Morris Manning & Martin, LLP

Tax Cuts and Job Acts: New Section 83(i) Election for Employee Stock Options and Restricted Stock Units

02.27.2018

Highlights

  • New law impacts employees receiving options or restricted stock units
  • Allows certain employees to defer tax for up to 5 years on exercise of options or vesting of restricted stock units
  • Requires making a tax election - 83(i) 

Employees who receive nonqualified stock options and restricted stock units (“RSUs”) are usually subject to tax when the award is exercised or settled.  Under the Tax Cuts and Jobs Act, certain employees of privately held corporations may be eligible to defer tax on the exercise or settlement of such awards for up to five years by making a Section “83(i) Election.” Private growing and start-up corporations may wish to implement stock incentive plans taking advantage of this new tax deferral feature.

Summarized below are the key requirements and considerations of the new 83(i) Election rules:

  • The corporation must have a written incentive plan in place that grants stock options or RSUs to at least 80% of its full-time U.S. employees.
  • The stock option or RSU award must be in exchange for the employee’s services and not subject to buy back by the corporation.
  • The corporation must provide notice to their eligible employees about the right to make the 83(i) Election as well as the tax impact of making such election.  The corporation is subject to a penalty for the failure to provide the notice.
  • The employee must make an affirmative 83(i) Election to the IRS no later than 30 days after the award vests and provide a copy of the election to the employer.
  • Once the election is made, tax to the employee can be deferred up to 5 years or until the earliest of the following:  the date the stock becomes transferable, the date the employee becomes an “excluded employee” (explained below), the date the corporation’s stock becomes publicly traded, or the date the employee revokes the 83(i) Election (with IRS approval).
  • The following are “excluded employees” and cannot make the election:  any individual who has ever served as the corporation’s CEO or CFO (or a spouse, child, grandchild or parent thereof), a 1% or more owner for the current or any of the 10 preceding tax years (or a spouse, child, grandchild or parent thereof), or one of the top four highest-paid employees for the current or any of the 10 preceding tax years.

The information presented and contained within this article is provided as general information only, and does not, and is not intended to constitute legal, employment or tax advice. Any opinions expressed within this article are solely the opinion of the featured author(s) and not of Morris, Manning & Martin, LLP.