Updates to the Cummins Employee Stock Purchase Plan
Last month, Cummins announced a change to its Employee Stock Purchase Plan (ESPP) allowing for additional savings on stock purchases from the company. Previously, Cummins provided a discount of 15% on stock purchased through its plan. This has now been expanded to a 25% match on purchases of stock up to 15% of the employee’s base salary. ESPPs are a great planning tool that can act as both an aggregator of wealth and align your financial performance with the performance of Cummins.
The Cummins ESPP, along with other company-sponsored stock ownership avenues, help employees increase wealth through company performance growth over time. As the company and stock perform well, employees reap the benefits through growth in their personal portfolio value. This is further amplified by the matching mechanism that Cummins has put into place, adding more opportunity for long-term gains. Since the shares are purchased and are not performance based, there are significantly reduced restrictions on selling your position, allowing far more flexibility for employees than with other stock ownership plans.
Unlike some other stock purchase benefits that Cummins offers, the ESPP is great for employees regardless of where they are in their career. New hires and early career employees can grow their wealth in an accelerated fashion as well as gain exposure to investing outside of their Retirement Savings Plan, all done automatically through payroll deductions. For mid-career employees, it also allows for accelerated asset growth that can supplement other stock ownership plans (e.g., RSP, KESIP, Performance Options & Shares), as well as their wider investment portfolio. Employees on the tail end of their career can consider the ESPP as a part of their broader retirement strategy, allowing for additional savings to meet retirement income needs.
There are things to watch out for with an ESPP, namely taxes and diversification. Although ESPP contributions are deducted from your payroll, they are not considered as deferred income, like it would be in your RSP. You will pay taxes on this income in the year that it’s received. In addition, the matched value is also considered taxable income. As with all securities sales, you will owe capital gains taxes on the increased value when you decide to sell your stock. Remember to always consult with your financial advisor or tax preparer for your specific tax situation and to strategize for maximum tax efficiency.
While ESPPs are an important vehicle for growing your investments, a critical consideration is ensuring diversity across your portfolio. Holding a significant amount of stock in a single company can be very risky, especially when it’s your employer. This means both your financial health, including both your income and investment performance, are tied to a single entity. Your goal should always be to diversify your portfolio to minimize risk.
The Cummins Employee Stock Purchase is an excellent benefit provided to employees, which has just been further improved with the 25% matching contribution from the company. As with all investing, there are benefits and risks thus; it’s important to discuss your specific situation with your financial advisor (preferably, a CFP® Professional). These plans are great tools to grow your wealth, to gain experience investing, and to position yourself to meet your financial and life goals.