FOR IMMEDIATE RELEASE, Contact: (202) 225-7601
October 5, 2000
No. OV-24
Congressman Amo Houghton (R-NY), Chairman, Subcommittee on Oversight of the Committee on Ways and Means, today announced that the Subcommittee will hold a hearing to examine the Federal tax treatment of employee stock option plans under current law. The hearing will take place on Thursday, October 12, 2000, in the main Committee hearing room, 1100 Longworth House Office Building, beginning at 10:30 a.m.
Oral testimony at this hearing will be from invited witnesses only. Invited witnesses include representatives from the U.S. Department of the Treasury and the private sector, including representatives from trade organizations and benefit groups. However, any individual or organization not scheduled for an oral appearance may submit a written statement for consideration by the Committee and for inclusion in the printed record of the hearing.
BACKGROUND:
Businesses generally can offer their employees one of three types of stock option plans: (1) non-qualified stock options, (2) incentive stock options, and (3) employee stock purchase plans. Each type of stock option is treated differently under the Internal Revenue Code (I.R.C.).
Non-qualified stock options are the most utilized form, and their tax treatment is found in section 83 of the I.R.C. Typically, non-qualified options are granted by businesses to a set of employees on a date certain and must be exercised within a certain time limit. For publicly-traded companies, the price at which employees may purchase the options (the grant price) is generally the value of the stock at the close of the markets on the day that the options are granted. There are no tax consequences to either the employee or the business at the time of grant. When the employee exercises an option, he or she recognizes ordinary income on the difference between the value of the stock when exercised and the grant price. Income and employment taxes must be withheld. The employer is entitled to a deduction equal to the amount of ordinary income recognized by the employee. If the employee holds the stock for 12 months after the day he or she exercises the options before selling, he or she recognizes long-term capital gain on the difference between the sale price and the exercise price.
A company may offer an unlimited amount of non-qualified options to its employees (subject only to shareholder approval). The company may offer non-qualified options only to its officers or to all of its employees; there are no tax or Employee Retirement Income Security Act (ERISA) requirements limiting the amount of options that may be granted to highly compensated employees vis-a-vis rank and file employees.
The tax treatment of incentive stock options is found in section 422 of the I.R.C. Generally, incentive stock options may only be granted at a price, not less than the fair market value, on the day they are granted. The maximum value that may vest for the first time in any given year is $100,000 based on the value of the option on date the options are granted. Incentive options must also be exercised within 10 years of the date they are granted. There are no tax consequences to either the employee or the business when the options are granted. When the employee exercises the options, he or she does not recognize ordinary income but may be subject to the alternative minimum tax. If the employee holds the stock for longer than two years from the day the options are granted and more than one year from the day he or she exercises the options, he or she recognizes long-term capital gain on the difference between sale price and grant price. If the holding requirements are met, the company does not receive a deduction. If the holding requirements are not met, incentive stock options are treated as non-qualified options, and the employee generally recognizes ordinary income on the difference between the fair market value of the stock on the day of exercise and the price at which the options were granted. No withholding is required for disqualifying dispositions. In such circumstances, the company would receive a deduction equal to the ordinary income recognized by the employee.
A company may offer incentive stock options to its officers or to all of its employees; there are no tax or ERISA requirements limiting the amount of options that may be granted to highly compensated employees vis-a-vis rank and file employees.
The tax treatment of employee stock purchase plans is found in section 423 of the I.R.C. Employee stock purchase plans differ from non-qualified options and incentive stock options in that they must be offered to all employees. Typically, employees are allowed to contribute a percentage of their income (up to $25,000 per year), via a payroll deduction, toward the purchase of company stock. For example, an employee may contribute 10 percent of his income toward the purchase of company stock from January 1 through June 30 of a given year. On June 30, the amount contributed would be used to purchase stock (the exercise of the option) at a price set under the plan. The plan may allow the employee to purchase the stock at the price of the stock at closing of June 30, or, as many plans do, the plan may allow the employee to purchase the stock at the lower of the prices on January 1 and June 30. Plans may grant employees a discount of up to 15 percent below the price of the stock. Similar to incentive stock options, there are no tax consequences when an employee exercises the option for either the employee or the company. If the employee holds the stock for two years after the day they are granted and one year after he or she exercises the options, he or she will recognize ordinary income on the 15 percent discount but long-term capital gain on the appreciation of the stock. The company receives no deduction under these circumstances. If the employee does not meet the holding requirements, he or she recognizes ordinary income on the discount and short term capital gain on the remaining amount. In this instance, the company does receive a deduction. No income or employment tax withholding is currently required for either the discount or for disqualifying dispositions.
In announcing the hearing, Chairman Houghton stated: "Stock option plans help employees become stakeholders in their companies, which leads to an increase in productivity and a sense of ownership within the business. We need to make sure the law offers attractive incentives for employers to offer stock option plans to all of their employees."
FOCUS OF THE HEARING:
The focus of the hearing is to examine the Federal tax treatment of stock option plans under current law and proposals to strengthen incentives for employers to offer such plans.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Any person or organization wishing to submit a written statement for the printed record of the hearing should submit six (6) single-spaced copies of their statement, along with an IBM compatible 3.5-inch diskette in WordPerfect or MS Word format, with their name, address, and hearing date noted on a label, by the close of business, Thursday, October 26, 2000, to A.L. Singleton, Chief of Staff, Committee on Ways and Means, U.S. House of Representatives, 1102 Longworth House Office Building, Washington, D.C. 20515. If those filing written statements wish to have their statements distributed to the press and interested public at the hearing, they may deliver 200 additional copies for this purpose to the Subcommittee on Oversight office, room 1136 Longworth House Office Building, by close of business the day before the hearing.
FORMATTING REQUIREMENTS:
Each statement presented for printing to the Committee by a witness, any written statement or exhibit submitted for the printed record or any written comments in response to a request for written comments must conform to the guidelines listed below. Any statement or exhibit not in compliance with these guidelines will not be printed, but will be maintained in the Committee files for review and use by the Committee.
1. All statements and any accompanying exhibits for printing must be submitted on an IBM compatible 3.5-inch diskette in WordPerfect or MS Word format, typed in single space and may not exceed a total of 10 pages including attachments. Witnesses are advised that the Committee will rely on electronic submissions for printing the official hearing record.
2. Copies of whole documents submitted as exhibit material will not be accepted for printing. Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material not meeting these specifications will be maintained in the Committee files for review and use by the Committee.
3. A witness appearing at a public hearing, or submitting a statement for the record of a public hearing, or submitting written comments in response to a published request for comments by the Committee, must include on his statement or submission a list of all clients, persons, or organizations on whose behalf the witness appears.
4. A supplemental sheet must accompany each statement listing the name, company, address, telephone and fax numbers where the witness or the designated representative may be reached. This supplemental sheet will not be included in the printed record.
The above restrictions and limitations apply only to material being submitted for printing. Statements and exhibits or supplementary material submitted solely for distribution to the Members, the press, and the public during the course of a public hearing may be submitted in other forms.
The
Committee seeks to make its facilities accessible to persons with
disabilities. If you are in need of special accommodations, please
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event
(four business days notice is requested). Questions with regard to
special accommodation needs in general (including availability of
Committee materials in alternative formats) may be directed to the
Committee as noted above.