (free money) and then max out my Roth IRA. I have close to 100k saved up for retirement across 401k, Roth IRA, and HSA but thanks for the concern.

At my previous job, I also contributed the max to ESPP and I sold immediately for a nice profit. At 15% discount it was a no brainer for me. At 10% I'm not so sure but I think it's still worth it.

 

[wagrxm2000]

How long is the holding, the market is very iffy right now and 10% may not hold up. If its 3 months I'd say its safe but sell immediately and invest elsewhere. 6 months is too long, that 50% drop is right around the corner.

 

[MindGeek]

thanks for the concern

Wow, looks like you and @Dr Wario have great long running strategies for capturing gains and reducing risk.
It's just a matter of if CVS stock is worthy of investment today to hold onto for the next two years.

 

[mentos]

It's two years to qualify for long term capital gains tax rate. If you sell before that then you have to pay short term capital gains. Maybe I will decrease my contribution from 15% to 5 or 10%.

 

[josh6718]

I have been maxing the ESPP for 5 years now but have always sold the instant that I could and reinvested the money, this has netted me a very nice profit without taking on the risk of having significant investments in your place of employment.

Do you sell as soon as you can regardless of a qualifying vs. disqualifying position?

 

[sosoo]

u can sell 1 yr from purchase date......... i also received letter saying 10% now. with high price, low discount, its not worthwhile. ....

 

[mnoble]

Luckily price has gone lower just in time for the end of the current period, I believe tomorrow's closing price will be what they use.

 

[BIOGUY2119]

You should donate that 15% to charity instead of helping an evil corporation. I think it's a horrible investment IMHO and they are the last stock I would invest in at this time. Learn stocks my friend, much more lucrative way to invest your money.

 

[Dr Wario]

I think it's a horrible investment IMHO and they are the last stock I would invest in at this time. Learn stocks my friend, much more lucrative way to invest your money.

???

 

[Dr Wario]

Do you sell as soon as you can regardless of a qualifying vs. disqualifying position?

I typically sell before it becomes a qualifying dispensation, the tax difference has not been that great due to the stock's movement pattern and I like moving the money into my real estate.

 

[northeast-southwest]

Yes. 10% is still a significant amount and there is a greater chance that this would make you money in comparison to other investments.

 

[BMBiology]

CVS rallied 5% today. Increased low end guidance and boosted dividend. Now you know where all the cuts are going....right into investors' pocket.

http://finance.yahoo.com/news/cvs-h...wMwBHJlZ2lvbgNVUwRzeW1ib2wDQ1ZT?.tsrc=applewf

 

[deleted723470]

I have been maxing the ESPP for 5 years now but have always sold the instant that I could and reinvested the money, this has netted me a very nice profit without taking on the risk of having significant investments in your place of employment.

^this exactly. Personally, I would not take the risk of investing in CVS long-term, only short term commitments then reinvest.

 

[mentos]

I typically sell before it becomes a qualifying dispensation, the tax difference has not been that great due to the stock's movement pattern and I like moving the money into my real estate.

How do you file taxes if you sell as a disqualifying dispensation? Is it reported as regular income? Is it easy to do with a program like TurboTax?

 

[pezdispenser]

How do you file taxes if you sell as a disqualifying dispensation? Is it reported as regular income? Is it easy to do with a program like TurboTax?

TurboTax should have a part to guide you through it. They even have a webpage explaining it:
https://turbotax.intuit.com/tax-too...s/Employee-Stock-Purchase-Plans/INF12047.html

Note that regardless of whether you do a qualifying or disqualifying disposition, part of it will still be taxed as regular income. For example:

The price on the first day of the window 7/1/14 was $76.04 and the last day 12/31/14 was $96.31. On 12/31/14 you get to purchase at 15% off the lower of the two, so $64.634 and say you buy 100 shares = $6,463.40.

If you sell now in Jan 2016 for $95, it is a disqualifying disposition because it hasn't been 2 years from the offering date 7/1/14 yet. So CVS will put on your W-2:

$96.31 - $64.634 = $31.676 x 100 = $3,167.60

which will be taxed as regular income.

Now if the cost basis at your broker only shows $6,463.40 then you must adjust it by the $3,167.60 to make sure you don't get taxed twice on this amount. So the adjusted cost basis is $9,631.

Now you will actually take a small long-term capital loss because:

$9,500 (sale proceeds) - $9,631 = -$131

Summary:
$3,167.60 regular income
-$131 long-term capital loss
=======
$3,036.60

---------------
If you sell after 7/1/16 so that it is a qualifying disposition, the taxation will be different. The amount taxed as ordinary income will be the price at the beginning of the offering period minus your purchase price:

$76.04 - $64.634 = $11.406 x 100 = $1,140.60

Once again, this amount will be put on your W-2 and you will have to adjust your cost basis:

$6,463.40 + $1,140.60 = $7,604

Now say you sell for the same $95, but after 7/1/16:

$9,500 - $7,604 = $1,896

This will be taxed as a long-term capital gain.

Summary:
$1,140.60 regular income
$1,896 long-term capital gain
=======
$3,036.60 (same for both scenarios)

However, the qualifying disposition will be taxed about $250 less because the long-term capital gain is taxed at 15%. So you should work it out using your particular stock prices and decide if it is worth it to wait for a qualifying disposition or not.

 

[BMBiology]

^ good summary. I would add that the effective tax rate for most pharmacists is 20% and capital gain tax is 15% so therefore the difference is just 5% in taxes.

 

[Dr Wario]

^ good summary. I would add that the effective tax rate for most pharmacists is 20% and capital gain tax is 15% so therefore the difference is just 5% in taxes.

The difference is not 5%, this will be taxed at your marginal tax rate which is likely to be 28% while capital gains is 15%, that means that the taxes go up around 90% higher than capital gains if they taken as ordinary income.

 

[BMBiology]

^ you are right. It is taxed at marginal tax rate and not effective tax rate.

 

[mentos]

TurboTax should have a part to guide you through it. They even have a webpage explaining it:
https://turbotax.intuit.com/tax-too...s/Employee-Stock-Purchase-Plans/INF12047.html

Note that regardless of whether you do a qualifying or disqualifying disposition, part of it will still be taxed as regular income. For example:

The price on the first day of the window 7/1/14 was $76.04 and the last day 12/31/14 was $96.31. On 12/31/14 you get to purchase at 15% off the lower of the two, so $64.634 and say you buy 100 shares = $6,463.40.

If you sell now in Jan 2016 for $95, it is a disqualifying disposition because it hasn't been 2 years from the offering date 7/1/14 yet. So CVS will put on your W-2:

$96.31 - $64.634 = $31.676 x 100 = $3,167.60

which will be taxed as regular income.

Now if the cost basis at your broker only shows $6,463.40 then you must adjust it by the $3,167.60 to make sure you don't get taxed twice on this amount. So the adjusted cost basis is $9,631.

Now you will actually take a small long-term capital loss because:

$9,500 (sale proceeds) - $9,631 = -$131

Summary:
$3,167.60 regular income
-$131 long-term capital loss
=======
$3,036.60

---------------
If you sell after 7/1/16 so that it is a qualifying disposition, the taxation will be different. The amount taxed as ordinary income will be the price at the beginning of the offering period minus your purchase price:

$76.04 - $64.634 = $11.406 x 100 = $1,140.60

Once again, this amount will be put on your W-2 and you will have to adjust your cost basis:

$6,463.40 + $1,140.60 = $7,604

Now say you sell for the same $95, but after 7/1/16:

$9,500 - $7,604 = $1,896

This will be taxed as a long-term capital gain.

Summary:
$1,140.60 regular income
$1,896 long-term capital gain
=======
$3,036.60 (same for both scenarios)

However, the qualifying disposition will be taxed about $250 less because the long-term capital gain is taxed at 15%. So you should work it out using your particular stock prices and decide if it is worth it to wait for a qualifying disposition or not.

Thanks so much, pezdispenser! Even with your explanation, I find it confusing. I should put this into a spreadsheet.

 

[Dr Wario]

Thanks so much, pezdispenser! Even with your explanation, I find it confusing. I should put this into a spreadsheet.

It is confusing because it is confusing, the government makes the tax code confusing on purpose.

 

[mentos]

I have about 95 shares available to sell now. If you don't plan on selling, do you guys keep it in Computershare? Is there any advantage of the two transfer options, Transfer to Broker or Issue Shares?

 

[ldiot]

TurboTax should have a part to guide you through it. They even have a webpage explaining it:
https://turbotax.intuit.com/tax-too...s/Employee-Stock-Purchase-Plans/INF12047.html

Note that regardless of whether you do a qualifying or disqualifying disposition, part of it will still be taxed as regular income. For example:

The price on the first day of the window 7/1/14 was $76.04 and the last day 12/31/14 was $96.31. On 12/31/14 you get to purchase at 15% off the lower of the two, so $64.634 and say you buy 100 shares = $6,463.40.

If you sell now in Jan 2016 for $95, it is a disqualifying disposition because it hasn't been 2 years from the offering date 7/1/14 yet. So CVS will put on your W-2:

$96.31 - $64.634 = $31.676 x 100 = $3,167.60

which will be taxed as regular income.

Now if the cost basis at your broker only shows $6,463.40 then you must adjust it by the $3,167.60 to make sure you don't get taxed twice on this amount. So the adjusted cost basis is $9,631.

Now you will actually take a small long-term capital loss because:

$9,500 (sale proceeds) - $9,631 = -$131

Summary:
$3,167.60 regular income
-$131 long-term capital loss
=======
$3,036.60

---------------
If you sell after 7/1/16 so that it is a qualifying disposition, the taxation will be different. The amount taxed as ordinary income will be the price at the beginning of the offering period minus your purchase price:

$76.04 - $64.634 = $11.406 x 100 = $1,140.60

Once again, this amount will be put on your W-2 and you will have to adjust your cost basis:

$6,463.40 + $1,140.60 = $7,604

Now say you sell for the same $95, but after 7/1/16:

$9,500 - $7,604 = $1,896

This will be taxed as a long-term capital gain.

Summary:
$1,140.60 regular income
$1,896 long-term capital gain
=======
$3,036.60 (same for both scenarios)

However, the qualifying disposition will be taxed about $250 less because the long-term capital gain is taxed at 15%. So you should work it out using your particular stock prices and decide if it is worth it to wait for a qualifying disposition or not.

Why would you have to adjust your cost basis to an amount greater than what you pay? Is this simply because it is reported on your W2?

 

[pezdispenser]

Why would you have to adjust your cost basis to an amount greater than what you pay? Is this simply because it is reported on your W2?

Yes, that's the horribly confusing part, but it's crucial that you do it correctly otherwise you will get taxed twice on the same gain! Yes, it is because part of the gain is reported on your W-2 to get taxed as regular income (exactly how much depends on whether you made a qualifying or disqualifying disposition as shown in the example). But your broker doesn't take this into account. They only report the cost basis as the discounted amount that you paid. So you have to increase your cost basis by the amount on your W-2 to take it out of the capital gains tax calculation.

 

[pezdispenser]

I have about 95 shares available to sell now. If you don't plan on selling, do you guys keep it in Computershare? Is there any advantage of the two transfer options, Transfer to Broker or Issue Shares?

I have a different ESPP with ComputerShare and I think they charge $35 to sell through them, and $50 to transfer to another broker. So I will just go with the cheaper option and sell through ComputerShare when the time comes.

I believe Issue Shares means they will send you the share certificates, and there is probably a fee for this as well. It's very old fashioned and will cause you more problems when you want to sell your certificates so I wouldn't do this.

 

[mentos]

I have a different ESPP with ComputerShare and I think they charge $35 to sell through them, and $50 to transfer to another broker. So I will just go with the cheaper option and sell through ComputerShare when the time comes.

I believe Issue Shares means they will send you the share certificates, and there is probably a fee for this as well. It's very old fashioned and will cause you more problems when you want to sell your certificates so I wouldn't do this.

Thanks, I'll keep it in ComputerShare. I won't have to do anything fancy with taxes until I sell, right?

If we ever leave CVS, would we still have access to ComputerShare?

 

[pezdispenser]

Thanks, I'll keep it in ComputerShare. I won't have to do anything fancy with taxes until I sell, right?

If we ever leave CVS, would we still have access to ComputerShare?

Yep, that is the advantage of a "Qualified Section 423 ESPP" like CVS's and Walgreen's. You don't pay any taxes until you sell. If it were a non-qualified plan, then you would pay taxes on the discount portion when you buy the shares.

Yes, you will still have access to ComputerShare after you leave, and the shares are still yours to keep.

 

[zelman]

Yep, that is the advantage of a "Qualified Section 423 ESPP" like CVS's and Walgreen's. You don't pay any taxes until you sell. If it were a non-qualified plan, then you would pay taxes on the discount portion when you buy the shares.

Yes, you will still have access to ComputerShare after you leave, and the shares are still yours to keep.

Note: you do need to pay taxes on the dividend income. The IRS let me know that recently...

 

[Momus]

Note: you do need to pay taxes on the dividend income. The IRS let me know that recently...

CP 2000 notice? Lol

 

[zelman]

CP 2000 notice? Lol

That's the one.

 

[mentos]

What happens if you sell at a loss? You don't pay any taxes right? And carry over the capital loss to the next year?

I believe the 1/15-6/15 offering period was bought around $83/share which is a little above the current share price. I was thinking of selling at a small loss to use towards a down payment for a home.

 

[pezdispenser]

What happens if you sell at a loss? You don't pay any taxes right? And carry over the capital loss to the next year?

I believe the 1/15-6/15 offering period was bought around $83/share which is a little above the current share price. I was thinking of selling at a small loss to use towards a down payment for a home.

Yes, it is just a straight long-term capital loss, which you can deduct up to $3,000 from your income, or carry over the rest for future years. This is because it is a qualifying disposition (more than 2 years from offering date 1/1/2015, and more than 1 year from purchase date 6/30/2015).

If you did not meet this holding period it would be a disqualifying disposition and you would actually get taxed on the difference on the purchase date 6/30/2015 of $105 - $83 = $22/share as ordinary income! You would then have to add this amount to your cost basis resulting in an increased capital loss. But the net result may be the same as long as you're under the $3,000 limit of capital losses that can be deducted from income.

 

[mentos]

I just looked and the 6/30/15 purchase date was for 80.835/share. So it would be a tiny profit if sold today. A lot of paperwork for nothing.

 

[MatCauthon]

Not sure I would do 10% discount right now, especially now that we are 8 years into a bull market with the beginnings of a new presidency. Also, does CVS look like it has a ton of growth ahead of it? They have already expanded into almost every pharmacy market now.

 

[pezdispenser]

I just looked and the 6/30/15 purchase date was for 80.835/share. So it would be a tiny profit if sold today. A lot of paperwork for nothing.

Unfortunately CVS stock went down today, so you're probably at a loss again. But if you were to take a small profit, yes, you would have to take the difference between your sale price and the purchase price as ordinary income, add that to your cost basis, then I guess you'll have a small capital loss equal to your brokerage fees.

 

[MSerforfun]

Bump:

You know, when they granted stock options and a 15% discount on ESPPs, the stock was going up. Some were making close to $10,000 from the combination of both. Now employees are actually losing! Literally losing money for the latter holding periods (around mid 2015). If you max out the ESPP purchase, you're really gambling out an average of $20,000 of after tax money that you can't cash out for a year to year and half. Coupled with the fact that the discount was reduced to 10%, the risk of losing money and time value of money, I am not sure if it is worth it anymore.

 

[Dr Wario]

Bump:

You know, when they granted stock options and a 15% discount on ESPPs, the stock was going up. Some were making close to $10,000 from the combination of both. Now employees are actually losing! Literally losing money for the latter holding periods (around mid 2015). If you max out the ESPP purchase, you're really gambling out an average of $20,000 of after tax money that you can't cash out for a year to year and half. Coupled with the fact that the discount was reduced to 10%, the risk of losing money and time value of money, I am not sure if it is worth it anymore.

It may not have been worth it when the stock was overbought at >110/share but now that it is likely oversold at the current price of 81/share it is worth it to fund the espp to the max if you are able and don't have a better place to put the money. I would also say that CVS going to RSUs instead of options as employee incentives is a fairly good indication that upper management sees the share price going higher since this move will limit the benefit if prices increase significantly.

 

[pezdispenser]

^^^Agree with the above. Usually when a stock is down, that is the best time to buy. Similar thing happened to me with WBA. There were several times when the stock took a dive: losing Express Scripts, merger with Boots, generics pricing. When those things happened, of course the stock outlook was grim, employee morale was rock bottom, people were getting laid off, and I was living on beans and rice so I could buy more stock in the $40-50s. Of course the company turned things around and the stock doubled into the $90s. So I sold most of it and was able to pay off my mortgage.

 

[MSerforfun]

I am in it really for the following factors
1- Discount
2- Lower of the first and last day of the offering period.

I am not in it because it is CVS. If I was, I wouldn't have a single dime in a taxable account. Being compelled to hold the stock is risky business. You just never know.