The IRS has finalized, with modifications, proposed regulations providing guidance on stock options granted under an employee stock purchase plan. The IRS has also issued final regulations relating to corporate employers’ return and notification requirements for employee stock options.
Under final regulations, a plan must meet certain requirements to qualify as an employee stock purchase plan. These requirements are satisfied either by the terms of the plan or an offering made under the plan. If the terms of an option are inconsistent with the terms of the employee stock purchase plan or an offering under the plan, then an option may not qualify for special tax treatment.
The regulations provide guidance for employee stock purchase plans under which more than one offering is made. One or more offerings may be made under the plan and the offerings may be consecutive or overlapping. Although the terms of each offering need not be identical, the terms of the plan and each offering together must satisfy the requirements. The determination whether the terms of a plan and offering satisfy the requirements related to covered and excluded employees is made on an offering-by-offering basis under the final rules.
Consistent with the proposed regulations, the final regulations also provide that the date of grant is the first day of an offering period if the terms of an employee stock purchase plan or offering designate a maximum number of shares that may be purchased by each employee during the offering. However, if the maximum number of shares that can be purchased under an option is not fixed or determinable until the date the option is exercised, then the date of exercise is the date of grant of the option.
Final regulations have also been released regarding the corporate employers’ return and notification requirements relating to employee stock options. Corporate employers are required to provide information returns to the IRS and an employee where the transfer of stock is made through the exercise of an option through an employee stock purchase plan or an incentive stock option program.
One of the changes from the proposed regulations relates to when a transfer of legal title to stock occurs. Under the final regulations, the transfer of stock to the employee’s third-party brokerage account upon exercise of an option is treated as the first transfer of legal title, necessitating the corporate filing of the information return. Alternatively, if the employer issues a stock certificate directly to an employee or registers the employee’s name in the employer’s record books and employer holds the certificate in book-entry form, the first transfer of legal title does not occur until the employee sells the stock or transfers the stock to a brokerage account.
Other changes relate to the amount of compensation income recognized where the exercise price is less that the value of the share on the date of the option grant, the return requirements where the transfer of legal title is a qualifying or disqualifying disposition, and the application of the filing requirements to nonresident aliens performing services outside the Untied States.
If you have any questions regarding employee stock purchase plans or the return and notification requirements, please call our office at your convenience.
Sal Censoprano, ATA CRTP
Reproduced with permission from CCH’s Client Letter, published and copyrighted by CCH Incorporated, 2700 Lake Cook Road, Riverwoods, IL 60015.