On July 12, 2016, the U.S. House of Representatives recently passed the Empowering Employees through Stock Ownership Act, a bill that would make it easier for startups and businesses to give employees an ownership stake by awarding stock options or restricted stock units.
Current tax law makes it difficult for many companies to share equity with their workers, as it requires employees to pay taxes when they exercise their non-qualified options (note there is no tax on exercise of an incentive stock option) or when their restricted stock units (RSUs) vest. Private company employees generally don’t have the ability to sell shares to cover their tax liability because there is no public market (or liquid secondary market) for the stock. So, they must pay the costs out of pocket. Without money to pay the IRS, a lot of employees end up passing on a chance to own the stock, and miss out on a potentially significant financial opportunity.
The “Empowering Employees through Stock Ownership Act” would amend the Internal Revenue Code to allow an employee to elect to defer, for income tax purposes, income attributable to certain stock transferred to the employee by an employer.
Under the bill, the employee could defer the inclusion of income from the stock until the year that includes the earliest of the dates on which:
- the stock becomes transferable;
- the employee becomes an excluded employee;
- stock of the corporation becomes readily tradeable on an established securities market;
- seven years have passed after the rights of the employee in the stock are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier; or
- the employee revokes the election with respect to the stock.
The stock must meet specified requirements and be transferred to the employee from an eligible corporation in connection with the performance of services as an employee.
In order to be eligible for the tax deferral, a corporation must extend stock options or RSUs to 80% of the workforce and not have any stock traded on an established exchange. Exclusions apply if the employee is a 1% owner, the CEO or the CFO, or has been one of the four highest paid officers during the past 10 years. The corporation transferring stock must also notify employees regarding the option of deferring income and meet specified withholding and reporting requirements.
I’ll keep you posted on the success of the bill.
