Certain states also have adopted similar tax provisions.(For example, California imposes an additional 20 percent state tax, interest, and penalties.) Implications for discount stock options Under Section 409A, a stock option having an exercise price less than the fair market value of the common stock determined as of the option grant date constitutes a deferred compensation arrangement.Employee stock options generally fall into two categories: qualified or statutory options, and non-qualified options (also called NSOs).
Recent press reports of SEC investigations have focused the attention of the regulators and the public on "backdated" stock options.In the case of any specified employee, the requirement of subparagraph (A)(i) is met only if distributions may not be made before the date which is 6 months after the date of separation from service (or, if earlier, the date of death of the employee). 110–458 effective as if included in the provisions of Pub. 109–280 to which the amendment relates, except as otherwise provided, see section 112 of Pub. 110–458, set out as a note under section 72 of this title. The amendments made by this section shall not apply to any nonelective deferred compensation to which section 457 of the Internal Revenue Code of 1986 does not apply by reason of section 457(e)(12) of such Code, but only if such compensation is provided under a nonqualified deferred compensation plan—, a plan described in the preceding sentence adopts a plan amendment which provides a material change in the classes of individuals eligible to participate in the plan, this paragraph shall not apply to any nonelective deferred compensation provided under the plan on or after the date of the adoption of the amendment.” For special rules on applicability of amendments by subtitles A (§§ 101–108) and B (§§ 111–116) of title I of Pub. 109–280 to certain eligible cooperative plans, PBGC settlement plans, and eligible government contractor plans, see sections 104, 105, and 106 of Pub. 109–280, set out as notes under section 401 of this title.For purposes of the preceding sentence, a specified employee is a key employee (as defined in section 416(i) without regard to paragraph (5) thereof) of a corporation any stock in which is publicly traded on an established securities market or otherwise. 109–135 struck out “first” after “requires that the”. ], the Secretary of the Treasury shall issue guidance under which a nonqualified deferred compensation plan which is in violation of the requirements of section 409A(b) of such Code shall be treated as not having violated such requirements if such plan comes into conformance with such requirements during such limited period as the Secretary may specify in such guidance.”], the Secretary of the Treasury shall issue guidance on what constitutes a change in ownership or effective control for purposes of section 409A of the Internal Revenue Code of 1986, as added by this section.” Written determinations for this section These documents, sometimes referred to as "Private Letter Rulings", are taken from the IRS Written Determinations page; the IRS also publishes a fuller explanation of what they are and what they mean. It appears that the IRS updates their listing every Friday.Option "backdating" is the term that has generally been applied in the media to instances where executives have intentionally dated an option at a date earlier than the actual date of grant for the purpose of reporting a lower strike price, thereby increasing the spread (or gain) at exercise.While there are certain instances where this was done intentionally, there are also cases where the lapse resulted from an inadvertent failure to follow the companys option grant practices.
While stock option backdating scandals for public companies have littered the business pages for months now, many privately held companies are likely grappling with their own stock option headaches.