Options De Stock Des Employés Du Service De Recherche Du Congrès

OPTIONS D'ACHAT ET CALCUL DE PAIEMENTS SUR LES HEURES SUPPLÉMENTAIRES EN VERTU DE LA LOI FAVORABLE SUR LES NORMES DU TRAVAIL Rapport du CRS pour le congrès Options d'achat d'actions et calcul des heures supplémentaires Règle de la Loi sur les normes de travail équitables Mise à jour le 30 mai 2000 William G. Whittaker Spécialiste de l'économie du travail Pour les employés couverts, la rémunération des heures supplémentaires pour les heures travaillées de plus de 40 en une seule semaine est calculée, en vertu de la Loi sur les normes du travail équitables (FLSA), sur la base de la Loi sur les normes de travail équitables 1189 fois un taux de salaire régulier du travailleur. Lorsque le travailleur reçoit un salaire direct en espèces, le calcul est relativement simple. Toutefois, la rémunération peut également comprendre des avantages non pécuniaires tels que des dons, une participation réelle aux bénéfices, etc., et l'alinéa 7e) de la Loi explique comment ces éléments doivent être traités pour le calcul du taux normal. La façon dont les options sur actions et les éléments de valeur connexes doivent être traités peut être moins claire. Le 12 février 1999, en réponse à une enquête spécifique, la Division des heures et salaires du ministère du Travail a envoyé une lettre d'opinion expliquant que, dans les circonstances énoncées dans l'enquête, la valeur des options d'achat d'actions ne serait pas exclue de l'inclusion Dans le calcul du taux régulier FLSA. La lettre était précise et limitée à un seul cas, mais elle suscitait des inquiétudes au sein de la communauté patronale. Le refus d'exonération s'appliquerait-il plus largement et, dans l'affirmative, les employeurs pourraient-ils faire l'objet de poursuites pour les salaires dus à des heures supplémentaires? La question a été reprise par l'Association de la politique du travail (LPA) DC Il ya eu une série de conférences et d'échanges de lettres et, finalement, une audition devant le Sous-comité de la Chambre sur la protection des effectifs (2 mars 2000). Après des négociations entre les parties intéressées, une loi a été déposée à la Chambre et au Sénat le 29 mars: H. R. 4109 (Ballenger) et S. 2323 (McConnell). Le 5 avril, le Représentant Cunningham présente H. R. 4182. Le 12 avril, après avoir dépassé le processus d'audiences au Sénat, S. 2323 a obtenu l'approbation du Sénat, 95 à 0 et 5 n'ont pas voté. Le 3 mai, la mesure a été adoptée à la Chambre et adoptée par 421 voix contre 0, sans vote. La mesure a été signée par le président Clinton (P. L. 106-202) le 18 mai 2000. Le problème immédiat en vertu de la législation en suspens est relativement étroit: le traitement des options d'achat d'actions pour le calcul des taux réguliers. Si le traitement des options d'achat d'actions (et des instruments connexes) à des fins de taux réguliers n'est pas clarifié, les porte-parole de l'industrie ont indiqué que l'octroi de telles options aux travailleurs rémunérés à l'heure devrait cesser ou au moins être sérieusement diminué. L'exemption créée en vertu de la législation en suspens supprimerait un obstacle à la poursuite de ces arrangements. Sommaire Un problème émerge. 1 Réaction de l'industrie. 2 Une audience à la Chambre. 4 Création d'une solution législative. 4 Substance de la 8220Stock Option8221 Amendments. 6 Les 8220Stock Option8221 Dispositions. 6 Immunité rétroactive de responsabilité. 7 Autre. 8 Commentaire. 8 Calcul des salaires et des heures supplémentaires Selon la Loi sur les normes du travail équitables La Loi de 1938 sur les normes du travail équitables, telle que modifiée, est la loi fédérale de base régissant les salaires minima, les heures supplémentaires et les questions connexes. Elle exige que les travailleurs couverts, employés plus de 40 heures en une seule semaine, soient payés à un taux de 1189 fois leur salaire normal. Étant donné que toutes les indemnités ne sont pas en espèces, des exceptions sont prévues dans la loi en vertu de l'alinéa 7e) pour divers types de prestations non pécuniaires (dons, régimes de partage des bénéfices de bonne foi, plans d'épargne ou d'épargne bona fide, etc.) Pas être inclus dans le calcul du taux normal. La manière dont les options d'achat d'actions et la rémunération hors trésorerie y afférente doivent être traitées à des fins de taux réguliers peut ne pas être entièrement claire. Au début de 1999, le ministère du Travail (DOL) a publié une lettre d'opinion suggérant que les options d'achat d'actions pourraient, dans certaines circonstances, être incluses dans le calcul du taux normal. 1 Par implication, la lettre d'opinion a également soulevé le spectre de la responsabilité rétroactive potentielle pour les employeurs qui avaient mis des options d'achat d'actions à la disposition de leurs employés. Le résultat a été une mesure de préoccupation chez les employeurs et un appel à la clarification. Le 2 mars 2000, le Sous-comité de la protection des effectifs de la Chambre a tenu une audience sur le problème général des options d'achat d'actions et des heures supplémentaires. Par la suite, le 29 mars, le sénateur Mitch McConnell (R-KY) a déposé un projet de loi visant à modifier la LSF afin de donner une définition plus claire du taux normal en ce qui concerne les options d'achat d'actions (art. 2323). La loi parallèle (H. R. 4109) a été présentée à la Chambre par le représentant de Cass Ballenger (R-NC). 2 Le 12 avril, sans audience sur le projet de loi, S. 2323 a été adopté par le Sénat: 95 oui avec 5 pas de vote. Le 3 mai, le projet de loi a été convoqué à la Chambre et approuvé par 421 voix contre 0, sans vote. Il a été signé par le président Clinton le 18 mai 2000 (P. L. 106-202). Un problème surgit Au début de 1999, une enquête a été effectuée auprès de la Division des salaires et des heures du ministère du Travail relativement à un cas particulier dans lequel des options d'achat d'actions devaient être offertes aux employés. Pour compléter les règlements élaborés dans le cadre du processus de réglementation, DOL émet périodiquement 8220 lettres d'avis 8221 destinées à répondre aux exigences réglementaires en fonction de situations particulières du lieu de travail. Ainsi, on a successivement: le statut, le règlement d'application et 8220 lettres d'opinion.8221 Ces derniers traitent habituellement des cas individuels. Dans une lettre d'opinion datée du 12 février 1999, DOL a examiné les circonstances particulières énoncées dans l'enquête et a déclaré: 8220Non, le stock proposé Ne s'applique pas aux exclusions du taux ordinaire 3, tel que défini à la section 7 (e) (1) de la LSF.8221 La lettre d'information a ensuite répondu aux questions concernant les plans d'options d'achat d'actions et le taux normal: Avec le calcul de la valeur, les termes de l'option, quand elle doit être exercée, etc. Et la lettre close en notant que cette opinion est fondée exclusivement sur les faits et les circonstances énoncés dans l'enquête. 8220 L'existence d'autres antécédents factuels ou historiques qui ne sont pas contenus dans votre demande pourrait nécessiter une conclusion différente de celle qui est exprimée ici.8221 4 Réaction de l'industrie Lorsque la lettre d'opinion du 12 février a été portée à l'attention de la LPA, Axée sur les intérêts, basée à Washington, DC, a suscité diverses inquiétudes. Après avoir consulté les cabinets membres, le président de l'APL, Jeffrey McGuiness, a écrit au secrétaire du Travail, Alexis Herman, affirmant que 8220 cette nouvelle politique DOL rendra très difficile pour les entreprises d'offrir des options d'achat d'actions aux employés non exempts8221 8212, Payer des dispositions de la FLSA. McGuiness a déclaré le problème comme suit: En vertu de la décision, les employeurs doivent entreprendre une série trop compliqué de calculs pour payer les heures supplémentaires sur le bénéfice gagné par les employés horaires. Par exemple, si une entreprise donnait des options à 10 000 employés non exemptés, qui travaillaient tous des heures supplémentaires, la société devait faire ce qui suit: 8226déterminer la date d'exercice de chaque action exercée par chaque employé 8226déterminer le bénéfice de chacun Employé effectué sur le stock à la date de l'exercice 8226déterminer les heures supplémentaires effectuées par chaque employé pendant les semaines où l'employé détenait les options 8226calculer les heures supplémentaires supplémentaires envers chaque employé et 8226 couper un chèque pour les heures supplémentaires supplémentaires. Parce que les employés peuvent exercer des options à tout moment au cours de la vie du programme, dont beaucoup permettent aux employés de détenir des options pour une période de dix ans, les calculs des heures supplémentaires deviennent excessivement lourds. Quelques jours plus tard, le Représentant William C. Goodling (R-Pa.), Président de la Commission de l'éducation et de la main-d'œuvre, a écrit au Secrétaire Herman pour protester contre la confusion et la complexité des réglementations salariales et horaires déjà découragées par de nombreux employeurs. La Section 7 (e) de la LSF définit le taux régulier 8221 pour les calculs de la rémunération des heures supplémentaires et traite des types de revenus hors trésorerie que le taux normal ne doit pas inclure. 4 Lettre d'opinion de Daniel F. Sweeney, Bureau de la politique d'application de la loi, Division des salaires et des heures, Ministère du Travail des États-Unis. 12 février 1999. 5 Jeffrey C. McGuiness à Alexis Herman, 11 janvier 2000. travail acharné. L'interprétation du Département sur les plans d'options d'achat d'actions, 8221, at-il ajouté, 8220 complique davantage le problème.8221 6 D'autres échanges ont suivi. Bien que l'on ait fait valoir que les options d'achat d'actions pour les travailleurs rémunérés à l'heure représentaient une situation gagnant-gagnant, on a également noté qu'après cette politique, les employeurs pourraient assujettir les employeurs à des heures supplémentaires non prévues.8221 7 À moins que les ambiguïtés soulevées par la lettre d'opinion ne soient clarifiées, , Les employeurs cesseraient probablement d'offrir leurs options d'achat d'actions à des salariés rémunérés à l'heure. DOL a répondu qu'elle n'avait pas statué que les plans d'options d'achat d'actions doivent toujours être reflétés dans les paiements des heures supplémentaires. Nous n'avons pas non plus établi que les plans d'options d'achat d'actions ne peuvent pas être structurés de façon à satisfaire aux exigences de l'article 7 e) de la Loi. 8221 À ce moment-là, DOL a cherché à développer une meilleure compréhension de la façon dont la loi s'applique ou devrait s'appliquer à la vaste gamme de plans d'options sur actions8221 et a entrepris des discussions approfondies avec un large éventail de groupes. Afin d'identifier les facteurs pertinents pour savoir si un plan d'options d'achat d'actions devrait ou non être inclus dans le taux normal.8221 9 Pendant ce temps, les groupes d'intérêt se sont également organisés. La Fondation pour la politique de l'emploi, élément pédagogique de l'APL, a suggéré que la position du DOL sur les options d'actions 10 pourrait pénaliser des millions de travailleurs. La Coalition pour la promotion de l'actionnariat salarié (organisée en janvier 2000 en réponse à la lettre d'opinion du DOL) a exhorté le Congrès 8220 à élaborer une loi qui permet aux entreprises de continuer à offrir des options d'achat d'actions et d'autres programmes de participation aux travailleurs 11. Entre-temps, le secrétaire Herman a reconnu que le milieu de travail change constamment et que, pour maintenir l'esprit de la loi, parfois la lettre de la loi doit changer.8221 Elle a affirmé: 8220 Si toutes les parties intéressées travaillent Herman, 27 janvier 2000. La lettre a été co-signée par trois présidents des sous-comités du Comité de l'éducation et de la main-d'œuvre. 7 James A. Klein, président de l'Association des régimes de retraite et de prévoyance privés, à Alexis Herman le 24 janvier 2000. En date du 31 janvier 2000, le représentant Cunningham avait distribué une lettre 8220Dear Colleague8221 conseillant les membres de la question et Solution législative. Le 15 février 2000, avec d'autres députés, il a abordé la question dans une lettre adressée au secrétaire Herman. Voir Bureau des affaires nationales, Rapport quotidien sur le travail, 17 février 2000: A12-A13. (Ci-après dénommé DLR) 8 T. Michael Kerr au représentant de Cass Ballenger, président du Sous-comité sur la protection de la main-d'œuvre, 28 février 2000. 9 Ibid. 10 Communiqué, Fondation pour la politique de l'emploi, 2 mars 2000. 11 Communiqué, Coalition pour la promotion de l'actionnariat salarié, 2 mars 2000. La Coalition est identifiée comme étant composée de plus de 100 entreprises et associations professionnelles dédiées à travailler avec le Congrès, L'administration et d'autres groupes afin de préserver la capacité des employés non exemptés de recevoir les avantages de la participation au capital dans leurs entreprises.8221 12 Une audience à la Chambre Le 2 mars, le Sous-comité sur la protection de la main-d'œuvre a tenu une audience sur la question de l'option d'achat d'actions, sous la présidence de M. Ballenger. L'audience ne portait que sur le concept d'options d'achat d'actions pour les travailleurs rémunérés à l'heure; aucun langage législatif n'avait encore été présenté. Plusieurs porte-parole de l'industrie figuraient parmi les témoins. Randall MacDonald, vice-président de GTE et membre du conseil d'administration de la LPA, a expliqué comment les plans d'options d'achat d'actions fonctionnent et a souligné certains passifs 8221 à la suite de la lettre d'opinion. Même si le ministère du Travail décide de ne pas appliquer les lignes directrices de l'avis consultatif, la Loi sur les normes du travail équitables prévoit un droit d'action privé. Les tribunaux considèrent souvent les lettres d'avis consultatif comme une indication de la façon dont la Division des salaires et des heures, qui est l'organisme expert en matière de salaires et d'heures fédéraux, interprète la loi et les règlements qu'elle applique. Par conséquent, les tribunaux pourraient toujours considérer la lettre comme une directive principale dans l'interprétation de la FLSA. Cela signifie que les employeurs qui ont essayé de réduire l'écart et de donner des avantages similaires aux employés exonérés et non exonérés pourraient se trouver le sujet d'énormes poursuites en action de classe 13 fondées sur cette politique. Sous l'interrogation du Sous-comité, l'Administrateur Kerr a reconnu la nécessité de résoudre rapidement le conflit actuel et a exprimé sa volonté de coopérer avec le Sous-Comité pour élaborer un amendement approprié à la FLSA. L'élaboration d'une solution législative Au cours des deux prochaines semaines, les négociations se sont poursuivies entre le DOL et le personnel du Congrès, compliquées par des différences quant à la définition des types de programmes qui seraient couverts par une nouvelle exemption légale8221. Selon certaines estimations, 8220entre 7 millions et 10 millions Les non-fonctionnaires reçoivent une certaine forme d'options d'achat d'actions.8221 Mais, DOL a constaté qu'il n'y a pas beaucoup d'informations sur les 12221 au sujet du communiqué de presse, US Department of Labor, 8220Statement d'Alexis M. Herman sur Stock Options et le FLSA, 2000. Au cours des premières semaines de l'année 2000, le rôle des lettres d'opinion s'est manifesté sur deux fronts: le cas des options d'achat d'actions, discuté ici, et la couverture de l'OSHA sur les employés qui travaillent à domicile. Le 15 février 2000, le Représentant David McIntosh (R-IN), président du sous-comité de la réforme gouvernementale sur la croissance économique nationale, les ressources naturelles et les affaires réglementaires, a tenu une audience sur l'utilisation des lettres d'opinion. Voir Bureau des affaires nationales, DLR, 16 février 2000: AA1-AA2, E1-E2. 13 Déclaration de J. Randall MacDonald devant le Sous-comité de la Chambre sur la protection de la main-d'œuvre, 2 mars 2000. 14 DLR, 3 mars 2000: AA1-AA2. Kerr est cité comme ayant dit que la meilleure solution serait d'aborder cette question de façon législative. 15 Le 22 mars, le secrétaire Herman a comparu devant le Sous-comité sur le travail, la santé et les services sociaux et l'éducation de la Chambre et, comme indiqué dans le Rapport quotidien sur le travail, réaffirmer son engagement à résoudre la question dans une voie avantageuse pour les Américains Une semaine plus tard, le 29 mars, le secrétaire Herman s'est joint à un groupe bipartisan de membres de la Chambre et du Sénat pour annoncer l'introduction d'une loi corrective: S. 2323 (McConnell) et HR 4109 (Ballenger). Le rapport quotidien sur le travail a noté que la loi, la Loi sur les perspectives économiques des travailleurs, 8220 semble être sur la voie rapide8221. Elle a ajouté: 8220La présentation de la mesure a été saluée avec beaucoup de fanfare, en particulier des groupes représentant des employeurs de haute technologie, Qui s'appuient de plus en plus sur des options d'achat d'actions pour attirer et retenir des employés.8221 17 Le Sénat agirait en premier. Le sénateur McConnell a ouvert la discussion sur le projet de loi en déclarant que tout le monde gagne avec cette proposition. Il a souligné les lois du travail de l'époque de 193082178221 et a déclaré: 8220Il serait un Pour que les vieilles lois volent cette chance pour que l'employé moyen participe à la croissance économique de sa société.8221 Il a exhorté l'adoption de la loi afin que les lois du travail 8222 ne modifient pas les avantages que nos offres 8216New Economy8217 aux travailleurs américains .8221 Le sénateur McConnell a déposé dans le dossier une approbation de la Chambre de commerce des États-Unis pour le numéro 2323 et a noté: 8220. ce projet de loi comprend un vaste port 8217 qui stipule que les employeurs n'ont aucune responsabilité en raison d'options d'achat d'actions ou de programmes semblables qu'ils ont Donné aux employés dans le passé.8221 18 Divers sénateurs ont parlé en faveur de la loi aucun dans l'opposition. Et, aucune question critique de la proposition n'a été soulevée. Le sénateur Christopher Dodd (D-CT) a dit que l'administration Clinton-Gore est un solide appui de la loi. Le sénateur James Jeffords (R-VT) a souligné que les programmes d'options d'achat d'actions aident les employeurs à se doter d'un outil clé pour le recrutement, la motivation et la rétention des employés.8221 Le sénateur Mike Enzi (R-WY) envisageait 8220 secrétaires, ouvriers d'usine, concierges, Les options d'achat d'actions et a fait valoir que la ligne est obscurcissant sur qui est l'employeur et qui est l'employé.8221 Le sénateur Edward Kennedy (D-MA) a parlé à l'appui de la FLSA, notant le rôle fondamental 8222 il a joué 8220 dans assurer un niveau de vie plus juste Pour tous les travailleurs américains8221 et il a averti le Congrès 8220 de veiller à ce que tout changement apporté à cette importante loi ne porte pas atteinte aux protections salariales et horaires garanties aux travailleurs en vertu de la loi.8221 Il appuiera S. 2323, at-il dit, Abuser de l'acte comme une excuse pour exclure les travailleurs de rang des dossiers d'options d'achat d'actions.8221 15 DLR, 20 mars 2000: C1-C2. Italiques ajouté. L'estimation est faite par le Centre national de la propriété des employés. 16 DLR, 29 mars 2000: A1-A2. 17 DLR, 30 mars 2000: A12-A13. 18 Le débat au Sénat est résumé dans: Congressional Record, 12 avril 2000, p. S2575- S2586. Sans discussion dissidente, le débat a pris fin et le rôle a été appelé. S. 2323 a été approuvé par un vote de 95 yeas avec 5 membres ne votant pas. 19 Le 3 mai 2000, le projet de loi a été appelé à la Chambre. Le soutien à la proposition était bipartisan. Le major Owens (DN. Y.), s'exprimant au nom du projet de loi, a exprimé son plein appui sur le fait que les options d'achat d'actions spéculatives ne devraient pas faire l'objet d'heures supplémentaires et que le fait d'invoquer les exigences de la loi à posteriori 8221 Le représentant Ballenger a souligné le projet de loi comme un moyen par lequel 8220 pour protéger les programmes d'options d'achat d'actions pour les employés de rang et de fichier. 8221 Et, at-il affirmé: 82208221Avoyant travailleurs travaillant à la croissance de leurs entreprises est bon Pour le moral, bon pour les familles et bon pour le pays.8221 2 1 Après un bref débat au cours duquel aucune dissidence n'a été présentée, la Chambre a voté 421 à 0 pour adopter la loi (13 ne pas voter). 22 Le 18 mai 2000, le projet de loi a été signé par le président Clinton (P. L. 106-202). Substance de la 8220Stock Option8221 Modifications Dans la Loi sur les normes de travail équitables, la section 7 (e) définit 8220 taux régulier 8221 aux fins du calcul de la rémunération des heures supplémentaires à 1189 fois 8217s 8220 taux régulier.8221 En vertu de ce paragraphe, Le tarif ordinaire 8220 ne sera pas réputé inclure.8221 Le projet de loi (art. 2323 et HR 4109) ajouterait à cette liste un huitième alinéa. Le nouveau paragraphe 7 (e) (8) exclut toute valeur ou tout revenu provenant de subventions ou de droits accordés par l'employeur en vertu d'un droit d'option d'achat d'actions, d'un droit de plus-value d'actions ou d'un programme d'achat d'actions de bonne foi qui ne soit pas autrement Exclure en vertu de l'un des paragraphes (1) à (7) if82128221. Il énonce ensuite une série de qualificatifs: (A) les subventions sont faites en vertu d'un programme dont les modalités sont communiquées aux employés participants au début de la participation du salarié au programme ou au moment de la subvention ( B) dans le cas des options d'achat d'actions et des droits à la plus-value d'actions, la subvention ou le droit ne peut être exercé pendant une période d'au moins 6 mois après le moment de l'octroi (sauf que les subventions ou les droits peuvent devenir exerçables. : S2586 20 Compte rendu du Congrès, 3 mai 2000, p. H2443, 23 mai 2000, p. Dans le dossier du Congrès (le 12 avril 2000, p. S2576-S2581), une déclaration de l'intention du législateur et une analyse section par section de la proposition en raison du décès d'un employé, d'un handicap, d'une retraite ou d'un changement de propriétaire d'entreprise , Ou d'autres circonstances permises par règlement), et le prix d'exercice est d'au moins 85% de la juste valeur marchande du stock au moment de l'octroi (C) l'exercice de toute subvention ou droit est volontaire et (D) L'attribution et le montant des subventions ou des droits accordés par l'employeur qui sont fondés sur le rendement8212 (i) sont fondés sur les critères de rendement établis antérieurement (qui peuvent inclure les heures de travail, l'efficacité ou la productivité) de toute unité commerciale constituée de D'au moins 10 employés ou d'un établissement, sauf que les déterminations peuvent être fondées sur la durée du service ou sur le calendrier minimum des heures ou des jours de travail ou (ii) sur la base des résultats passés Plus d'employés dans une période donnée, pourvu que la détermination soit à la seule discrétion de l'employeur et non en vertu d'un contrat antérieur. En outre, le projet de loi modifie l'alinéa 7h). Les auteurs expliquent le but, ici, technique, de préciser que les montants exclus en vertu de l'alinéa 7e) du projet de loi ne sont pas pris en compte dans l'exigence d'un salaire minimum imposée par l'employeur en vertu de l'article 6 de la Fair Labor Standards Act et que les montants exclus En vertu de l'article 7 (e) (1) - (4) et de la nouvelle section 7 (e) (8) ne sont pas pris en compte dans le calcul de la rémunération des heures supplémentaires 24 en vertu de l'article 7 de la Loi. 8221 Immunité rétroactive de la responsabilité (A) qu'un programme d'options d'achat d'actions avait été en vigueur, (b) que sa valeur n'avait pas été prise en compte lorsque le taux régulier du travailleur a été calculé et (c) Le Ministère devait appliquer la lettre d'opinion sur les options d'achat d'actions au-delà du seul cas dont il traite), le projet de loi contient une clause prévoyant l'immunité rétroactive de cette responsabilité. Aucun employeur n'est responsable en vertu de la Fair Labor Standards Act de 1938 pour tout défaut d'inclure dans le taux régulier d'un employé. Tout revenu ou toute valeur découlant de subventions ou de droits accordés par l'employeur en vertu d'une option d'achat d'actions, d'un droit de plus-value d'actions ou d'un programme d'achat d'actions des employés. (1) les subventions ou les droits ont été obtenus avant la date d'effet visée à l'alinéa (c) 25 (2), les subventions ou les droits ont été obtenus dans la période de 12 mois commençant à la date d'entrée en vigueur mentionnée à l'alinéa c) Ce programme existait à la date de promulgation de la présente loi et exigerait l'approbation des actionnaires pour modifier ce programme afin de se conformer à l'alinéa 7e) (8). Ou (3) ce programme est offert en vertu d'une convention collective qui est en vigueur à la date d'entrée en vigueur prévue au paragraphe (c). Autre Le secrétaire du Travail a le pouvoir de formuler les règlements nécessaires à la mise en oeuvre des amendements 8221 énoncés dans la loi. Enfin, l'ensemble des modifications entrera en vigueur 90 jours après la date de sa promulgation. Commentaire De l'audition du Sous-comité sur la protection des effectifs et des déclarations des partisans de la loi, il semble clair qu'après la lettre d'opinion du DOL du 12 février 1999, des éclaircissements ont été jugés nécessaires. Il est peut-être moins évident de savoir si la clarification peut être obtenue grâce au processus de réglementation avec plus de souplesse que par le biais de la législation. Il n'est pas non plus évident que l'approche législative en suspens soit nécessairement la seule option possible. 8220 Le ministère du Travail a appuyé une solution législative étroite et ciblée limitée à la question particulière soulevée dans la lettre d'opinion, 8221 a observé le rapport quotidien sur le travail 8220, alors que les groupes d'affaires ont poussé pour une exemption large de la FLSA qui reconnaîtrait que les programmes d'actionnariat sont façonnés de nombreuses manières différentes .8221 26 Mais le ministère et les auteurs de la législation en suspens semblent avoir opté pour une loi. Le problème immédiat de la législation en suspens n'est pas de savoir si les employeurs devraient instituer des programmes d'options d'achat d'actions pour leurs employés ou si de telles initiatives sont des politiques publiques saines. La loi ne préciserait que le traitement des options d'achat d'actions à des fins de taux régulier en vertu de la LSF. Cependant, en l'absence de telles précisions, des témoins de l'industrie ont fait valoir que ces programmes d'options d'achat d'actions seraient probablement réduits. Avec l'adoption de la loi, un obstacle institutionnel à ces programmes est supprimé. 25 L'alinéa c) rendrait les modifications en vigueur 90 jours après la date de leur entrée en vigueur. Un rapport récent de la firme d'investissement de New York, Sanford C. Bernstein et Cie. Inc., précise qu'environ 45% de la rémunération des employés est En stock options. Cette augmentation de l'intérêt pour les options d'achat d'actions signifie que le planificateur de biens de bienfaisance et le planificateur de succession doivent connaître les règles de base sur les options d'achat d'actions, et comment ils peuvent être traités dans la planification des dons de bienfaisance et la planification successorale. 1 Options d'achat d'actions Les options d'achat d'actions sont un droit contractuel donné par une société à un employé (et parfois à un entrepreneur indépendant) d'acheter des actions dans la société à un prix indiqué par action pour une période déterminée. Il existe deux types d'options de base. Options non-statutaires (non-qualifiées) IRC sect 83: Généralement, ce type d'option n'est pas imposable pour un employé lorsqu'il est accordé, sauf si l'option a une valeur facilement vérifiable (c'est-à-dire qu'elle est effectivement négociée sur un marché de valeurs établi) au moment de l'octroi. La rémunération est réalisée lorsque l'option est exercée ou autrement cédée. La rémunération est égale à la différence entre la juste valeur marchande de l'action au moment de l'exercice et le prix d'exercice. Un employé peut choisir de reconnaître le revenu de la rémunération au titre de la subvention en procédant à un choix de l'article 83 (b) du CRI. Cela est rarement fait, cependant, en raison de la difficulté à déterminer la valeur de ces options. Aucun revenu ne sera alors réalisé lors de leur exercice subséquent. Options légales: Comprend les options d'achat d'actions incitatives (ISO) et les plans d'achat d'actions des employés. Un ISO est une option de compensation lorsque l'employeur accorde à l'employé le droit d'acheter le stock de l'employeur à un moment donné à un prix déterminé. En général, les ISO ne peuvent être accordées à une personne qui, à l'époque, détient plus de 10 des droits de vote de la société. Les règles d'attribution s'appliquent. Et pas plus de 100 000 de subventions ISO pour tout employé peut devenir exerçable pour la première fois au cours d'une année civile. Section 442 (d) de l'IRC Un plan d'achat d'actions des employés est utilisé par les employeurs comme méthode pour les employés d'acheter des actions de l'employeur qui utilisent habituellement des retenues sur la paie pour payer les actions. Ces régimes accordent des options aux employés pour acheter des actions de la société. Ce que le prix de l'option est et quand l'option est accordée sont des variables. Certains employeurs parrainent des offres à tous les employés d'un stock à un certain prix, et l'employé peut accepter l'offre et recevoir des actions une fois le prix d'offre est payé. D'autres régimes peuvent prévoir que les retenues sur salaire des employés servent à acheter des actions à un moment donné (comme la fin de chaque trimestre civil). Les retenues sur la paie qui n'étaient pas suffisantes pour acheter une part entière du stock peuvent être reportées à la prochaine période d'achat. La caractéristique la plus importante d'un plan d'achat d'actions est qu'il peut offrir des options avec un prix d'option compris entre 85 et 100 de la juste valeur marchande du stock, soit à la subvention ou à l'exercice. Entre autres exigences, l'employé (titulaire d'option) ne sera pas imposé lors de l'octroi ou de l'exercice d'une option légale, pourvu que l'option: soit par écrit ne soit pas transférable par le preneur d'option (autrement que par testament ou par lois de descendance et de distribution) Exerçable, pendant la durée de vie du preneur, uniquement par l 'optionné. Règl. Section 1.421-7 (b) Sections 422 (b) (6) et 423 (b) (9) de l'IRC Section générale des impôts: L'employé ne reconnaît pas le revenu imposable de rémunération au moment de l'octroi de l'option ou au moment de l'option Exercé (à moins qu'il ne soit exercé plus de trois mois après avoir quitté son emploi). Le prix pour cette évitement est que l'employé ne doit pas aliéner le stock au plus tard de deux ans à compter de la date de l'option a été accordée ou un an à compter de la date où l'employé a reçu les actions lors de l'exercice. Une disposition comprend une vente, un échange ou un don. Si l'employé dispose du stock avant la fin de la période de détention, il doit comptabiliser comme revenu de rémunération la différence entre le prix d'exercice de l'option et la juste valeur marchande du stock au moment de l'exercice de l'option. De plus, il comptabilisera un revenu égal à la différence entre sa base dans le stock (le prix d'exercice augmenté du montant inclus dans le revenu brut à titre de rémunération) et le montant qu'il reçoit dans la disposition. Si l'employé attend de disposer du stock jusqu'à la fin de la période de détention, il n'y aura pas de revenu de rémunération, mais il y aura des gains en capital possibles (à moyen ou long terme, selon la durée du stock). Les gains en capital seraient la différence entre le montant reçu dans la disposition sur la base du stock (c'est-à-dire le montant payé par l'employé lors de l'exercice de l'option). Implications minimales de la taxe minimale (AMT) pour les ISO: Bien que l'exercice d'une norme ISO ne donne pas lieu à un revenu imposable actuel, il y a des implications à l'égard de l'AMT. Lors du calcul du revenu aux fins de l'AMT, la différence entre la juste valeur marchande et le prix d'exercice sera considérée comme faisant partie du revenu AMT. Exemple: En 1998, A exerce 1.000 options pour les actions de X Corporation à 50 par action lorsque la juste valeur marchande du stock de X Corporation était de 75. Dans le calcul d'AMT, 25 000 seront ajoutés comme un élément d'ajustement. If A makes a disqualifying disposition of the ISO stock in 1999, the 25,000 that was recognized as compensation income in 1998 will not be reflected in the calculation of taxable income for AMT purposes in 1999. If, however, A sells all his ISO stock after the expiration of the ISO holding period at 100 per share, the gain on the sale of stock for AMT purposes would be 25,000 (100,000 of proceeds on sale, less 50,000 the cost basis of stock and less 25,000 the amount previously recognized as AMT income). Holding Period: The holding period for capital gains treatment does not begin until the option is exercised. Accordingly, stock must be held at least 12 months after exercise to obtain long-term capital gains treatment with 20 maximum tax rate. Where does cash for exercise come from Other assets. Brokerage loan and sale. Sale in same year. Disposition Of Option Stock Generally, a disposition is any sale, exchange, gift or transfer of legal title of the stock. IRC sect 424(c) provides certain exceptions: Transfer from a decedent who held ISO stock to an estate, or a transfer by bequest or inheritance. Exchange of ISO stock in certain nonrecognition transactions (e. g. reorganization). Pledge or hypothecation is not a disposition, but transfer pursuant to pledge or hypothecation is a disposition. Between spouses incident to a divorce. Acquisition in joint ownership with right of survivorship. Change in joint ownership is disposition. Taxpayer in bankruptcy. The IRS has ruled that: Purchase of a put on option stock is not a disposition. Rev. Rul. 59-242, 1959-2 C. B. 125 Short sale on option stock is a disposition. Rev. Rul. 73-92, 1973-1 C. B. 208 Charitable Alternatives Outright Gift of Acquired Stock to Charity (Intervivos or Testamentary): As long as the employee has held the stock for the required holding period - at least two years from the grant of the option, but also more than one year after its exercise - the gift is subject to the same deductibility rules as with any gift of appreciated long-term capital gain property: a charitable deduction at fair market value, subject to the 30 ceiling, and no capital gain imputed to the donor. Charitable Remainder Trust: After the holding period, an employee contributes acquired stock to a charitable remainder trust, and the trust sells stock. Another option is for the employee to establish a charitable remainder trust with other assets to offset gain in connection with exercise of option. Charitable Lead Trust: An employee establishes a charitable lead trust with cash proceeds of sale or with other assets to offset gain in connection with exercise of option. Charitable Gift Annuity: An employee transfers stock to charity in exchange for an annuity. Lifetime Gifts: Lifetime gifts are an important element of estate planning. Assets with significant appreciation potential are attractive property for giving. Options often fill the bill in this regard. However, the gift is not completed until employee performs services that are a precondition to exercise of the option. Rev. Rul. 98-21 Tax Implications for Option Holder: A transfer by gift is not considered disposition because it is not at arms-length. Règl. sect 1.83.7(a) The transferor, not the transferee, recognizes ordinary income on exercise. The transferee benefits because the option appreciates without being subject to income tax. Payment of income tax on exercise should not be considered a further gift subject to gift tax. Tax Implications for Transferee: On exercise of option, the transferee gets the cost basis equal to the sum of consideration paid by the transferee on exercise and amount of income realized by the donor. The transferee recognizes capital gains (or loss) only upon sale of the acquired stock. The holding period begins on date of exercise. Securities Law Restrictions Federal Law: For those employers whose stock is subject to SEC regulations, there are three primary securities law issues that must be considered in the establishment of an 153 plan: securities registration, proxy disclosure, and short swing profits. The stock to be offered under the option plan must be registered, usually through filing a Form S-8. Participants will receive information regarding the ISO plan and its operation, although this information does not necessarily have to be a separate document for securities law purposes. Annual proxy statements must disclose the existence and the details of an ISO plan, as well as the stock options granted to or exercised by directors and officers. Under sect 16(b) of the Securities Exchange Act, an officer, director, or owner of over 10 or more of the stock of a company (insider) may be sued by a shareholder for any profits realized by the insider for a purchase or a sale of a company stock within a six-month time frame (short swing profit). The Securities and Exchange Commission amended its rules regarding short swing profit liability effective May 1, 1991. SEC Rel. No. 28869 (2891) provides that the grant of the option is considered a purchase of company stock for determination of short swing profits. However, the grant is exempt from short swing profit liability if it is pursuant to a written employee benefit plan that is approved by the shareholders and that specified the basis for determining eligibility to participate in the plan, and that either: a committee of disinterested persons administers the plan, making decisions concerning the pricing, amount, and timing of grants and awards of securities or a formula predetermines price, amount, and timing of awards that can be granted to officers and directors. The plan, or a written agreement, with the employee also must provide that derivative securities are not transferable other than by Will or the laws of descent or distribution, or pursuant to a qualified domestic relations order. SEC Rule 144 Stock: Regardless of whether they are publicly traded or not, securities are subject to certain Securities and Exchange Commission rules regarding their sale if they are acquired, directly or indirectly, in a transaction or chain of transactions not involving a public offering (in which case they are restricted securities) from: 1) the company issuing them or 2) an individual or company affiliated with the issuing company (generally including officers and directors of the company, in which case they are control securities). SEC Rule 144 provides a safe harbor for the sale of these securities if all the conditions of the rule are met. Generally, Rule 144 requires that a charity and its donor together must hold restricted securities for a minimum of one year before their sale in accordance with the rule. It also imposes a value limitation on the amount of securities that can be sold by affiliates of the company during any three-month period and may require aggregation of the charitys sales with the donors. Adequate current information on the issuing corporation must be on file with the SEC. The SEC, as well as the principal national exchange on which the securities are listed, must be notified of the sale. Securities laws do not generally prohibit giving options, but donors restrictions on sale do apply to the donee (including charity). Publicly-Traded Securities and Private Foundations The rule that a donor receives a fair market value charitable deduction for income tax purposes for gifts of publicly traded stock to a private foundation is now permanent and retroactive to June 30, 1998. The CHESOP ESOP is tax qualified, defined contribution employee benefit plan whereby, in return for meeting certain rules that protect the interests of plan participants, the ESOP sponsors receive various tax benefits. Ordinarily, to set up an ESOP, the company creates a trust fund for employees and funds it by one, or a combination of the following tax deductible methods: contributing shares of the company contributing cash to buy company shares or having the plan borrow money to buy shares with the company then making payments to an ESOP trust to repay the loan. The employer can deduct (within limits) contributions to an ESOP, including both principal and interest on loan proceeds the ESOP uses to buy company stock. The employer can generally deduct reasonable cash dividends, if paid to an ESOP and used to repay the ESOP loan or passed through to participants on ESOP held stock. The shareholders of a closely held corporation can defer taxation on the gain resulting from their sale of company stock to an ESOP, provided the ESOP owns 30 or more of a companys shares after the sale, by reinvesting sale proceeds in qualified replacement property (QRP) consisting of stock or bonds in operating companies in the United States. A CHESOP is a combination of an ESOP and a gift to charity. The simplest way to implement this is to have the shareholder donate hisher privately held stock to a nonprofit institution, which then sells the stock back to an ESOP established by the company. The donor gets a charitable deduction for the full fair market value and avoids capital gains on the appreciation, or the owner of shares can use the proceeds of the sale to an ESOP to purchase a QRP and then give the QRP to a qualified charity. The individual owns the QRP with the same holding period and basis as the stock sold to the ESOP, but avoids capital gains and gets the full fair market value deduction by giving QRP to charity or, perhaps, to a qualified charitable remainder trust, retaining an income stream. Conclusion The following case study, Exhibit A . demonstrates a variety of options when selling stocks. The discussion includes selling stock in the same year with contributions of cash to a life income trust, charitable lead trust, and gift annuity. Also shown is the sale of stock after 18 months with contributions to a life income trust, charitable lead trust, and gift annuity. We believe the comparisons speak for themselves. Harry and Phyllis, both age 65, own incentive stock options worth 750,000. They intend to exercise their options, and then either hold the stock for at least 12 months, or sell it earlier. The questions they face are: What are the consequences of exercising the option What are the consequences of selling the stock within 12 months after exercise What are the consequences of selling the stock more than 12 months after exercise Are there other planning opportunities Besides the options, Harry and Phyllis own 1.5 million of other assets. For this case study, we will assume the remaining assets generate nontaxable income to this couple. Overall, they seek the following: to maximize tax benefits to enjoy more cash flow to minimize estate taxes to provide for the children and to provide for charity. Assume Harry and Phyllis exercise 10,000 options of X Corporation stock at 25.00 per share, when the fair market value of X Corporation stock is 75.00 per share. Assume further that X Corporation stock is worth 100.00 per share 12 months after exercise. Choice 1: Analysis Of Exercise And Sale Of Stock In The Same Year Choice 2: Analysis Of Exercise And Sale Of Stock In The Same Year Followed By Contribution Of Cash To 7 Charitable Remainder Trust Choice 3: Analysis Of Exercise And Sale Of Stock In The Same Year Followed By Contribution To Charitable Lead Trust Choice 4: Analysis Of Exercise And Sale Of Stock In The Same Year Followed By Contribution To Charity In Exchange For Charitable Gift Annuity Choice 5: Analysis Of Exercise Followed By Sale Of Stock After 12 Months Choice 6: Analysis Of Exercise Followed By Contribution Of Stock After 12 Months To 7 Charitable Remainder Trust Choice 7: Analysis Of Exercise Followed By Contribution Of Stock After 12 Months To Charity In Exchange For Charitable Gift Annuity Its a timely topic, as shown by recent articles in, for example, The New York Times . See the April 5, 1998 issue of Money Business for an article entitled Flying High on the Option Express and the April 19, 1998 section The Week in Review for a discussion entitled, Feeding the New Work Ethic, with a subhead of Stock Options Stoke Corporate Americas Lottery Fever. back 20 rate under Taxpayer Relief Act of 1997. Phase out of exemption over 150,000 and completely phased out at 330,000. back Assume full use of 1,250,000 joint exemption available in 1998. Joint exemption increases to 2,000,000 by 2006. back Charitable contribution deduction for 300,000 gift to 7 Life Income Trust. back Assume full use of 1,250,000 joint exemption available in 1998. back Assume 350,000 to 15-year 7 grantor lead unitrust produces 222,384 deduction, which can be utilized against 50 of Adjusted Gross Income. back Assume 250,000 of other assets used to exercise option. back Assume full use of 1,250,000 joint exemption available in 1998. back 375,073 not distributed until Lead Trust term ends in 15 years. back Deduction for establishment of 300,000 charitable gift annuity agreement. back Actual tax may be less because of taxation of gift annuity payments. back Assume full use of 1,250,000 joint exemption available in 1998. back Federal capital gains rate of 20 and State tax of 9.3. Assume results in no deduction for State taxes. back Assume full use of 1,300,000 joint exemption as of 1999. back Total charitable contribution deduction of 184,905 for 650,000 gift to 7 Life Income Trust for couple both age 67. Can be used in year of gift against 30 of adjusted gross income and carried forward up to five years. back Assume full use of 1,300,000 joint exemption as of 1999. back Deduction of 217,219 for establishment of 650,000 charitable gift annuity for couple both age 67. back Actual tax may be less because of taxation of gift annuity payments. back Assume full use of 1,300,000 joint exemption as of 1999. back Income from lead trust for 15 years. backPractical Charitable Planning for Employee Stock Options Because of the complex rules governing the taxation of stock options, careful planning is essential when considering a charitable contribution of stock options or of stock acquired through the exercise of stock options. In this article from Estate Planning Journal, attorney Richard L. Fox navigates the opportunities and obstacles that accompany these assets. Published on Jul 2005 This article is reprinted with the publishers permission from ESTATE PLANNING, a monthly journal on strategies for saving taxes, building wealth, and managing assets published by RIA under the WGL imprint. Copying or distribution without the publishers permission is prohibited. To subscribe to ESTATE PLANNING or other RIA journals please call 800.950.1216 or visit riahomejournals. For information on ESTATE PLANNING . click here . Employee stock options have traditionally been one of the most popular forms of deferred compensation used by corporations. In light of the enactment of the American Jobs Creation Act of 2004 (AJCA), which places substantial restrictions on other forms of deferred compensation, stock options are likely to become even more widely used as a means of compensating employees. 1 Given the substantial wealth often associated with employee stock options and the stock acquired upon the exercise of such options, both planners and charities should be aware of the potential adverse tax ramifications when donors are contemplating using inherently valuable stock options to further their philanthropic giving. This article explores issues to consider in this context, including the potential traps that exist for an unwary donor who contributes to a charity employee stock options or stock acquired upon exercise of the options, without fully analyzing or planning for the resulting tax consequences. 2 Background on employee stock options An employee stock option provides a corporate employee with a contractual right to purchase stock from the corporation at a specific price, typically referred to as the strike price, over a stated period of time. 3 Because the strike price remains fixed, an employee stock option becomes inherently more valuable as the fair market value (FMV) of the stock subject to the option increases over the term of the option. The Internal Revenue Code generally creates two categories of employee stock options: incentive stock options (ISOs) and nonqualified stock options (NQSOs). 4 ISOs provide certain income tax advantages that are not available to NQSOs, although, in return for such favorable treatment, ISOs are subject to certain conditions and limitations not applicable to NQSOs. 5 In addition to the rules applicable under the Internal Revenue Code, ISOs and NQSOs are subject to the terms and conditions of their respective underlying plan documents. These plan documents generally include provisions aimed at furthering the underlying purpose of granting employee stock options, which is to provide the employee with an incentive to contribute to the continued growth of the corporations value over the long term. For this reason, plan documents often impose vesting requirements before the options can be exercised, and may prevent the employee from transferring the options during life, including transfers to charity. 6 It is of the utmost importance, therefore, when planning for the use of stock options to consider carefully the specific terms and conditions of the applicable plan documents. ISOs, by their terms, may not be transferred by an employee during life, thereby preventing the possibility of an inter vivos transfer of these options to any transferee, including a charity. ISOs may be transferred by a testamentary disposition, however. Although ISOs cannot be contributed to a charity during life, the stock acquired upon the exercise of an ISO can be contributed, subject to certain holding period requirements in order to avoid triggering negative income tax consequences. While a plan document may permit inter vivos transfers of NQSOs to various permitted transferees (including charities), or the plan may be amended to provide for such transfers, the income tax consequences associated with NQSOs cannot be transferred, so the employee remains liable for the income tax associated with the exercise of an NQSO-no matter when the options are exercised or by whom. 7 This may produce a favorable result if an NQSO is transferred to a child or other family member the employee intends to benefit. 8 On the other hand, this could lead to a disastrous and presumably unanticipated result for an unwary donor who contributes NQSOs to his favorite charity, only to learn subsequently that he is personally liable for substantial income taxes resulting from the charitys later exercise of the options. Moreover, unless the employee retains control over the exercise of the NQSOs after their contribution, it appears that any available charitable income tax deduction attributable to the contribution of an NQSO is limited to the employees tax basis (which is likely to be zero), despite the ordinary income required to be recognized by the employee upon exercise by the charity. For this reason, NQSOs are generally not good candidates for lifetime charitable giving, although they are an ideal asset for testamentary charitable planning. Nevertheless, it is possible to combine other charitable giving techniques with the exercise of NQSOs during an employees lifetime, so as to further an employees philanthropic intentions while sheltering the income tax liability otherwise triggered upon the exercise of the NQSOs. Income tax consequences generally. An ISO is an option granted pursuant to a plan adopted by an employer that meets all the statutory requirements imposed under Section 422. 9 No income tax consequences result when an ISO is granted to the employee. Similarly, there are no income tax consequences to the employee upon the exercise of an ISO, even though the FMV of the stock acquired upon exercise may be substantially greater than the strike price paid for the stock. 10 Instead, only a subsequent disposition of the stock triggers income tax consequences, and the income realized from such disposition generally is characterized as capital gain. If the employee disposes of the stock within two years from the date of the grant of the option or within one year after the stock is acquired upon exercise of the option, a disqualifying disposition results. In that case, the employee must recognize ordinary income 11 in the year when the disqualifying disposition occurs, in an amount equal to the excess of the FMV of the stock at the time the ISO was exercised over the strike price paid for the stock. 12 This income, which is added to the tax basis of the stock acquired on exercise, 13 is equal to the bargain element of the stock purchase. Example 1. On 1105, the ABC Corporation grants Henry, an employee of the company, an ISO under which Henry can purchase 1,000 shares of ABC stock at 10 per share over a ten-year period. On 63005, when the FMV of the ABC stock is 20 per share, Henry exercises the option to purchase all 1,000 shares by paying 10,000 for stock having an FMV at that time of 20,000. Henry recognizes no income tax consequences upon the grant of the option or upon the exercise of the option. 14 Example 2. The facts are the same as in Example 1, except that Henry sells all 1,000 shares of the ABC stock on 113006 for 25 per share. Because the sale of the ABC stock occurs within two years following the grant of the option, the sale constitutes a disqualifying disposition. Accordingly, for the taxable year 2006, Henry must recognize ordinary income equal to 10,000-i. e. the excess of the 20,000 FMV of the ABC stock upon exercise over the 10,000 strike price the 20,000 FMV represents Henrys tax basis in the 1,000 shares of stock acquired upon exercise of the option. The difference between the 25,000 sale price and the 20,000 tax basis is long-term capital gain because Henry held the ABC stock for more than one year after the exercise of the ISO. Example 3. Assume the same facts as in Example 1, except that Henry sells all 1,000 shares of the ABC stock on 1109 for 35 per share. In this case, Henry has held the stock for a sufficient period of time (i. e. more than two years after the grant of the ISO and more than one year after the acquisition of the stock upon exercise of the ISO) to avoid causing the sale to constitute a disqualifying disposition. Accordingly, for the taxable year 2009, Henry recognizes long-term capital gain on the sale of the stock equal to 25,000-i. e. the excess of the 35,000 sale price over the 10,000 strike price paid by Henry. Henry recognizes no ordinary income. Prohibitions on lifetime transfers of ISOs to charity. An ISO is not transferable by the individual holding the option other than by will or the laws of descent and distribution, thereby foreclosing the possibility of lifetime transfers of ISOs to charity. 15 If an employee dies while holding an ISO that is transferable by will or the laws of descent and distribution, the option retains its status as an ISO. Consequently, the same favorable ISO rules apply to the estate of the employee or anyone who has acquired the ISO as a result of a bequest or inheritance or otherwise by reason of the death of the employee, subject to two exceptions which liberalize the rules otherwise applicable to an employee. 16 Under the first exception, the option need not be exercised within three months of the termination of the employment of the deceased employee. 17 Second, the estate or other person acquiring the ISO is not subject to the holding period requirements otherwise applicable in order to be accorded ISO tax treatment. 18 Provided the plan otherwise permits, an ISO may be used as a funding source for a charitable bequest, although the retention of ISO tax benefits is not particularly relevant to a charity, which is exempt from tax under Section 501(a). 19 Stock previously acquired upon the exercise of an ISO can be bequeathed to charity upon an employees death without resulting in a disqualifying disposition, no matter how long the employee held the stock following the exercise of the ISO. 20 Contributions of stock acquired pursuant to exercise of ISOs. Although an ISO cannot be transferred to a charity during an employees lifetime, the stock acquired pursuant to the exercise of an ISO can be contributed to charity as an inter vivos gift. In determining whether a disqualifying disposition occurs, however, a disposition is broadly defined to include a sale, exchange, gift, or a transfer of legal title. 21 Although certain transactions are excepted from the meaning of disqualifying distribution under Section 424(c)(1), a contribution to charity is not one of the enumerated exceptions. Accordingly, a charitable contribution of stock results in a disposition for this purpose. 22 Stock acquired pursuant to an exercise of an ISO, which is subsequently contributed to a charity within two years from the date the option was granted or within one year after the stock was acquired, therefore, results in a disqualifying disposition. If a disqualifying disposition occurs as a result of a charitable contribution of stock acquired through exercise of an ISO, the income tax consequences are as follows: The employee is required to recognize ordinary income in the taxable year of the contribution in an amount equal to the excess of the FMV of the stock at the time the ISO is exercised over the strike price. If the stock contributed to charity was held for more than one year following the exercise of the option, the available charitable income tax deduction may be based on the FMV of the stock at the time of the contribution, 23 even though a disqualifying disposition occurs. If the stock contributed to charity was held for one year or less following the exercise of the option, the maximum charitable income tax deduction is the FMV of the stock at the time the stock option is exercised, because any subsequent appreciation from the date of exercise through the date of the contribution would be subject to the reduction rules of Section 170(e)(1)(A). 24 Because a disqualifying distribution can result upon a charitable contribution of stock acquired pursuant to an ISO, such stock should generally be held for more than two years from the date of the grant and one year from the date of the exercise before it is contributed. 25 Otherwise, the donor will recognize ordinary income upon the contribution of the stock. In addition, if a disqualifying distribution results from the contribution occurring within one year of the exercise of the ISO (as opposed to resulting from the contribution being made within two years of the date of the grant of the ISO), the amount of the charitable income tax deduction will be limited to tax basis, notwithstanding that the FMV of the stock may be significantly greater. 26 The above rules apply to transfers to charitable split-interest trusts as well. For example, in Ltr. Rul. 9308021. the taxpayer proposed to transfer to a charitable remainder trust (CRT) stock acquired pursuant to the exercise of an ISO. Where the stock to be contributed would not meet the requisite holding period, the IRS ruled that the Taxpayer must include in gross income the difference between the fair market value of the stock at the date the options were exercised and the exercise price. The IRS also found that this amount will be includible in the Taxpayers gross income for the taxable year in which the stock is transferred to the trust. Where the ISO requisite holding period would be met, the IRS ruled that no income will be recognized by the Taxpayer upon the transfer to the CRT. NQSOs may be transferred during an employees lifetime because, unlike ISOs, there is no prohibition on lifetime transfers under the Internal Revenue Code. Nevertheless, the specific terms of the stock option plan govern the permissibility of transfers of stock options issued under the plan and, therefore, such terms should be reviewed prior to any contemplated transfer. For example, the terms of the plan may allow transfers only to family members or to legal entities established for the benefit of family members, thereby preventing transfers of the stock options to charity. Alternatively, the terms of the plan may permit charitable transfers, but only with the consent of the board of directors or a committee of the board. Unlike an ISO, the income tax consequences of which are governed by Sections 421 and 422, the income tax consequences with respect to NQSOs are governed by Section 83. Under Section 83, an employee generally does not recognize taxable income upon the grant of a nonqualified stock option. An exception to this general rule exists where the stock option has a readily ascertainable value, which requires that it be actively traded on an established securities market or meet all the following four conditions: (1) the option is transferable (2) the option is exercisable immediately in full (3) the option or the property subject to the option is not subject to any restriction or condition (other than a lien or other condition to secure the payment of the purchase price) which has a significant effect on the FMV of the option and (4) the FMV of the option privilege is readily ascertainable. 27 As a general rule, NQSOs granted to employees are not the type of options that are actively traded on an established securities market and will fail one or more of the above four requirements. Hence, in the usual situation, no taxable income will be recognized by an employee upon receipt of an NQSO. Unlike in the case of an ISO, when an employee subsequently exercises an NQSO, ordinary income must be recognized in an amount equal to the excess of the FMV of the stock at the time of exercise over the strike price. 28 As further discussed below, although NQSOs are not attractive for lifetime charitable giving, they are excellent candidates for testamentary bequests to charity. Moreover, the stock acquired on the exercise of an NQSO can be an ideal asset for charitable giving. Even if such stock is not held for a one-year period prior to its contribution to charity, the income tax charitable contribution deduction will equal the FMV of the stock on the exercise (or the FMV of the stock at the time of the contribution, if lower). 29 If the stock is held for one year following exercise, the deduction will be based on the FMV of the stock on the date of the contribution, thereby allowing any appreciation realized subsequent to exercise to be deducted. Consequences of inter vivos transfer of nonqualified stock options to charity. The Regulations under Section 83 address only the tax effects of a sale or other disposition of an NQSO in an arms length transaction. 30 Neither Section 83 nor the accompanying Regulations address the tax consequences of a transfer of an NQSO in the context of a non-arms-length transaction, such as a contribution to charity. 31 The IRS has ruled, however, that a contribution of an NQSO to charity does not trigger the immediate recognition of income to the employee, although the employee continues to be subject to Section 83 when the option is ultimately exercised by the charity. 32 Thus, although the contribution of the NQSO will not result in immediate recognition of income, the employee will not avoid recognition of the ordinary income associated with the exercise of an NQSO by contributing it to charity, even though the charity-rather than the employee-will subsequently exercise the option on its own behalf. 33 Instead, when the charity ultimately exercises the option, the employee must recognize ordinary income (as compensation) equal to the excess of the FMV of the stock at the time of exercise over the exercise price in the taxable year of exercise. Because the contribution of NQSOs does not allow an employee to escape taxation upon the exercise of the options, NQSOs do not offer the tax benefits associated with contributions of other types of property, where the donor avoids tax on the built-in gain attributable to contributed property. Further, if NQSOs-which have been held for over a year-are then contributed to charity, the available charitable income tax deduction nonetheless appears to be limited to the tax basis of the options, given that the Section 170(e)(1)(A) reduction rules should be applicable. 34 Assuming that the NQSO was not taxed to the employee upon its grant (the usual case), the employee will generally have no tax basis in the stock options, thereby reducing the charitable deduction to zero (notwithstanding that the NQSOs might otherwise have substantial value on the date of the contribution). Moreover, when the NQSOs are actually exercised and the employee recognizes ordinary income equal to the excess of the FMV over the strike price paid by the charity, a charitable income tax deduction would not appear to be available to the employee at such time, either for the amount of the income recognized by the employee or the tax required to be paid. 35 The inability of the employee to take a charitable deduction upon the exercise of the option by the charity is inconsistent with the application of the Section 170(e)(1)(A) reduction rules upon the contribution of the NQSO. Furthermore, from a policy standpoint, the employee should be entitled to a charitable deduction equal to the compensation recognized by the employee upon the exercise of the option by the charity. 36 From a technical standpoint, however, where the employee has, in fact, previously transferred all rights and title to the NQSOs to the charity, so that the transfer is fully complete for income tax purposes, no additional charitable deduction would appear to be available upon the subsequent exercise of the options by the charity, even though the income is required to be recognized by the employee upon the subsequent exercise of the options by the charity. 37 Although there is no clear authority on these issues, the likely result of contributing an NQSO to charity is that the donor is eligible only for a charitable income tax deduction in the year of the contribution limited to the tax basis of the options (presumably zero). This result is coupled with the fact that the donor recognizes ordinary income in the year in which the charity exercises the options, with no offsetting charitable deduction in that year. These negative consequences obviously make an NQSO a rather unattractive candidate for charitable giving. 38 One alternative for avoiding such consequences is set forth in Ltr. Rul. 9737016. There, NQSOs were transferred to a charity, but the transfer was not complete for income tax purposes because the employee retained a continuing inter vivos right to veto any proposed exercise of the options by the charity. 39 The employee also compelled the charity to pay the applicable withholding taxes attributable to the taxable income required to be recognized by the employee on the exercise of the options by the charity. 40 Because the transfer was not complete for income tax purposes, no charitable deduction was available on the transfer of the NQSOs to the charity. 41 The IRS ruled, however, that the gift of the options was complete when the charity exercised the options. At that time, said the IRS, the employee was entitled to a charitable deduction based on the FMV of the stock, without reduction under Section 170(e)(1)(A), given that the employee recognized income at the same time he was considered to have made a completed transfer of the options to the charity. 42 Thus, although the employee was taxed on the excess of the FMV of the stock on the exercise of the options by the charity, an offsetting charitable deduction based on FMV was available. The actual allowable deduction was equal to the FMV of the stock upon the exercise of the NQSO less the strike price paid by the charity, and was further reduced by the amount of the withholding taxes paid by the charity for which the employee would otherwise have been responsible. The resulting tax consequences in Ltr. Rul. 9737016 are presumably more favorable than where an employee makes a completed gift of NQSOs prior to their exercise by the charity. The tax consequences in Ltr. Rul. 9737016 are the same as where the employee retains the NQSOs, exercises them, and then immediately transfers to the charity the stock acquired on exercise or the sale proceeds thereon, less the required tax withholding, rather than making a transfer of the NQSOs to the charity. 43 The technique used in Ltr. Rul. 9737106, however, gives absolute assurance to the charity that it will ultimately receive the value associated with the options (although subject to lifetime veto rights by the employee), including the value of the options upon the employees death, without the charity facing the possibility that the employee might transfer the options to some other charity, either as an inter vivos or testamentary disposition. Using other charitable giving techniques in conjunction with exercise of NQSOs. Although the income associated with the exercise of NQSOs cannot be assigned by contributing the options to charity, other charitable giving planning techniques may be used in conjunction with NQSOs so as to shelter the income required to be recognized by the employee upon the exercise of the options. Often, employees with NQSOs already own substantially appreciated stock in the company issuing the NQSOs which has been held for over a year. This stock can be an excellent tool to shelter the income realized on the exercise of the NQSOs. In this situation, consideration should be given, for example, to the employee contributing such stock directly to a charity, to a CRT, a pooled income fund, or a grantor charitable lead trust. The charitable income tax deduction, which would be based on the FMV of the contributed stock, would then be available to offset the taxable income the donor recognizes upon the exercise of the NQSOs, subject to the applicable gross income percentage limitations imposed under Section 170. Testamentary bequests of NQSOs. In the context of a testamentary bequest of an NQSO, the IRS has ruled that the same treatment accorded nonvested property under Reg. 1.83-1(d) should apply when the charity exercises the option after the death of the employee. 44 As a result, an employees bequest of NQSOs to a charity will result in income in respect of a decedent (IRD) under Section 691 to the charity when the options are exercised, and not to the employees estate or to the heirs or devisees of the estate. 45 Because the IRD should not be considered unrelated business taxable income (UBTI) under Section 512, the income recognized by the charity should be fully exempt from tax under Section 501(a). Because the exercise of an NQSO will result in income to the charity, rather than to the employees estate, 46 a testamentary disposition of NQSOs produces a particularly attractive result, thereby making a bequest of an NQSO an excellent vehicle for testamentary charitable planning. The substantial wealth often associated with employee stock options and the stock acquired upon exercise may prove a useful source of charitable giving, although the tax rules associated with employee stock options are highly complex. Planners and charities should be aware of and fully consider the potential adverse tax consequences when donors are contemplating using employee stock options to further their philanthropic giving. In addition, the parties must be particularly careful to avoid the potential traps that exist for an unwary donor considering the contribution of either stock options or stock acquired upon exercise of such options. The American Jobs Creation Act of 2004 (AJCA) imposes substantial restrictions on the ability to defer the recognition of taxable income on deferred compensation. Section 409A. AJCA excludes incentive stock options (ISOs) from these restrictions, and provides a specific exclusion from FICA and FUTA wages with respect to the transfer of stock on the exercise of an ISO or any subsequent sale of that stock. All other stock option arrangements where the exercise price is at least equal to the fair market value of the stock on the date of the grant are also not subject to the restrictions imposed on deferred compensation under AJCA. back The same considerations and risks would apply to contributions of options, or stock acquired on the exercise of options, to split-interest charitable trusts, such as charitable remainder trusts and charitable lead trusts, as well as to pooled income funds. back For the definition of an option, as provided under the Regulations, see Reg. 1.421-1(a)(1). back ISOs are also referred to as statutory or qualified options, and NQSOs are also referred to as nonstatutory or nonqualified stock options. back In addition, the employer generally cannot take any compensation deduction on the issuance or the exercise of an ISO. back Most stock options granted to employees of publicly traded corporations historically were not transferable, generally so as to comply with the exemption requirements of Rule 16b-3 of the Securities Exchange Act of 1934. In 1996, however, Rule 16b-3 was amended, so that nontransferability was no longer required as a condition of qualifying for the available exemptions. Prior to the transfer of stock options or stock involving a publicly traded corporation, securities law aspects of such a transfer should be fully considered. In any event, as discussed below, ISOs, by their very terms, are not transferable during life. back As discussed below, however, if the NQSO is exercised following the death of the employee, the income that is triggered upon exercise is considered income in respect of a decedent, taxable to the person exercising the option. If the charity exercises an NQSO after the employees death, the income recognized upon the exercise is sheltered from tax because of the charitys tax-exempt status under Section 501(a). back The transfer of NQSOs to children or other family members allows the future appreciation potential to be transferred free of estate and gift tax, and the income tax liability associated with the exercise of the NQSOs remains with the employee-another advantage from an estate and gift tax planning standpoint. The IRSs position is that the gift of such options is not complete for gift tax purposes until the later of the transfer or the time when the donees right to exercise the option is no longer conditioned on the performance of services. Rev. Rul. 98-21, 1998-1 CB 975. Unlike noncharitable transfers, where the goal is to transfer property at its lowest value, the goal of a charitable transfer (for which both charitable income tax and gift tax deductions are available) is to transfer property at its highest value, so as to maximize the available charitable income tax deduction. back For example, to qualify for ISO treatment, the individual holding the option must remain an employee of the issuing corporation (or a parent or subsidiary of that corporation) at all times during the period beginning on the date the option is granted and ending on the day three months before the date of exercise. Section 422(a)(2). The ISO plan may, but need not, prohibit the exercise of the option more than three months following the termination of employment however, an exercise after such three-month period would not be accorded ISO treatment. The specific plan requirements for ISO treatment are found in Section 422(b). back Section 421(a)(1). The spread between the FMV of the stock upon the exercise of the option and the strike price paid is a tax preference item for purposes of determining the alternative minimum taxable income. Section 56(b)(3). Thus, although the exercise of an ISO does not cause the recognition of regular taxable income, the alternative minimum tax (AMT) consequences must be carefully considered prior to exercise of an ISO or the use of stock acquired via exercise of an ISO. back Such ordinary income is taxed as compensation and, accordingly, is subject to employer withholding requirements. back As indicated in note 10 supra, however, the excess of the 20,000 FMV over the 10,000 strike price is a tax preference item for AMT purposes. back Because a charity is tax-exempt, its exercise of the ISO or its sale of stock acquired upon exercise of the ISO is sheltered from tax under Section 501(a), since any such income should not be considered unrelated business taxable income (UBTI) under Section 512. Given the favorable income tax treatment accorded a testamentary disposition of an ISO, a bequest of an ISO may be more suitable to noncharitable beneficiaries, depending on the decedents other assets. back Section 424(c)(1)(A) (the term disposition does not include a transfer from a decedent to an estate or a transfer by bequest or inheritance). back A testamentary transfer to a charity is an enumerated exception, however. See note 20 supra. back Any deduction based on FMV is subject to the reduction rules of Section 170(e). back In such a situation, given that the holder of the option obtains a step-up in basis upon the exercise of the option equal to the FMV of the stock on the date of exercise, any appreciation in value from the date of the grant until the date of the exercise would not reduce the available charitable income tax deduction under Section 170(e)(1)(A) (because such appreciation is included as income and therefore increases the basis of the stock). back As in the case of any stock that continues to be held over a period of time, the employee is subject to the risk that the value of the stock acquired upon the exercise of the ISO will decline in value. In situations where, for whatever reason, it is anticipated that the stock acquired pursuant to the exercise of an ISO will substantially decline in value, a sale or contribution of that stock prior to the expiration of the applicable holding period should be considered, despite the consequences resulting from a disqualifying disposition. back The deduction is limited to basis in such a situation because if the stock were sold, it would not produce long-term capital gain. As a result, Section 170(e)(1)(A) would limit the deduction to the basis of the stock contributed, which would likely be equal to the strike price paid upon exercise. back The reason is that the basis of the stock acquired upon exercise is stepped up to its FMV as a result of the employee recognizing income at such time. Thus, even if the Section 170(e)(1)(A) reduction rules apply on the contribution of the stock (because any gain realized on the sale would not produce long-term capital gain), the minimum deduction would be based on the basis of the stock. In no event can the charitable deduction exceed the FMV of the stock on the date of the contribution, no matter what the basis. (Where basis exceeds the value, it is generally better to sell the stock, recognize the taxable loss, and contribute the sale proceeds to charity.) back In such a case, the receipt of money or other property upon such sale or disposition is taxed under Section 83 in the same manner as if the option had actually been exercised. The employee recognizes ordinary income (as compensation) as a result of the disposition, and Section 83 ceases to apply. The ordinary income is equal to the excess of the money or other property received upon the disposition over the employees basis in the option (which is generally zero). back See, e. g. Ltr. Rul. 200012076 (section 1.83-7 is silent regarding the transfer of a nonstatutory option in a non-arms length transaction). back See, e. g. Ltr. Ruls. 9737015 and 9737016. The IRS has similarly ruled that a transfer of NQSOs to family members does not cause the recognition of taxable income to the employee, even though the gift is complete for gift tax purposes. Voir, par exemple, Ltr. Ruls. 199952012 and 199927002 . back If the charity were to exercise the option after to the employees death, income in respect of a decedent would result upon the charity exercising the option. The IRS has ruled that such income is taxable to the charity, not to the decedent or the estate, as discussed below. back Under Section 170(e)(1)(A), the deduction that is otherwise available for the FMV of contributed property is reduced by any gain that would not have been long-term capital gain if the contributed property had been sold by the taxpayer at its FMV. If an NQSO is sold at its FMV, the employee recognizes ordinary income (not long-term capital gain) equal to the excess of the sale proceeds over the employees basis in the option, thereby triggering the Section 170(e)(1)(A) reduction rules. back Because the tax liability triggered upon the exercise of the NQSOs by the charity is an obligation imposed by operation of law, the payment of the tax liability by the employee would not be viewed as an additional contribution. Voir Rev. Rul. 2004-64, 2004-27 IRB 7 (payment of tax by settlor of grantor trust is not a gift by settlor to trust because settlor, not trust, is liable for the payment of the income tax). back Clearly, it seems inequitable and contrary to good tax policy for the deduction available for the contribution of NQSOs to be limited to tax basis (presumably resulting in no charitable deduction because the basis is likely to be zero) and for the donor later to be taxed fully on the subsequent exercise of the options by the charity. This is a worse result than if ordinary income property (such as short-term capital gain property or inventory) is contributed, in which case the deduction is limited to tax basis under Section 170(e)(1)(A), but the donor is not taxed on the sale of the property by the charity. back If an employee endorses over his paycheck to a charity or assigns the right to receive wages or compensation to a charity, the employee is generally taxed on such income, but is entitled to a corresponding charitable deduction. Voir, par exemple, McEneany . TCM 1986-413. Although an argument could be made that any compensation realized by an employee upon the exercise of an NQSO by a donee charity should similarly result in a corresponding charitable deduction, this does not appear to be the correct result under a technical analysis. When a paycheck, wages, or compensation is assigned to a charity, the gift is considered complete upon the payment of such compensation to the charity (at which point the compensation is recognized by the employee and the charitable deduction is taken). In contrast, the transfer of an NQSO to a charity results in a completed gift of such property at the time of the transfer, rather than upon the subsequent exercise of the option when the compensation is actually recognized by the employee. Under general Section 170 jurisprudence, if property is transferred to charity, the available income tax deduction is based on the FMV of such property when the transfer to charity is complete, rather than being based on the actual income subsequently received by the charity with respect to the contributed property. (AJCA no longer applies this approach with respect to contributions of vehicles and patents. In those instances, the amount actually received by the charity from such property serves as the basis for the amount of the charitable deduction available to the donor.) Thus, it would appear that any deduction available to an employee for the contribution of an NQSO to charity would be available only at the time the transfer of the NQSO to the charity is complete, rather than upon the subsequent exercise of the option by the charity. If, however, the donee charity exercises the option in the same taxable year as it receives it, Reg. 1.170A-4(a) (discussed further in note 42 infra) arguably appears to support a charitable deduction equal to the compensation recognized by the employee in that same year. back If an employee makes a contribution of an NQSO, consideration should be given to having the charity legally obligated to pay all required employer tax withholdings upon the exercise of the option by the charity. Otherwise, the employee will be required to pay such withholdings out of personal funds. Voir, par exemple, Ltr. Rul. 9737016 (imposing such an obligation upon the donee charity with respect to contributed NQSOs). back In support of its conclusion that a completed gift did not occur, the IRS cited Reg. 1.170A-1(e), which generally provides that no deduction is allowable if a transfer for charitable purposes is dependent on the performance of some act or the happening of some event. For a private letter ruling dealing with similar issues in the context of a contribution of NQSOs (where the options were subject to a gift administration agreement with an intermediary), see Ltr. Ruls. 9737014 and 9737015 . back Such a requirement could not, for example, be imposed on a CRT, because such a trust cannot pay any obligation of a noncharitable beneficiary payments to or on behalf of a noncharitable beneficiary of the CRT are limited to the annuity or unitrust payouts. Règl. 1.664-2(a)(4) (annuity trust) Reg. 1.664-3(a)(4) (unitrust). back As indicated above, however, if the transfer of the NQSO had been completed, any available charitable deduction appears to be limited to the tax basis of the stock options (presumably zero). back The IRSs determination regarding this issue was based on Reg. 1.170A-4(a), which provides that the Section 170(e)(1) reduction rules do not apply to reduce the amount of the charitable contribution where, by reason of the transfer of the contributed property, ordinary income or capital gain is recognized by the donor in the same taxable year in which the contribution is made. The IRS stated that the effect of the exercise of the NQSOs by the charity, i. e. triggering the recognition of compensation income by the employee, is similar to the situation considered in Reg. 1.170A-4(a), so that the NQSOs do not have an appreciated value at the time of the deductible section 170 contribution. The IRS also ruled that for purposes of applying the percentage limitations under Section 170(b)(1), the contribution of the NQSOs would not be considered a contribution of capital gain property, thereby making the more favorable gross income percentage limitations applicable. back This result is still not as good as the outcome from a contribution of appreciated long-term capital gain property, in which case a charitable deduction based on FMV is available and the donor recognizes no income on the sale of the appreciated property by the donee charity. back Ltr. Ruls. 200002011 and 200012076. Reg. 1.83-1(d) provides that if substantially nonvested property has been transferred in connection with the performance of services and the person who performed the services dies while the property is still substantially nonvested, any income realized on or after such death with respect to such property under Section 83 is IRD to which the rules of Section 691 apply. In Ltr. Rul. 200012076, the IRS stated that although section 1.83-1(d) refers only to income that is income in respect of a decedent under section 691 when a person who performed services dies before stock vests, that same treatment should be afforded to income attributable to options. back This is in contrast to the situation where the charity exercises an NQSO prior to the employees death, in which case the income recognized upon the exercise of the option is taxed to the employee, not to the charity. arrière