what is it?
DESCRIPTION
What is it?. A plan for compensating a broad group of employees with options to buy stock of the employer company at a specified price generally not used for executive compensation limited to $25,000 / year forbidden to more than 5% owners. When is it Indicated?. - PowerPoint PPT PresentationTRANSCRIPT
Copyright 2009, The National Underwriter Company
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Chapter 37Employee Benefit & Retirement Planning
Employee Stock Purchase Plan (Section 423 Plan)
A plan for compensating a broad group of employees with options to buy stock of the employer company at a specified price
– generally not used for executive compensation– limited to $25,000 / year– forbidden to more than 5% owners
What is it?
Copyright 2009, The National Underwriter Company
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Chapter 37Employee Benefit & Retirement Planning
Employee Stock Purchase Plan (Section 423 Plan)
1. Employer willing to compensate employees with shares of company stock
2. Employer wishes to reward executive performance with equity based compensation
When is it Indicated?
Copyright 2009, The National Underwriter Company
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Chapter 37Employee Benefit & Retirement Planning
Employee Stock Purchase Plan (Section 423 Plan)
1. provides incentive
2. easy form of savings
3. little to no out-of-pocket cost to company
4. tax deferred to employee
Advantages
Copyright 2009, The National Underwriter Company
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Chapter 37Employee Benefit & Retirement Planning
Employee Stock Purchase Plan (Section 423 Plan)
Coverage: Plan must cover all employees, but may exclude those
– with < 2 yrs. Service– with customary service < 20 hrs. / week or not more than
5 months in any calendar year– who are highly compensated
ESPP Requirements Under Code Section 423
Copyright 2009, The National Underwriter Company
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Chapter 37Employee Benefit & Retirement Planning
Employee Stock Purchase Plan (Section 423 Plan)
Benefits:– same rights and benefits to all covered employees, but
amount of stock can be % of compensation– cannot purchase > $25,000 of stock under ESPP in any
one calendar year– stock price must not be less than LESSER
• 85% of fair market value at time option granted
• 85% of fair market value at time stock purchased– options generally must be exercised within 5 yrs.
ESPP Requirements Under Code Section 423
Copyright 2009, The National Underwriter Company
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Chapter 37Employee Benefit & Retirement Planning
Employee Stock Purchase Plan (Section 423 Plan)
1. If employee meets certain criteria, no taxable income to employee when ESPP option is
– granted– exercised
2. if holding period met when employee sells stock, taxable income consists of
– ordinary compensation income– capital gain
Tax Implications
Copyright 2009, The National Underwriter Company
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Chapter 37Employee Benefit & Retirement Planning
Employee Stock Purchase Plan (Section 423 Plan)
3. if employee meets holding period requirements, employer receives NO tax deduction
if employee DOES NOT meet holding period requirements, amount included in employee compensation income is amount employer CAN deduct
Tax Implications
Copyright 2009, The National Underwriter Company
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Chapter 37Employee Benefit & Retirement Planning
Employee Stock Purchase Plan (Section 423 Plan)
ESPP is not a pension or welfare benefit under ERISA
No reporting requirement
Other ERISA provisions also not applicable
ERISA and Other Requirements
Copyright 2009, The National Underwriter Company
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Chapter 37Employee Benefit & Retirement Planning
Employee Stock Purchase Plan (Section 423 Plan)
• Plan must be approved by stockholders of granting corporation within 12 months before or after the date the employer adopts the plan
• A written plan and notification of employees are wise, but not mandated by law
How is the plan set up?
Copyright 2009, The National Underwriter Company
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Chapter 37Employee Benefit & Retirement Planning
Employee Stock Purchase Plan (Section 423 Plan)
1. ESPP benefits are forbidden to more than 5% owners.
2. ESPPs are used by closely-held corporations.
3. ESPPs have little to no out-of-pocket costs.
4. The employer bears the market risk of an ESPP.
5. ESPP options must be exercised within 10 years.
True or False?
Copyright 2009, The National Underwriter Company
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Chapter 37Employee Benefit & Retirement Planning
Employee Stock Purchase Plan (Section 423 Plan)
Zeta Corp. granted Norman an option under its employee stock purchase plan to buy 100 shares of Zeta for $20 per share when the stock was valued at $22 / share. A year and a half later, when the stock was $23 / share, Norman exercised his option; 14 months later he sold his stock for $30 / share
a. What must Norman report as wages?
b. What must Norman report as capital gains?
Discussion Question