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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.
The IRS has issued proposed regulations, amending existing regulations under Code Sec. 423, which affect those who participate in the transfer of stock pursuant to the exercise of options granted under an employee stock purchase plan. Such options, under Code Sec. 423, and incentive stock options, under Code Sec. 422, are collectively called statutory options.
The proposed regulations would apply to any option issued under an employee stock purchase plan that is granted on or after January 1, 2010. Pending issuance of final regulations, taxpayers may rely upon the proposed regulations for resolving tax issues with respect to options issued under an employee stock purchase plan granted after July 29, 2008, the date these proposed regulations were published in the Federal Register.
Stockholder approval: To qualify as an employee stock purchase plan under Code Sec. 423(b)(2), the plan must be approved by the stockholders of the granting corporation within 12 months of the date of plan adoption. Under the proposed regulations, stockholder approval is required if there is a change in the aggregate number of shares or in the employees eligible to be granted options under the plan. These proposed regulations clarify that new stockholder approval is required if there is a change in the shares with respect to which options are issued or a change in the granting corporation. The proposed regulations also provide additional guidance regarding the application of the stockholder approval requirements where an employee stock purchase plan is assumed in connection with a corporate transaction.
Maximum aggregate number of shares: Under the existing regulations, an employee stock purchase plan must designate the maximum aggregate number of shares that may be issued under the plan. Under the proposed regulations, the plan may specify that this amount may increase annually by a specified percentage of the authorized, issued, or outstanding shares as of the date of plan adoption. Further, a plan may provide that this amount may change based on other specific circumstances only if the stockholders approve an immediately determinable maximum number of shares that may be issued under the plan in any event.
Subsets of employee groups excluded: Code Sec. 423(b)(4) permits an employer to exclude from participation: 1) employees who have been employed less than two years; 2) employees who customarily work 20 hours or less per week; 3) employees who customarily work not more than five months in any calendar year; and 4) highly compensated employees (HCEs) within the meaning of Code Sec. 414(q). The proposed regulations provide that an employee stock purchase plan does not fail to satisfy the coverage requirements merely because the plan excludes employees who have completed a shorter period of service or whose customary employment is for fewer hours per week or fewer months in a calendar year than above, provided the exclusion is applied in an identical manner to all employees of every corporation whose employees are granted options under the plan. The proposed regulations also allow the employee stock purchase plan to exclude HCEs with, for instance, compensation above a certain level, provided the exclusion is applied in an identical manner to all HCEs of every corporation whose employees are granted options under the plan.
Equal rights requirements for offerings to foreign residents: Code Sec. 423(b)(5) requires that the terms of an employee stock purchase plan provide that all employees granted options under the plan have the same rights and privileges. The proposed regulations provide that a plan or offering will not fail to satisfy those requirements if, in order to comply with the laws of a foreign jurisdiction, the terms of an option granted under a plan or offering to citizens or residents of such foreign jurisdiction are less favorable than the terms of options granted under the same plan or offering to employees resident in the United States. The IRS states, however, that requirements will not be met if the plan terms are more favorable to citizens or residents of such foreign jurisdiction than to employees resident in the United States.
Annual $25,000 limitation: Under Code Sec. 423(b)(8), an employee stock purchase plan must provide that no employee may be permitted to purchase stock under all the employee stock purchase plans of his or her employer corporation and its related corporations at a rate which exceeds $25,000 in fair market value of the stock, determined on the date of grant, for each calendar year in which an option granted to the employee is outstanding and exercisable. To provide guidance under this section, the proposed regulations provide that the $25,000 limit for employee stock purchase plans is, to the extent possible, calculated in a manner consistent with the $100,000 limitation for incentive stock options. The timing of both measures is based on when the option first becomes exercisable and both measures are made based on the fair market value of the stock determined at the date of grant.
The date of grant for an option granted under an employee stock purchase plan is important, the IRS states, because: 1) the favorable tax consequences apply to the shares acquired pursuant to the exercise of an option granted under the plan if the shares are not disposed of within two years from the date of grant of the option or within one year from the date of exercise of the option; 2) the $25,000 limitation under Code Sec. 423(b)(8) is determined based on the fair market value of the stock measured on the date of grant of the option; 3) it is used to determine the employees eligible to participate in the plan; and 4) in certain cases, it is used in determining the purchase price of stock under the plan.
The proposed regulations are therefore specific in stating that the “date of the granting of the option,” the “time such option is granted” and similar phrases refer to the date or time when the granting corporation completes the corporate action constituting an offer of stock for sale to an individual under the terms and conditions of a statutory option. Further, the corporate action is not considered complete until the date on which the maximum number of shares that can be purchased under the option and the minimum option price are fixed or determinable.
It is not always possible to determine the minimum option price on the first day of an offering, and many granting corporations intend for the first day of an offering to be the date of grant, the IRS notes. Accordingly, the proposed regulations allow the first day of an offering to be the date of grant for an option issued under an employee stock purchase plan even though the minimum option price is not fixed or determinable on the first day of the offering. Further, the date of grant will be the first day of an offering if the terms of the plan or offering require the application of a formula to establish, on the first day of the offering, the maximum number of shares that may be purchased by each participant during the offering. Under the proposed regulations, 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 will be the date of grant of the option.
Written or electronic comments on the proposed regulations must be received by October 27, 2008, and submitted to: CC:PA:LPD:PR (REG–106251– 08), Room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044, or via the Federal eRulemaking Portal at http://www.regulations.gov (REG–106251–08).
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