$25,000 IRS Limit - ESPP

What is the $25,000 IRS Limit?

For ESPPs like Upstart’s, the IRS limits share purchases to $25,000 worth of stock in one calendar year for tax reasons.

How does the IRS-required $25,000 limit work?

The IRS limits ESPP purchases to $25,000 worth of stock in one calendar year. If an offering period extends over more than one calendar year, the limit is $25,000 worth of stock for each calendar year in which the offering period is in effect. This means that if a portion of an individual’s $25,000 limit for a calendar year remains unused, it will rollover to the next calendar year if the same offering period is in place.

For purposes of calculating whether the $25,000 annual limit has been reached for a specific ESPP period, Upstart is required to use the closing price of Upstart’s stock on the first day of the ESPP offering period (not the last day or the lower of the two dates).

Hypothetical Example

If you started participating in the ESPP when it was first launched in December 2020, for purposes of this IRS limit, you would have $25,000 for 2020 and $25,000 for 2021 for a total IRS limit of $50,000 related to the first ESPP period that ended in August 2021. Hypothetically, if you had purchased $32,000 of ESPP shares in August 2021, you would have had $18,000 left under the IRS limit for 2021. This $18,000 would carryover to 2022, and your IRS limit for 2022 would be $43,000 ($18,000 from 2021 and $25,000 for 2022).

At the beginning of the ESPP period from 8/15/21 to 2/15/22, Upstart’s stock price was approximately $200. So the most you could have purchased on 2/15/22 under this $25,000 IRS limit would have been 214 shares ($43,000/$200), even though the stock price on 2/15/22 was approximately $109. This is because the IRS rule requires Upstart’s stock to be valued as of the first day of the ESPP offering period (i.e. $200) for purposes of this calculation. If you had purchased 214 shares or a number of shares close to 214 on 2/15/22, you would have exhausted most of the 2022 amount permitted under the $25,000 IRS limit at that time. And there would have been very little left to purchase under the $25,000 IRS limit on 8/15/22.

What happens to the contributions from my paycheck if they weren’t used to purchase ESPP shares? Will I get that money back and when?

Any contribution amount in excess of what you were able to purchase will be refunded to you in your paycheck as soon as administratively possible. It will not stay in your Schwab account.

If I used all of the $25,000 IRS limit during one offering period, will I be able to purchase any ESPP shares in a subsequent ESPP offering period that crosses calendar years?

Yes, if an ESPP offering period crosses calendar years, you will have a new $25,000 limit in the new calendar year. You would divide that amount by Upstart’s stock price at the beginning of the current ESPP period to determine the maximum number of ESPP shares you can purchase at the end of that offering period..

Where can I get more information on this $25,000 IRS limit for the ESPP?

Please refer to Question 16 of the ESPP Prospectus for more information on how the $25,000 IRS limit works or contact Schwab Stock Plan Services at 1-800-654-2593.

You can find more information about stock administration here or ESPP here.