Qualified Equity Awards - Code Section 83(i)

Added by Section 13603 of the Tax Reform Act of 2017


Here is an excellent overview from this TowersWatson Memo (2017.12.20):

PRIVATE COMPANY EQUITY GRANTS
The legislation includes new Code section 83(i), which would delay for up to five years the taxation of compensation paid to employees of “eligible corporations” in the form of “qualified stock.” An “eligible corporation” is one with stock that is not readily tradable on an established securities market and that has a written plan in place to grant stock options or restricted stock units (RSUs) to at least 80% of all full-time, U.S.-based employees.  “Qualified stock” is:

  • Received in connection with the exercise of options or settlement of RSUs
  • Provided for an employee’s performance of services during a calendar year in which the corporation was an eligible corporation

Stock would not be considered “qualified stock” if the shares can be liquidated by permitting the employee to transfer the stock back to the corporation for cash once it first becomes transferable or not subject to a substantial risk of forfeiture.
Employees must make an affirmative election within 30 days of the date of an equity grant to defer income taxes on qualified stock, or be taxed, similar to an 83(b) election under current law. Once this election is made, income taxes on qualified stock would be due upon the earliest of the following:

  1. The date the stock is transferrable, including to the employer
  2. The date the employee first becomes an “excluded employee” (i.e., CEO, CFO or a 1% owner or one of the top four highest-paid employees for any of the 10 preceding taxable years, determined on the basis of the Securities and Exchange Commission disclosure rules for compensation, as if such rules applied to such a corporation).
  3. The first date any stock of the employer becomes readily tradable on an established securities market
  4. The date five years after the date the employee’s right to the stock is not subject to a substantial risk of forfeiture
  5. The date on which the employee revokes a deferral election

For employees to be eligible to make an 83(i) election, an eligible corporation would need to grant at least 80% of all full-time, U.S.-based employees stock options or RSUs that have the same rights and privileges (determined under the rules for Employee Stock Purchase Plans in Code section 423(b)(5)). To meet this standard, employees may receive different amounts of stock, but each participant must get more than a de minimis amount and employees cannot be granted a combination of stock options and RSUs during a year (i.e., they must be granted stock options or RSUs for the year).
Employees that have made 83(b) elections with respect to any stock options are not eligible to make elections under Code section 83(i). Additionally, the deferral election is generally not available if the corporation has bought back any outstanding stock in the preceding calendar year, unless at least 25% of the total dollar amount the company bought back is stock to which a Code section 83(i) deferral election is in effect and the determination of which individuals from whom such stock is purchased is made on a reasonable basis. In applying this requirement, stock subject to the longest deferral election under Code section 83(i) must be purchased first. 
The employer would be subject to reporting requirements regarding stock on which employees have deferred income tax. The employer would also be required to provide notice to employees about their right to defer income tax on the stock as well as the consequences of the deferral. Employees who make the election would pay tax on the share value at vesting, which could decline over the deferral period. 
Finally, qualified stock under 83(i) would not be treated as deferred compensation for purposes of Code section 409A.

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