The 2017 tax reform legislation created a new provision that allows certain employees to defer recognizing gain on certain employer-issued stock options and restricted stock units (RSUs) for up to five years following issuance.
The new provision contains several important restrictions, including rules that require the employer to issue options with similar features to at least 80 percent of employees and continue to withhold employment-related taxes based on the value of the benefits. Because many of the details in the law were vague, the IRS has recently released guidance designed to provide clarity for employers who wish to take advantage of the new deferral option.
The new guidance provides details on both the 80 percent requirement and the employer’s withholding obligations, and requires that the employer create an escrow arrangement in which the stock or RSUs must be held throughout the deferral period. The guidance has been initially received with mixed opinions, and we asked Professors Robert Bloink and William Byrnes, who are affiliated with ALM’s Tax Facts, and hold opposing political viewpoints, to weigh in on the new rules.
Below is a summary of the debate that ensued between the two professors.
Byrnes: This is one area that tax reform impacted where we really needed additional clarity and guidance from the IRS and Treasury. Employers have been reluctant to take advantage of the deferral option because of uncertainty, and this guidance is a very positive step in the right direction—the clarity should encourage more employers to take advantage of this tax deferral benefit.
Bloink: The new guidance created additional problems and complexities for employers who were already on the fence about the strict requirements of the new Section 83(i) deferral option. Offering stock options to at least 80 percent of employees was already a steep ask for many of the start-up type employers that would benefit most from this new compensation option, and the IRS guidance made this hurdle much more difficult to cross.
Byrnes: The guidance provides specific and detailed rules for what employers have to do to satisfy the 80 percent requirement. The rule isn’t bad just because it isn’t necessarily the easiest to satisfy—and it’s designed to make sure that the deferral option is offered to a broad range of employees within an offering company.