The NASPP Blog

The next area of the proposed ESPP regs that I’d like to bring your attention to is the calculation of the $25,000 limit. 

As I’m sure you know, under Section 423, participants in an ESPP cannot purchase more than $25,000 worth of stock per year. Where an offering spans multiple calendar years, however, if a participant does not purchase a full $25,000 worth of stock in the first year of the offering, the unused portion of the limitation can be carried forward to the next year and increases the amount of stock the participant can purchase in that year. The proposed regulations “clarify” that participants accrue the right to purchase $25,000 worth of stock only in years in which their options under the plan are both outstanding and exercisable.

This is a key consideration when the first purchase under an offering occurs in a different calendar year than the year the offering began. For example, assume that an offering under a company’s ESPP begins on October 1, 2008 and the first purchase under the offering will occur on March 31, 2009. A common practice now is to allow participants to purchase $50,000 worth of stock on March 31: $25,000 worth carried forward from 2008 and another $25,000 worth for 2009. The regulations would limit the amount of stock that could be purchased on March 31 to $25,000 worth. Since participants did not have the right to purchase stock under the plan in 2008, they do not accrue the right to purchase $25,000 worth of stock for that year, even though the offering began then.

The term “clarify” is significant, implying that the IRS doesn’t consider this to be a rule change but that companies should have been applying the limit in this manner all along. I know that many companies, especially here in California, have taken the more liberal approach and are wondering if they need to change their practices now, before the final regulations are issued. I’m not sure what the answer is–on one hand, changing to the more conservative approach is a less aggressive strategy. But, changing would be administratively burdensome if your ESPP tracking system doesn’t support the conservative approach; may not be necessary, since it’s always possible that things can change in the final regulations; and, in that event, could unfairly restrict employee purchases. The current economic environment doesn’t help any, since employees are more likely to hit the $25,000 limit when stock prices are declining–making this something that many companies are likely to have to address.

In his September 30, 2008 blog on CompensationStandards.com, Ed Burmeister of Baker & McKenzie takes issue with the IRS’s interpretation. Ed makes a good argument that the tax code clearly states that employees can purchase $25,000 worth of stock for each year the option is outstanding. Although, under the code, the right to purchase stock doesn’t accrue until the option becomes exercisable, if, at that point, the option has been outstanding during multiple calendar years, the language in the code doesn’t seem to preclude accruing the right to more than $25,000 worth of stock at that time.

NASPP Conference is Going Great

This week I’m blogging to you from New Orleans, where the 16th Annual NASPP Conference is in full swing. We have a great turn-out this year and so far, all the sessions have been excellent. Those of you that aren’t here don’t have to miss out, however. All of the Conference sessions are being recorded; you can purchase the audio and listen to it at your convenience. I know that my staff and I will be listening to the recordings of the sessions we aren’t able to attend.

– Barbara