The NASPP Blog

With the deadline to comment on the proposed ESPP regs coming up at the end of the month, I thought I would use my next few blogs to highlight some of the key issues in the regs that our members should be aware of. Today I discuss the definition of grant date under the regs. 

ESPP Grant Date

One of the most significant issues addressed by the proposed ESPP regs is the definition of grant date.  For Section 423 purposes, the grant date is important for four reasons:

1. Determination of the minimum permissible price (the price must be at least 85% of FMV at grant or purchase).
2. Determination of the number of shares that can be purchased under the $25,000 limitation (the value of the shares for purposes of the limit is the FMV at grant).
3. Start of the two-year statutory holding period (shares must be held for one year from purchase and two years from grant to qualifying for preferential tax treatment).
4. Determination of compensation income on qualifying dispositions (compensation income is equal to the lower of the discount at grant or actual gain on the sale).

Under the proposed regs, if the purchase price is not fixed when an employee enrolls in an offering, there must be a limit on the number of shares employees can purchase for the enrollment date to be treated as the grant date.  The regs specifically state that the $25,000 limit isn’t sufficient for this purpose; the plan must have separate fixed and determinable limit.  The limit can be a flat number of shares or can be established via a formula, but you have to be able to determine the maximum number of shares individual employees can purchase at the time that they enroll for their enrollment date to be considered their grant date.

The biggest implication here is that, without this limit, the plan can’t have a look-back.  With no limit and no fixed price, the purchase date becomes the grant date.  Thus, under #1 above, the price would have to be 85% of the FMV on the purchase date. 

The second most significant implication is that the two-year holding period wouldn’t start until the purchase date. This is less of an issue if the company’s stock price is increasing, however.  By moving the grant date to the purchase date, as long as the employee sells at a value higher than the FMV at purchase, the employee would recognize the same amount of compensation income on both a qualifying and disqualifying disposition.  Of course, if the employee sells at less than the FMV on purchase, there would be a difference in income: on a disqualifying disposition the employee would report income and a loss, whereas on a qualifying disposition the employee’s income would be limited to her actual gain, if any.

If you have a Section 423 plan, now would be a good time to make sure the plan has this limit.  If the plan lacks this feature, board action alone should be sufficient to amend the plan to include it (shareholder approval shouldn’t be required).  Discuss with your legal counsel whether it makes sense to add this provision now or to wait until the final regulations come out (it’s especially a concern if you have a new offering beginning now that won’t conclude for, say, 24 months, by which time the final regulations may be in effect).

I’ve looked at a couple of plans recently that don’t specify a maximum, but instead provide the plan administrator (usually the board or the compensation committee) with discretion to set one.  So long as this limit is established at the start of each offering (and I think it would be acceptable for the board/comp committee to establish a limit that is in effect for all future offerings until it is changed), this should still be sufficient to establish a grant date under the proposed regs and it provides some added flexibility.  For an example of this type of plan, see Gilead Sciences’s Employee Stock Purchase Plan (provision 6).   

For more information on the proposed ESPP regs, see our alert “IRS Proposes New Regulations for Section 423 ESPPs“

More on ESPPs at the NASPP Conference

And while we’re on the topic of ESPPs, I’m going to put in a shameless plug for my session, “Oops! Fixing ESPP Problems,” at this year’s NASPP Conference. My panel is going to discuss many common problems that occur in ESPPs, such as share shortfalls, inadvertently included or excluded employees, purchases in excess of plan limits, contribution glitches, and lots more!  We’ll highlight legal and accounting considerations for each scenario and provide real-world, practical solutions.  It’s going to be a great session covering information that I’ve never seen presented before; I hope to see you there!

Online Registration for the NASPP Conference Closes on Thursday

Online registration for the 2008 NASPP Annual Conference closes at 8:00 PM Eastern on Thursday, October 16.  Walk-up registrations will still be accepted on site, but will be subject to an additional $100 charge.  Avoid the last minute rush and save $100 by registering today. 

The 2008 NASPP Annual Conference will be held in New Orleans from October 21-24 (pre-Conference programs start on October 20). I look forward to seeing you all there!