Employee Stock Purchase Plans (ESPPs) Flashcards
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Read the first 7 Employee Stock Purchase Plans (ESPPs) flashcards as text
What is the primary distinction between a Section 423 ESPP and a non-qualified ESPP?
Answer: Section 423 plans offer tax-favored treatment if IRS requirements are met; non-qualified plans do not
Section 423 ESPPs provide favorable tax treatment (no ordinary income at purchase) when IRC requirements are satisfied, whereas non-qualified ESPPs trigger ordinary income at the time of purchase.
Under a Section 423 ESPP, when is income typically recognized by the employee for federal income tax purposes?
Answer: At the time of sale or other disposition of the shares
Under Section 423, no income is recognized at enrollment or purchase; income is deferred until the employee disposes of the shares.
What typically happens to an employee's ESPP payroll contributions when they terminate employment during an offering period?
Answer: Accumulated contributions are refunded to the employee without interest
Most Section 423 plans require that upon termination, accumulated payroll deductions be returned to the employee as a cash refund since eligibility to purchase is lost.
Which IRS code section governs tax-qualified Employee Stock Purchase Plans?
Answer: Section 423
IRC Section 423 specifically governs qualified Employee Stock Purchase Plans and sets out the requirements for favorable tax treatment.
Under a Section 423 ESPP, the $25,000 annual accrual limit is based on the FMV of the stock measured at:
Answer: The first day of each offering period in which the right is granted
The $25,000 limit is calculated using the FMV on the first day of the offering period, regardless of the actual purchase price or the price on the purchase date.
Which of the following is a permissible exclusion under a Section 423 ESPP?
Answer: Employees who have completed less than two years of service
Section 423(b)(4) allows plans to exclude employees with less than two years of service, among other limited categories such as part-time and seasonal workers.
If a company's Section 423 ESPP uses a 24-month offering period with quarterly purchase dates, and the stock price drops significantly after the offering starts, what benefit does a look-back provision provide?
Answer: It allows shares to be purchased at 85% of the lower offering-date FMV, maximizing the employee discount
With a look-back, if the stock price falls, employees still benefit from the 15% discount off the original (lower) offering-date price, effectively increasing their gain at purchase.