Empowering Employees through Stock Ownership Act Passes Ways and Means Committee

A bill to help employees in closely held companies defer taxation from the gain on exercised stock options and restricted stock units for shares that are not yet liquid has passed a key House Committee. H.R. 5719, the "Empowering Employees through Stock Ownership Act," passed the House Ways and Means Committee by a unanimous vote. The bill would allow employees to defer taxation on the gain from stock options or restricted stock units for whichever is later:

• Seven years after the awards are transferable (this appears to refer only to the availability of an option to sell an award before it is exercised, such as back to the company, on a secondary market, or when the company is sold)
• When the shares are publicly traded
• The date that is seven years after the first date the rights of the employee in such stock are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier
• The data the employee revokes the special tax status of the award
• The date on which the employee becomes an excluded employee

One-percent owners, CEOs and CFOs, and any of the top four compensated employees at any time during the last 10 years cannot qualify for this treatment. They lose their preferential treatment under this bill when they become excluded.

Awards must be made available to at least 80% of a company's employees on more than a de minimis basis, and they must be granted the awards with the same rights and privileges. The bill says that the company should use the guidelines under Code Section 423(b)(5), which covers employee stock purchase plans, to determine what this means. Typically, it involves such terms as vesting rules, forfeiture, redemption options, how the awards are allocated, etc. Barbra Baksa, executive director of the National Association for Stock Plan Professionals, says this provision leaves room for considerable uncertainty, as do some other sections of the bill.