Description

Attention CEPI students: Since 2020, the CEPI curriculum has been all-digital, and the CEPI provides you digital access to the books, including this, as part of the exam fee. You still can buy the printed books from us as a supplement to the free digital access you receive from the CEPI. See our CEPI information page.

In recent years, the level of legal, accounting, and regulatory complexity associated with employee stock options has continued to grow. This book, written by attorneys Alisa Baker and Alison Wright, and writer and editor Pam Chernoff, CEP, presents a straightforward, comprehensive overview of both the big-picture issues and the technical details related to designing and implementing stock option plans and employee stock purchase plans. The book also looks at hot issues and provides illustrative exhibits, a glossary, a bibliography, and primary source materials, plus a seminal article by Corey Rosen on plan design.

The 21st edition updates several chapters, and includes changes related to new tax form 1099-NEC for nonemployee compensation and a partially reorganized accounting chapter.

"Anyone involved with the design or administration of employee stock option programs, from the inexperienced stock plan administrator to the seasoned compensation professional, will appreciate this useful reference tool."
- Tim Sparks, President, Compensia, Inc.

"This book should be on the desk of every stock option professional."
- Robert H. (Buff) Miller, Cooley Godward Kronish LLP

Product Details

PDF, 394 pages
9 x 6 inches
21st (January 2021)
Available for immediate purchase

Table of Contents

Preface
Introduction
Part I: Overview of Stock Options and Related Plans
Chapter 1: The Basics of Stock Options
Chapter 2: Tax Treatment of Nonstatutory Stock Options
Chapter 3: Tax Treatment of Incentive Stock Options
Chapter 4: Plan Design and Administration
Chapter 5: Employee Stock Purchase Plans
Chapter 6: Trends in Equity Compensation: An Overview
Part II: Technical Issues
Chapter 7: Financing the Purchase of Stock Options
Chapter 8: Overview of Securities Law Issues
Chapter 9: Tax Law Compliance Issues
Chapter 10: Basic Accounting Issues
Chapter 11: Tax Treatment of Options on Death and Divorce
Chapter 12: Post-Termination Option Issues
Part III: Current Issues
Chapter 13: Legislative and Regulatory Initiatives Related to Stock Options: History and Status
Chapter 14: Cases Affecting Equity Compensation
Chapter 15: Transferable Options
Chapter 16: Reloads, Evergreens, Repricings, and Exchanges
Appendix 1: Designing a Broad-Based Stock Option Plan
Appendix 2: Primary Sources
Glossary
Bibliography

Excerpts

From Chapter 2, "Tax Treatment of Nonstatutory Stock Options" (footnotes omitted)

Some companies allow optionees to exercise unvested NSOs. In such cases, the company retains a right to repurchase the shares for the lower of the option exercise price or the stock’s fair market value at the time of repurchase until the stock becomes vested. When unvested NSOs are exercised, tax is deferred until the restrictions lapse. This means that if the value of the stock appreciates between the date of exercise and date of vesting, the optionee will be subject to tax on a greater spread than the spread at the date of exercise. The tax (and in the case of an employee, the associated withholding) will be due regardless of whether the optionee sells or otherwise disposes of the stock in order to finance the liability.

To avoid an unknown future tax event, an optionee who exercises unvested options may wish to file an election under Section 83(b) of the Code, which allows the optionee to “freeze” the compensation element of the spread (if any) on exercise and pay tax in the year of exercise as if the stock were already vested. If the election is timely filed, there will be no tax consequences as the stock vests. In other words, filing the election avoids ordinary income tax on any appreciation between the date of exercise and the date of vesting but does not avoid ordinary income tax on the excess of fair market value on the date of exercise over the exercise price. Exhibit 2-2 gives an example of taxation of an early-exercised NSO with and without a Section 83(b) election.

The drawback to a Section 83(b) election occurs if the stock is forfeited or depreciates in value after exercise of the option. In that case, the optionee may be in the unenviable position of having paid unnecessary tax on income with no available refund or capital loss treatment.

To make a Section 83(b) election, the optionee must file an election with the IRS office where he or she files his or her income tax return within 30 days of exercise. There is no specific form for filing a Section 83(b) election, but the IRS did provide sample language in Rev. Proc. 2012-19. The optionee should also provide the company with a copy of the election so that tax withholding can be handled correctly.

From Chapter 9 "Tax Law Compliance Issues"

Until 2016, liability accounting was required for grants for which shares could be withheld at more than the minimum statutory rate (generally the supplemental rate). However, Accounting Standards Update 2016-09 allows for withholding at the maximum statutory rate if allowed under the plan. In response, the NYSE added language to its Frequently Asked Questions on Equity Compensation document stating, “an amendment to a plan to provide for the withholding of shares based on an award recipient’s maximum tax obligation rather than the statutory minimum tax rate is not a material revision if the withheld shares are never issued, even if the withheld shares are added back to the plan.”

In practice, withholding at the 22% supplemental rate for employees whose supplemental wage payments total $1 million or less is more practical than applying each participant’s W-4 rate. The rate required for supplemental payments above $1 million is the current U.S. maximum of 37%. The change to accounting rules has more practical application for companies with participants outside the U.S. than for domestic participants, as determining the minimum statutory rate had proved challenging in some jurisdictions. Note that income from disqualifying dispositions of ISOs does not trigger withholding, but is reported as income on the Form W-2. Income from the disqualifying disposition of an ISO is not factored into the determination of whether the employee has reached $1 million in supplemental wages. Likewise, income from previous employment at an unrelated company is not factored into the employer’s determination of whether an employee has more than $1 million in supplemental payments.

The company must deposit federal income taxes with the IRS within the next business day for any transactions if the cumulative tax liability exceeds $100,000. An exception to this that applies only to NSOs exercised using a same-day sale allows companies to remit taxes within one day after settlement from the brokerage firm was laid out in a 2003 IRS field directive. The field directive does not apply to other forms of equity (for example, restricted stock transfers) or to other methods of exercise, even if, like net exercises, they have similar outcomes to same-day sales. At the request of taxpayers to apply the same treatment to restricted stock units, the IRS revisited the issue and concluded in a 2020 Office of Chief Counsel Memorandum that the next business day should be measured from the exercise date for NSOs and the vest date for restricted stock units. However, the 2020 Memorandum does not affect the application of the earlier guidance. Notwithstanding the IRS guidance and the long-term tradition of T+3, effective March 22, 2017, the SEC adopted a rule amendment that shortened the standard settlement period for most broker-dealer securities transactions to T+2.