News & Information

 

FEATURED PRODUCT

5500 Preparer's Manual for 2012 Plan Years

5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.

CCH® PENSION — 8/4/08

IRS Issues Proposed Regulations On IRC Sec. 423 Employee Stock Purchase Plans

From Spencer's Benefits Reports: The Internal Revenue Service has issued proposed regulations relating to options granted under an employee stock purchase plan as defined in IRC Sec. 423, and which also include related provisions under IRC Secs. 421 and 422. The proposed regulations were published in the July 29 Federal Register.

In general, the income tax treatment of the grant of an option to purchase stock and of the transfer of stock pursuant to the exercise of the option is determined under IRC Sec. 83. However, Sec. 421 provides special rules for determining the income tax treatment of the transfer if the requirements of Sec. 422(a) or 423(a) are met. Sec. 422 applies to incentive stock options, while Sec. 423 applies to options granted under an employee stock purchase plan.

Under Sec. 421, if a share of stock is transferred to an individual pursuant to the exercise of a statutory option, there is no income at the time of exercise of the option with respect to the transfer and no deduction under IRC Sec. 162 is allowed to the employer with respect to the transfer. Sec. 423(a) provides that Sec. 421 applies to the transfer of stock to an individual pursuant to the exercise of an option granted under an employee stock purchase plan if (1) no disposition of the stock is made within two years from the date of grant of the option or within one year from the date of transfer of the share; and (2) at all times during the period beginning on the date of grant and ending on the day three months before the exercise of the option, the individual is an employee of either the corporation granting the option or a parent or subsidiary of such corporation. Sec. 423(b) sets forth several requirements that must be met for a plan to qualify as an employee stock purchase plan, while Sec. 423(c) provides a special rule that is applicable where the option exercise price is between 85% and 100% of the fair market value of the stock at the time the option was granted.

Provisions Of The Regulations

The proposed regulations would provide a comprehensive set of rules governing stock options issued under an employee stock purchase plan and would incorporate substantially all of the rules contained in the existing regulations under Sec. 423.

The proposed regulations are comprised of two sections: Reg. Sec. 1.423-1, governing the applicability of Sec. 421(a); and Reg. Sec. 1.423-2, governing the definition of an employee stock purchase plan. The proposed regulations would amend the existing regulations under Sec. 423 in several ways. First, the proposed regulations would update the existing rules to incorporate statutory changes and to make them consistent, where appropriate, with the regulations under Sec. 422 related to incentive stock options, which were last updated in 2004. Second, the regulations would update the existing rules to provide additional guidance in certain areas. Finally, the regulations would update the existing regulations to remove obsolete rules.

Comments on the proposed regulations must be submitted by October 27 to: CC:PA:LPD:PR (REG-106251-08), Room 5203, IRS, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Comments also may be submitted electronically via the Internet to http://www.regulations.gov/ (IRS REG-106251-08). For further information concerning the regulations, contact Thomas Scholz at (202) 622-6030; for further information concerning submissions of comments and/or to request a public hearing, contact Oluwafunmilayo Taylor at (202) 622-7180.

 

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

Visit our News Library to read more news stories.