The Employee Ownership Update
August 8, 2002
Lieberman Bill Would Encourage Broad-Based Options
Senator Joseph Lieberman (D-CT), along with Senator Barbara Boxer (D-CA) has introduced the "Rank and File Stock Options Act" (S. 2877). The bill has three main provisions:
- Companies could not take a tax deduction for the exercise of stock options unless at least half the value of the options available in the company go to employees making under $90,000 per year.
- Shareholders would have to approve all stock option plans.
- The SEC would have to issue rules requiring top executives to hold shares a set period of time and to forbid them from selling shares while still employed by the issuing company.
Boehner, Houghton Offer Bill to Encourage Employee Stock Purchases
John Boehner (R-OH) and Amo Houghton have introduced the "Workplace Stock Option Act of 2002" (H.R. 5242). The bill would allow employees to put aside regular tax-deductible payroll deferrals into a special trust over up to five years for the purpose of purchasing shares of their employer. At the end of the deferral period (or earlier, if the company allows), the employee could purchase shares at the price of the stock at the beginning of the deferral period. When the employee actually receives the shares, there would be no tax due. If the stock is later sold for more than the exercise price, the employee would pay ordinary income tax on the price paid for the shares, plus capital gains tax on any increase in value. If the sale price is less, the employee would pay ordinary income tax on that amount only. The company would get a tax deduction equal to the exercise price for the shares when they are transferred to the employee, but would not be able to take a tax deduction on income the employee puts aside during the accumulation period.
401(k) Plans Still Heavily Invested in Employer Stock
A new Congressional Research Service study of 277 large public companies has found that employer stock accounts for an average of 38% of all assets in defined contribution plans other than stand-alone ESOPs, with a median of 24.7%. The report Employer Stock in Retirement Plans: Investment Risk and Retirement Security, found that employer matches in company stock led to higher concentrations of employer stock in the plans. Where company stock was the match, 45.4% of assets were in these securities; otherwise, 27.2% was. Larger companies and companies with better than average stock returns also had higher percentages of employer stock in their plans. The average concentration of employer stock was lower in companies with defined benefit plans, but the median concentration was about the same.
IRS Exempts Brokers from Certain Stock Options Reporting Requirements
In Revenue Procedure 2002-50, the IRS provided an exemption from 1099-B reporting requirements for stock brokers handling the sale of shares acquired through options by employees, former employees, or other people providing a service to a company who engage in same-day sale transactions. 1099-B covers proceeds from broker and barter exchange transactions. To meet the exemptions rules, the transaction must:
- be executed the same day the stock is acquired through the option;
- the options must be covered by Section 83(b) of the Internal Revenue Code and be granted in conjunction with services performed for a company;
- the optionee must certify in writing to the broker that the optionee will report to the employing company any compensation resulting from the exercise and/or disposition of the option;
- there must either be no commission or fee for the transaction, or, if there is, the broker must provide a written statement to the optionee detailing the charges; and
- the optionee must use the sale price for the shares to calculate the compensation element for reporting to the company; brokers can rely on a written statement from the optionee to verify this.
If a fee is involved, the broker must provide the gross sales price for shares sold through the broker, commissions and fees, and a description of how the optionee should report gains or losses with respect the to exercised options on federal income tax filings.
IASB Board Approves Staff Recommendations to Require Stock Plan Expensing
On July 16, the International Accounting Standards Board (IASB) approved recommendations from its staff that companies expense share-based compensation. The board vote was unanimous. Stock options would be expensed as of the date of grant, but the board has not yet issued proposed guidance on how the expensing would proceed. Other share-based compensation would also be subject to the new accounting standards. The IASB will now work to develop proposed mechanisms for the accounting; the would be released for public review before being finalized.
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