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Erschienen in:

2021 | OriginalPaper | Buchkapitel

4. The ABCs (and ESPPs, RSUs, SARs, ISOs, and NSOs) of Equity-Based Compensation

verfasst von : Michael J. Nathanson, Jeffrey T. Craig, Jennifer A. Geoghegan, Nadine Gordon Lee, Michael A. Haber, Max B. Haspel, Seth P. Hieken, Matthew C. Ilteris, D. Scott McDonald, Joseph A. Salvati, Stephen R. Stelljes

Erschienen in: Personal Financial Planning for Executives and Entrepreneurs

Verlag: Springer International Publishing

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Abstract

One of the most overlooked, but most important, areas of executive financial planning involves taking advantage of stock-based grants and ownership. Many executives, like David, don’t take the opportunity to understand these opportunities fully until a company, career, or personal event forces them to look more closely. The authors consider planning techniques for maximizing the benefits associated with: directly owned company stock; employee stock purchase plans; qualified benefit plans; deferred compensation plans; restricted stock; restricted stock units; stock appreciation rights; incentive stock options; and non-qualified stock options. While the tax rules are important, it also is important to take into account: current holdings; company and market risks; career plans; and risk tolerance. Special situations, hedging strategies, trading plans, and rules for insiders are also considered.

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Vorheriges Kapitel Understanding and Negotiating Executive Employment Agreements for Success

Nächstes Kapitel The Story of David and Goliath, And Abby and Samson: The Aftermath

See I.R.S. Publications 590A and 590B.

See I.R.C. § 401.

In general, cost basis is the overall investment made by the executive in the shares, subject to adjustments. Importantly, however, the rules for calculating cost basis can be complex, often requiring their application with expert advice.

See I.R.C. § 1.

In Massachusetts, for example, short-term capital gain tax rates are more than double the rate of taxation on long-term capital gain. See M.G.L. ch. 62, § 4.

See I.R.C. § 170.

See I.R.C. § 423.

See I.R.C. § 423(b).

See I.R.C. § 421(a)(1).

See I.R.C. § 401.

See I.R.S. Publication 575.

It may also be important to consider contributing the NUA shares to a charitable remainder trust, which we’ll discuss in Chap. 10.

But see I.R.C. § 409A.

See I.R.C. § 83.

See I.R.C. §§ 3401 and 3402. Withholding generally presupposes an employment relationship.

See I.R.C. § 83.

See I.R.C. § 1211.

See Treas. Reg. § 1.83-2.

See I.R.C. § 3121(v)(2) and Treas. Reg. §1.451-2(a). Again, withholding generally presupposes an employment relationship.

Nevertheless, after 2017, certain qualified stock received under an RSU or stock option may be eligible for a Section 83(i) deferral election. The Tax Cuts and Jobs Act of 2017 provides eligible employees an election under Internal Revenue Code Section 83(i) to defer income taxes on the amount of income attributable to the receipt of “qualified stock.”

Qualified stock includes, with respect to a qualified employee, stock in a corporation that employs the employee if:

The stock is received in settlement of an RSU or in connection with the exercise of a stock option; and

The RSU or stock option was granted in connection with the performance of services to an employee by an eligible corporation that satisfies certain requirements, including that the corporation has privately owned stock and has a written plan under which not less than 80% of all U.S. employees are granted RSUs or stock options with the same rights to receive qualified stock.

The election must be made no later than 30 days after the first date the rights of the employee in the stock are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier. The manner for making the election is similar to the manner in which an election is made under Section 83(b). If it is made, the income becomes taxable on the earliest to occur of the date on which:

The stock becomes transferable;

The employee becomes an “excluded employee,” generally defined as an individual:

(a)

Who owns or at an any time during the ten preceding calendar years owned 1% or more of the corporation, or

(b)

Who is or has been at any prior time for the corporation the CEO, CFO, acting in that capacity, or related in certain respects to such an individual, or

(c)

Who is one of the four highest compensated officers for the taxable year or any of the ten preceding taxable years;

The stock becomes readily tradable on an established securities market;

Five years have passed since the first date the employee’s right to the stock are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier; or

The employee properly revokes the election.

The considerations in making a decision as to whether to make a Section 83(i) election are similar, but not identical, to those applicable to making a Section 83(b) election with respect to restricted stock. We recommend a thorough analysis with the help of knowledgeable advisors.

If an employee receives qualified stock from an employer that is eligible for the election, the employer generally is required to inform the employee: (1) that income inclusion may be deferrable; (2) that, if the employee makes an inclusion deferral election, the employee must report, at the end of the deferral period, income based on the value of the stock at the time the stock becomes substantially vested, even if the value of the stock decreases by the end of the deferral period; and (3) that the income will be subject to federal income tax withholding, leading to responsibility for the employee. If the employer fails to do so, the employer may be subject to penalties. For more information, see Section 83(i)(6).

See Treas. Reg. §1.451-2(a).

See I.R.C. § 422.

See I.R.C. §§ 421 and 422.

See I.R.C. § 83(a). Again, we are assuming an employment relationship.

See I.R.S. Publication 15. The Social Security wage base was $137,700 in 2020.

Note that if a protective put is placed on a position held less than one year, the holding period is suspended and restarted anew upon the closing of the option contract. See Treas. Reg. § 1.1092(b)-2T.

See Chap. 11 for a more detailed discussion of concentrated ownership positions.

See 17 CFR 240.10b5-1(c).

See 17 CFR 230.144.

See 15 U.S.C. § 78p.

Titel: The ABCs (and ESPPs, RSUs, SARs, ISOs, and NSOs) of Equity-Based Compensation
verfasst von: Michael J. Nathanson
Jeffrey T. Craig
Jennifer A. Geoghegan
Nadine Gordon Lee
Michael A. Haber
Max B. Haspel
Seth P. Hieken
Matthew C. Ilteris
D. Scott McDonald
Joseph A. Salvati
Stephen R. Stelljes
Verlag: Springer International Publishing
Buch: Personal Financial Planning for Executives and Entrepreneurs
Print ISBN: 978-3-030-65399-6

Electronic ISBN: 978-3-030-65400-9

Copyright-Jahr: 2021
DOI: https://doi.org/10.1007/978-3-030-65400-9_4