Employee stock purchase plan irs limit

This document contains the final regulations relating to options granted under an employee stock purchase plan as defined in section of the Internal Revenue Code Code. These final regulations affect certain taxpayers who participate in the transfer of stock pursuant to the exercise of options granted under an employee stock purchase plan.

These final regulations provide guidance to assist taxpayers in complying with section in addition to clarifying certain rules regarding options granted under an employee stock purchase plan.

This document also contains final regulations under sections , and of the Code. These regulations are effective on November 17, These regulations apply as of January 1, This document contains final amendments to the Income Tax Regulations 26 CFR part 1 under sections , , and of the Code.

Section was added to the Code by section a of the Revenue Act of , Public Law 78 Stat. Changes to the applicable law concerning section were made by sections b 1 C and b 2 of the Tax Reform Act of , Public Law 90 Stat.

Regulations under section were published in the Federal Register on June 23, T. These regulations were amended on September 27, T. In Notice , C. On July 29, , the Treasury Department published a notice of proposed rulemaking REG, I. A public hearing on the proposed regulations was held on January 15, Written and electronic comments responding to the notice of proposed rulemaking were received.

After consideration of these comments, the Treasury Department adopts the proposed regulations as final regulations, with the modifications set forth in this Treasury decision. The significant revisions are discussed in this preamble.

In general, the income tax treatment of the grant of an option to purchase stock in connection with the performance of services and of the transfer of stock pursuant to the exercise of the option is determined under section 83 and the regulations thereunder. However, section provides special rules for determining the income tax treatment of the transfer of shares of stock pursuant to the exercise of an option if the requirements of sections a or a , as applicable, are met.

Section applies to incentive stock options and section applies to options granted under an employee stock purchase plan collectively, statutory options. Under section , if a share of stock is transferred to an individual pursuant to the exercise of a statutory option, there is no income at the time of exercise of the option with respect to the transfer and no deduction under section is allowed to the employer corporation with respect to the transfer. Section a provides that section applies to the transfer of stock to an individual pursuant to the exercise of an option granted under an employee stock purchase plan if: Section b sets forth several requirements that must be met for a plan to qualify as an employee stock purchase plan.

Section c provides a special rule that is applicable where the option exercise price is between 85 and percent of the fair market value of the stock at the time the option was granted. These final regulations provide a comprehensive set of rules governing stock options issued under an employee stock purchase plan and incorporate substantially all of the rules contained in the existing regulations under section These final regulations are comprised of two sections: The modifications to the proposed regulations that are included in these final regulations reflect consideration of the comments submitted by taxpayers.

The final regulations adopt these requirements of the proposed regulations, although the numerical designation of the requirements is modified. Commenters requested clarification of whether options with terms that are inconsistent with the terms of the plan will be eligible for the special tax treatment of section These final regulations provide further guidance for employee stock purchase plans under which more than one offering is made. Further, pursuant to section b and its flush language, the terms of each offering need not be identical.

The proposed regulations provide that the exclusions for various categories of employees must be applied in an identical manner to all employees of every corporation whose employees are granted options under the plan. Commenters noted that the requirement of identical exclusions for all offerings under a plan constrains the ability to make future and overlapping offerings that are more or less inclusive than prior offerings under the plan.

Commenters suggested that the final regulations should permit multiple offerings under a plan with different exclusions applicable to the one or more corporations whose employees participate in the particular offering under the plan. These final regulations generally adopt the approach suggested by the commenters. The exclusions established with respect to a particular offering must be applied in an identical manner to all employees of every corporation whose employees are granted options under that particular offering.

Some commenters suggested that the final regulations permit employers to exclude from plan participation employees who are nonresident aliens and who receive no earned income that constitutes income from sources within the United States.

Other commenters suggested that the final regulations permit employers to exclude from plan participation employees under a specified age. The IRS and the Treasury Department are aware of the complexities often associated with participation in an employee stock purchase plan by nonresident aliens and employees under a specified age, such as the age of majority. However, section does not provide exclusions for nonresident aliens or employees under a specified age.

Accordingly, the IRS and the Treasury Department are constrained by statutory authority from providing a general exclusion from plan participation for employees who are nonresident aliens or employees under a specified age. One commenter suggested that the final regulations provide additional flexibility by permitting employers to exclude from plan participation highly compensated employees HCEs within the meaning of section q on any basis.

These final regulations do not adopt the suggestion that HCEs may be excluded from participation in an employee stock purchase plan on any basis.

Commenters further suggested that the final regulations provide flexibility by permitting employers to make multiple offerings with different rights and privileges applicable to the participants of each offering under a plan. However, the rights and privileges established with respect to a particular offering must be applied in an identical manner to all employees of every corporation whose employees are granted options under that particular offering. Commenters asked whether the designation of a maximum number of shares that may be purchased by an employee during the offering is necessary in order for the first day of the offering period to be the date of grant.

Similarly, the date of grant will be the first day of an offering if the terms of the plan or offering require the application of a formula to establish, on the first day of the offering, the maximum number of shares that may be purchased by each employee during the offering.

If the maximum number of shares that can be purchased under an option is not fixed or determinable until the date the option is exercised, then the date of exercise will be the date of grant of the option.

Commenters also asked whether any particular number of shares is necessary to satisfy the requirement to designate a maximum number of shares that may be purchased during the offering in order for the first day of the offering period to be the date of grant. No particular number of shares is necessary to satisfy this requirement and establish the first day of the offering period as the date of grant for the option.

Section b 8 A provides that the right to purchase stock under an option accrues when the option first becomes exercisable.

Consistent with comments received by the Treasury Department and the IRS in response to Notice , C. To qualify as an employee stock purchase plan, section b 2 requires that the plan be approved by the stockholders of the granting corporation within 12 months before or after the date the plan is adopted. These final regulations clarify that new stockholder approval is required if there is a change in the shares with respect to which options are issued or a change in the granting corporation.

In particular, these final regulations clarify that the stockholders of a subsidiary corporation include the parent corporation and any other stockholders of the subsidiary. The commenter proposed that the example be amended to require the acquiring company instead of its stockholders to approve the amendment of the option plan to issue parent stock instead of subsidiary stock. These regulations apply as of January 1, , and will apply to any statutory option granted on or after that date.

Taxpayers may rely on these final regulations for the treatment of any statutory option granted prior to January 1, It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order Therefore, a regulatory assessment is not required.

It also has been determined that section b of the Administrative Procedure Act 5 U. Pursuant to section f of the Code, the notice of proposed rulemaking preceding these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

The authority citation for part 1 continues to read in part as follows:. Except for paragraph c 1 of this section, the regulations under this section are effective on August 3, Paragraph c 1 of this section is effective on November 17, Paragraph c 1 of this section applies to statutory options granted on or after January 1, Assume further that the plan was approved by the stockholders of S in this case, P on March 1, On January 1, , S changes the plan to provide that incentive stock options for P stock will be granted to S employees under the plan.

Because there is a change in the stock available for grant under the plan, the change is considered the adoption of a new plan that must be approved by the stockholder of S in this case, P within 12 months before or after January 1, The regulations under this section are effective on November 17, The regulations under this section apply to options granted under an employee stock purchase plan on or after January 1, If the terms of the plan do not satisfy the requirements of paragraph a 3 of this section, then such requirements may be satisfied by the terms of an offering made under the plan.

However, where the requirements of paragraph a 3 of this section are satisfied by the terms of an offering, such requirements will be treated as satisfied only with respect to options exercised under that offering.

How to avoid getting double-taxed on employee stock purchase plan - San Francisco Chronicle

One or more offerings may be made under an employee stock purchase plan. Offerings may be consecutive or overlapping, and the terms of each offering need not be identical provided the terms of the plan and the offering together satisfy the requirements of paragraphs a 2 and a 3 of this section.

The plan and the terms of an offering must be in writing or electronic form, provided that such writing or electronic form is adequate to establish the terms of the plan or offering, as applicable. A An amount equal to 85 percent of the fair market value of the stock at the time the option is granted, or. B An amount not less than 85 percent of the fair market value of the stock at the time the option is exercised see paragraph g of this section.

A Five years from the date the option is granted if, under the terms of such plan, the option price cannot be less than 85 percent of the fair market value of the stock at the time the option is exercised, or. B Twenty-seven months from the date the option is granted, if the option price is not determined in the manner described in paragraph a 3 v A of this section see paragraph h of this section.

If the terms of an option are inconsistent with the terms of the employee stock purchase plan or the offering under the plan pursuant to which the option is granted, the option will not be treated as granted under an employee stock purchase plan. If an option with terms that are inconsistent with the terms of the plan or an offering under the plan is granted to an employee who is entitled to the grant of an option under the terms of the plan or offering, and the employee is not granted an option under the offering that qualifies as an option granted under an employee stock purchase plan, the offering will not meet the requirements of paragraph e of this section.

Accordingly, none of the options granted under the offering will be eligible for the special tax treatment of section However, if an option with terms that are inconsistent with the terms of the plan or an offering under the plan is granted to an individual who is not entitled to the grant of an option under the terms of the plan or offering, the option will not be treated as an option granted under an employee stock purchase plan but the grant of the option will not disqualify the options granted under the plan or offering.

If, at the time of grant, an option qualifies as an option granted under an employee stock purchase plan, but after the time of grant one or more of the requirements of paragraph a 3 of this section is not satisfied with respect to the option, the option will not be treated as granted under an employee stock purchase plan but this failure to comply with the terms of the option will not disqualify the other options granted under the plan or offering. The following examples illustrate the principles of paragraph a:.

Corporation A operates an employee stock purchase plan under which options for A stock are granted to employees of A. The terms of an offering provide that the option price will be 90 percent of the fair market value of A stock on the date of exercise.

A grants an option under the offering to Employee Z, an employee of A. The terms of the option provide that the option price will be 85 percent of the fair market value of A stock on the date of exercise.

Further, unless Z is granted an option under the offering that qualifies as an option granted under the employee stock purchase plan, the offering will not meet the requirements of paragraph e of this section and none of the options granted under the offering will be eligible for the special tax treatment of section Corporation B operates an employee stock purchase plan that provides that options for B stock may only be granted to employees of B. Under the terms of the plan, options may not be granted to consultants and other non-employees.

B grants an option to Consultant Y, a consultant of B. Because Y is ineligible to receive an option under the plan because Y is not an employee, the grant of the option to Y is inconsistent with the terms of the plan and the option granted to Y will not be treated as an option granted under the employee stock purchase plan.

However, the grant of the option to Y will not disqualify the options granted under the plan or any offering because Y was not entitled to the grant of an option under the plan.

Corporation C operates an employee stock purchase plan under which options for C stock are granted to employees of C. C grants an option pursuant to an offering under the plan to Employee X, an employee of C who is a highly compensated employee. The terms of the employee stock purchase plan exclude highly compensated employees from participation in the plan.

However, the grant of the option to X will not disqualify the options granted under the plan or offering because X was not entitled to the grant of an option under the plan. Corporation D operates an employee stock purchase plan under which options for D stock are granted to employees of D. D grants an option pursuant to an offering under the plan to Employee W, an employee of D.

The terms of the option provide that the option price will be 90 percent of the fair market value of D stock on the date of exercise. On the date of exercise, W pays only 85 percent of the fair market value of D stock. However, the failure to comply with the terms of the option granted to W will not disqualify the options granted under the plan or offering.

An employee stock purchase plan must provide that options can be granted only to employees of the employer corporation or employees of its related corporations to purchase stock in the employer corporation or one of its related corporations. If such a provision is not included in the terms of the plan, the plan will not be an employee stock purchase plan and options granted under the plan will not qualify for the special tax treatment of section The approval of the stockholders must comply with all applicable provisions of the corporate charter and bylaws and of applicable State law prescribing the method and degree of stockholder approval required for the issuance of corporate stock or options.

If the applicable State law does not prescribe a method and degree of stockholder approval, then an employee stock purchase plan must be approved—. A plan that merely provides that the number of shares that may be issued under the plan may not exceed a stated percentage of the shares outstanding at the time of each offering or grant under the plan does not satisfy the requirements of this paragraph c 3. However, the maximum aggregate number of shares that may be issued under the plan may be stated in terms of a percentage of the authorized, issued, or outstanding shares on the date of the adoption of the plan.

The plan may specify that the maximum aggregate number of shares available for grants under the plan may increase annually by a specified percentage of the authorized, issued, or outstanding shares on the date of the adoption of the plan. A plan that provides that the maximum aggregate number of shares that may be issued as options under the plan may change based on any other specific circumstances satisfies the requirements of this paragraph only if the stockholders approve an immediately determinable maximum number of shares that may be issued under the plan in any event.

If there is more than one employee stock purchase plan under which options may be granted and stockholders of the granting corporation merely approve a maximum aggregate number of shares that are available for issuance under the plans, the stockholder approval requirements described in paragraph c 1 of this section are not satisfied.

A separate maximum aggregate number of shares available for issuance pursuant to options must be specified and approved for each plan. Any increase in the aggregate number of shares that may be issued under the plan other than an increase merely reflecting a change in the number of outstanding shares, such as a stock dividend or stock split will be considered the adoption of a new plan requiring stockholder approval within the prescribed month period.

Similarly, a change in the designation of corporations whose employees may be offered options under the plan will be considered the adoption of a new plan requiring stockholder approval within the prescribed month period unless the plan provides that designations of participating corporations may be made from time to time from among a group consisting of the granting corporation and its related corporations.

The group from among which such changes and designations are permitted without additional stockholder approval may include corporations having become parents or subsidiaries of the granting corporation after the adoption and approval of the plan. In addition, a change in the granting corporation or the stock available for purchase under the plan will be considered the adoption of a new plan requiring stockholder approval within the prescribed month period.

Any other changes in the terms of an employee stock purchase plan are not considered the adoption of a new plan and, thus, do not require stockholder approval. The following examples illustrate the principles of this paragraph c:. On January 1, , E adopts an employee stock purchase plan under which options for E stock are granted to E employees. On January 1, , E changes the plan to provide that options for F stock will be granted to E employees under the plan.

Because there is a change in the stock available for grant under the plan, under paragraph c 4 of this section, the change is considered the adoption of a new plan that must be approved by the stockholders of E in this case, F within 12 months before or after January 1, Thereafter, E continues to grant options for E stock to E employees under the plan.

Assume further that, after F disposes of its interest in E, E changes the plan to provide for the grant of options for E stock to E employees. Because there is a change in the stock available for purchase or grant under the plan, under paragraph c 4 of this section, the stockholders of E must approve the plan within 12 months before or after the change to the plan to meet the stockholder approval requirements of paragraph c of this section.

Corporation H does not maintain an employee stock purchase plan. On May 15, , G and H consolidate under State law to form one corporation. The new corporation is named Corporation H. The consolidation agreement describes the G plan, including the maximum aggregate number of shares available for issuance under the plan after the consolidation. Additionally, the consolidation agreement states that the plan will be continued by H after the consolidation. The consolidation agreement is approved by the stockholders of G and H on May 1, H assumes the plan formerly maintained by G and continues to grant options under the plan to all eligible employees, but the options are for H stock.

Because the plan is fully described in the consolidation agreement, including the maximum aggregate number of shares available for issuance under the plan, the approval of the consolidation agreement by the stockholders constitutes approval of the plan.

Thus, the stockholder approval of the consolidation agreement satisfies the stockholder approval requirements of paragraph c 1 of this section, and the plan is considered to be adopted by H and approved by its stockholders on May 1, Corporation I adopts an employee stock purchase plan on November 1, On that date, there are two million shares of I stock outstanding.

The plan provides that the maximum aggregate number of shares that may be issued under the plan may not exceed 15 percent of the number of shares of I stock outstanding on November 1, Because the maximum aggregate number of shares that may be issued under the plan is designated in the plan, the requirements of paragraph c 3 of this section are met.

The plan provides that the maximum aggregate number of shares of J stock available for issuance under the plan is 50,, increased on each anniversary date of the adoption of the plan by 5 percent of the then outstanding shares. Because the maximum aggregate number of shares is not designated under the plan, the requirements of paragraph c 3 of this section are not met.

Because the maximum aggregate number of shares that may be issued under the plan is designated as the lesser of two numbers, one of which provides an immediately determinable maximum aggregate number of shares that may be issued under the plan in any event, the requirements of paragraph c 3 of this section are met.

In determining whether the stock ownership of an employee equals or exceeds this 5 percent limit, the rules of section d relating to attribution of stock ownership shall apply, and stock that the employee may purchase under outstanding options whether or not the options qualify for the special tax treatment afforded by section a shall be treated as stock owned by the employee.

An option is outstanding for purposes of this paragraph d although under its terms it may be exercised only in installments or after the expiration of a fixed period of time. If an option is granted to an employee whose stock ownership as determined under this paragraph d exceeds the limitation set forth in this paragraph d , no portion of the option will be treated as having been granted under an employee stock purchase plan. The aggregate voting power or value of all shares actually issued and outstanding immediately after the grant of the option does not include the voting power or value of treasury shares or shares authorized for issue under outstanding options held by the employee or any other person.

The following examples illustrate the principles of this paragraph d:. Employee V, an employee of Corporation K, owns 6, shares of K common stock, the only class of K stock outstanding. K has , shares of its common stock outstanding. Similarly, the result would be the same if, instead of actually owning 6, shares, V merely held an option on 6, shares of K stock, irrespective of whether the transfer of stock under the option could qualify for the special tax treatment of section , because this paragraph d provides that stock the employee may purchase under outstanding options is treated as stock owned by such employee.

Assume the same facts as in Example 1 , except that K is a 50 percent subsidiary corporation of Corporation L. An employee who owns or is treated as owning stock in excess of the limitation of this paragraph d , in any corporation in a group of related corporations, consisting of a parent and its subsidiary corporations, cannot receive an option under an employee stock purchase plan from any corporation in the group.

Employee U is an employee of Corporation M. M has only one class of stock, of which , shares are issued and outstanding. Assuming U does not own and is not treated as owning any stock in M or in any related corporation of M, M may grant an option to U under its employee stock purchase plan for 4, shares, because immediately after the grant of the option, U would not own 5 percent or more of the combined voting power or value of all classes of M stock actually issued and outstanding at such time.

Assume the same facts as in Example 3 but instead of an option for 4, shares, M grants U an option, purportedly under its employee stock purchase plan, for 5, shares.

Employee Stock Purchase Plans (ESPPs): Taxes

If an option is not granted to any employee who is entitled to the grant of an option under the terms of the plan or offering, none of the options granted under such offering will be treated as having been granted under an employee stock purchase plan. However, a plan that, by its terms, permits all eligible employees to elect to participate in an offering will not violate the requirements of this paragraph solely because eligible employees who elect not to participate in the offering are not granted options pursuant to such offering.

The following examples illustrate the principles of this paragraph e:. As a matter of corporate practice, however, N grants options under its plan to all employees, irrespective of their weekly rate of pay. Because the terms of the first offering satisfy the requirements of this paragraph e , stock transferred pursuant to options exercised under the first offering will be treated as stock transferred pursuant to the exercise of options granted under an employee stock purchase plan for purposes of section Corporation O has a stock purchase plan that excludes from participation all employees who have been employed less than one year.

Corporation P has a stock purchase plan that excludes from participation clerical employees who have been employed less than two years. However, non-clerical employees with less than two years of service are permitted to participate in the plan.

Corporation Q has a stock purchase plan that excludes from participation all officers who are highly compensated employees within the meaning of section q.

Corporation R maintains an employee stock purchase plan that excludes from participation all highly compensated employees within the meaning of section q , except highly compensated employees who are officers of R. Corporation S is the parent corporation of Subsidiary YY and Subsidiary ZZ. S maintains an employee stock purchase plan with both YY and ZZ participating in the same offering under the plan.

Assume the same facts as in Example 7 , except that Corporation S establishes separate offerings under the plan for YY and ZZ. Under the terms of the separate offering for YY, all employees of YY are permitted to participate in the plan.

The options granted under the separate offering for YY will be considered granted under an employee stock purchase plan. The laws of Country A require that options granted to residents of Country A be transferable during the lifetime of the option recipient.

Corporation T has a stock purchase plan that excludes residents of Country A from participation in the plan. Because compliance with the laws of Country A would cause options granted to residents of Country A to violate paragraph j of this section, T may exclude residents of Country A from participation in the plan. Thus, the provisions applying to one option under an offering such as the provisions relating to the method of payment for the stock and the determination of the purchase price per share must apply to all other options under the offering in the same manner.

If all the options granted under a plan or offering do not, by their terms, give the respective optionees the same rights and privileges, none of the options will be treated as having been granted under an employee stock purchase plan for purposes of section However, the carry forward of amounts withheld but not applied toward the purchase of stock under an earlier plan or offering will not violate the equal rights and privileges requirement of paragraph f 1 of this section, if all other employees participating in the current plan or offering are permitted to make direct payments toward the purchase of shares under a subsequent plan or offering in an amount equal to the excess of the greatest amount which any employee is allowed to carry forward from an earlier plan or offering over the amount, if any, the employee will carry forward from an earlier plan or offering.

The following examples illustrate the principles of this paragraph f:. The plan meets the requirements of this paragraph f. The plan will not meet the requirements of this paragraph f because the amount of stock that may be purchased under the plan is not based on a uniform relationship to the total compensation of all employees. In addition, the plan provides that employees who have not yet met the minimum service requirements on the first day of the offering will be granted similar options on the date the 18 month service requirement has been attained.

Corporation X is the parent corporation of Subsidiary AA, Subsidiary BB and Subsidiary CC. X maintains an employee stock purchase plan with AA, BB and CC participating in the same offering under the plan. Under the terms of the offering under the plan, options to purchase stock at a price equal to 90 percent of the fair market value at the time the option is exercised will be granted to all employees. Certain employees of AA are residents of Country B. The laws of Country B provide that options granted to employees who are residents of Country B must have a purchase price not less than 95 percent of the fair market value at the time the option is exercised.

The plan will not fail to satisfy the requirements of this paragraph f merely because the residents of Country B are granted options under the plan to purchase stock at a price equal to 95 percent of the fair market value at the time the option is exercised. Assume the same facts as in Example 4 , except that Corporation X establishes two separate offerings under the plan: Under the separate offering for the employees of BB and CC, options are granted to all employees with an exercise price equal to 90 percent of the fair market value at the time the option is exercised.

Under the separate offering for the employees of AA, options are granted to all employees with an exercise price equal to 95 percent of the fair market value at the time the option is exercised.

The plan does not violate the equal rights and privileges requirement of this paragraph f merely because the exercise price of options granted under one offering is less than the exercise price of options granted under a separate offering. Corporation Y maintains an employee stock purchase plan. Employee T is employed by Y. T is granted an option under the current offering to purchase a maximum of shares of Y stock at an option price equal to 85 percent of the fair market value of the stock at exercise.

The plan permits the carry forward of withheld but unused amounts from an earlier offering. The plan does not violate the equal rights and privileges requirement of this paragraph f. However, the option price must meet the minimum pricing requirements of this paragraph g. Any option that does not meet the minimum pricing requirements of this paragraph g will not be treated as an option granted under an employee stock purchase plan irrespective of whether the plan or offering satisfies those requirements.

If an option that does not meet the minimum pricing requirements is granted to an employee who is entitled to the grant of an option under the terms of the plan or offering, and the employee is not granted an option under such offering that qualifies as an option granted under an employee stock purchase plan, the offering will not meet the requirements of paragraph e of this section.

If the option price is stated as a dollar amount, then the requirement of this paragraph g can only be met by a plan or offering in which the price is fixed at not less than 85 percent of the fair market value of the stock at the time the option is granted.

If the fixed price is less than 85 percent of the fair market value of the stock at grant, then the option cannot meet the requirement of this paragraph g even if a decline in the fair market value of the stock results in such fixed price being not less than 85 percent of the fair market value of the stock at the time the option is exercised, because that result was not certain to occur under the terms of the option.

The following examples illustrate the principles of this paragraph g:. Corporation Z has an employee stock purchase plan that provides that the option price will be 85 percent of the fair market value of the stock on the first day of the offering which is the date of grant in this case , or 85 percent of the fair market value of the stock at exercise, whichever amount is the lesser. Notwithstanding that the option was issued under an employee stock purchase plan, the transfer of stock pursuant to the exercise of such option does not satisfy the requirement of this paragraph g and cannot qualify for the special tax treatment of section The option satisfies the requirement of this paragraph g , and can qualify for the special tax treatment of section If the option price is not less than 85 percent of the fair market value of the stock at the time the option is exercised, then the option period provided under the plan must not exceed five years from the date of grant.

ESPP max contribution

If the requirements of this paragraph h are not met by the terms of the plan or offering, then options issued under such plan or offering will not be treated as options granted under an employee stock purchase plan irrespective of whether the options, by their terms, are exercisable beyond the period allowable under this paragraph h. An option that provides that the option price is not less than 85 percent of the fair market value of the stock at exercise may have an option period of 5 years irrespective of whether the fair market value of the stock at exercise is more or less than the fair market value of the stock at grant.

However, if the option provides that the option price is 85 percent of the fair market value of the stock at exercise, but not more than some other fixed amount determined in accordance with the provisions of paragraph g of this section, then irrespective of the price paid on exercise, the option period must not be more than 27 months.

It is not required that an employee stock purchase plan or offering designate a maximum number of shares that may be purchased by each employee during the offering or incorporate a formula to establish a maximum number of shares that may be purchased by each employee during the offering. The following examples illustrate the principles of this paragraph h:. Options are exercised on the last day of the offering. One million shares of BB stock are reserved for issuance under the plan.

The terms of each option granted under an offering provide that a maximum of shares may be purchased by the option recipient during the offering. Because the maximum number of shares that can be purchased under the option is fixed and determinable on the first day of the offering, the date of grant for the option is the first day of the offering. The plan provides that employees who have not yet met the minimum service requirements on the first day of an offering will be granted an option on the date the month service requirement has been attained.

With respect to those employees who have been employed less than 18 months on the first day of an offering, the date of grant for the option is the date the month service requirement has been attained.

Money-Purchase Pension Plan

Assume the same facts as in paragraph i of Example 1 , except that the terms of each option granted do not provide that a maximum of shares may be purchased by the option recipient during the offering. Therefore the date of grant for the option is the last day of the offering when the option is exercised. Corporation CC has an employee stock purchase plan that provides that the option price will be 85 percent of the fair market value of the stock on the last day of the offering.

Each offering under the plan begins on January 1 and ends on December 31 of the same calendar year. The maximum number of shares that can be purchased under the option is fixed and determinable on the first day of the offering and therefore the date of grant for the option is the first day of the offering. In applying the foregoing limitation—. Furthermore, if the option was granted to an employee entitled to the grant of an option under the terms of the plan or offering, and the employee is not granted an option under the offering that qualifies as an option granted under an employee stock purchase plan, then the offering will not meet the requirements of paragraph e of this section.

Stock purchased under options to which section does not apply will not limit the amount that an employee may purchase under an employee stock purchase plan, except for purposes of the 5-percent stock ownership provision of paragraph d of this section. Under an employee stock purchase plan, an employee may not purchase stock in anticipation that the option will be outstanding in some future year. Thus, the employee may purchase only the amount of stock that does not exceed the limitation of this paragraph i for the year of the purchase and for preceding years during which the option was outstanding.

Thus, the amount of stock that may be purchased under an option depends on the number of years in which the option is actually outstanding. The amount of stock that may be purchased under an employee stock purchase plan may not be increased by reason of the failure to grant an option in an earlier year under such plan, or by reason of the failure to exercise an earlier option. For example, if an option is granted to an individual and expires without having been exercised at all, then the failure to exercise the option does not increase the amount of stock which such individual may be permitted to purchase under an option granted in a year following the year of such expiration.

The following examples illustrate the principles of this paragraph i:. Assume that Corporation DD maintains an employee stock purchase plan and that Employee S is employed by DD.

The option provides that it may be exercised at any time but cannot be exercised after May 31, However, S may not be granted another option under an employee stock purchase plan of DD or a related corporation to purchase stock of DD or a related corporation during the calendar years , , and , so long as the option granted June 1, , is outstanding.

The failure of S to exercise the option granted to S in , does not increase the amount of stock that S may be permitted to purchase under the option granted to S in Assume the same facts as in Example 1 , except that, on May 31, , S exercised the option granted to S in , and purchased shares of DD stock. Five hundred shares, the maximum amount of stock that could have been purchased in , under the option, are treated as having been purchased for the years and Only shares of the stock are treated as having been purchased for Corporation EE maintains an employee stock purchase plan and Employee R is employed by EE.

The option provides that it may be exercised at any time during years , , and Corporation FF maintains an employee stock purchase plan and Employee Q is employed by FF. On September 1, , FF grants Q an option under the plan that will be automatically exercised on August 31, , and August 31, The terms of the option provide that no more than shares may be purchased on each date that the option is automatically exercised.

For a limited exception to the requirement of this paragraph j , see section h 3. Thus, notwithstanding the inclusion of an amount as compensation in the gross income of an employee, as provided in this paragraph k , no income results to the employee at the time the stock is transferred to the employee, and no deduction under section is allowable at any time to the employer corporation or a related corporation with respect to such amount. See Example 9 of this paragraph k with respect to the determination of basis of the share in the hands of a surviving joint owner.

The following examples illustrate the principles of this paragraph k:. On June 1, , P exercises the option and on that date GG transfers the share of stock to P. The income tax consequences to P and GG are as follows—. Assume the same facts as in Example 1 , except that the option provides that the option price shall be 90 percent of the fair market value of the stock on the day the option is exercised. This is determined in the following manner: Assume the same facts as in Example 1 , except that the option provides that the option price shall be the lesser of 95 percent of the fair market value of the stock on the first day of the offering period and 95 percent of the fair market value of the stock on the day the option is exercised.

Assume the same facts as in Example 1 , except that instead of selling the share on January 1, , P makes a gift of the share on that day. Assume the same facts as in Example 2 , except that instead of selling the share on January 1, , P makes a gift of the share on that date.

These regulations apply to options granted under an employee stock purchase plan on or after January 1, Assume further that as part of the acquisition, X amends its plan to allow future grants under the plan to be grants to acquire Y stock.

IRS Issues Final Employee Stock Purchase Plan Regulations

Stiff , Deputy Commissioner for Services and Enforcement. Mundaca , Acting Assistant Secretary of the Treasury Tax Policy. Filed by the Office of the Federal Register on November 16, , 8: However, other personnel from the IRS and the Treasury Department participated in their development.

Subscriptions IRS Guidewire IRS Newswire QuickAlerts e-News for Tax Professionals IRS Tax Tips More. Employee Stock Purchase Plans Under Internal Revenue Code Section Table of Contents AGENCY: Offerings under an employee stock purchase plan. Employees covered by the plan.

Equal rights and privileges. Maximum number of shares that may be purchased by an employee. Adoption of Amendments to the Regulations. Note Filed by the Office of the Federal Register on November 16, , 8: Know Your Rights Taxpayer Bill of Rights Taxpayer Advocate Accessibility Civil Rights Freedom of Information Act No FEAR Act Privacy Policy. Treasury Treasury Inspector General for Tax Administration USA.

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