Senators offer bill removing hurdles to offering stock options

Greg Nash

A bipartisan pair of Senate Finance Committee members on Tuesday introduced legislation that would make it easier for businesses to offer stock options to their employees.

Sens. Mark Warner (D-Va.) and Dean Heller (R-Nev.) said their bill would extend up to seven years the time that employees have to pay taxes after exercising their stock options of non-public firms.

{mosads}“When employee ownership is spread across a growing business, it has a huge impact on workplace culture, productivity and wealth creation,” Warner said. 

“Extending employee stock programs to a broader universe of workers will strengthen business growth and create new economic opportunities, especially for rank-and-file workers,” he said. 

Identical legislation was also introduced in the House by Rep. Erik Paulsen (R-Minn.).  

To qualify for the income tax deferral, the company is required to grant options to 80 percent or more of its employees annually.

Majority owners, corporate officers and the highest-paid executives will not be eligible for the seven-year tax deferment.

“This legislation will allow for companies, like startups and other small businesses, to offer competitive compensation packages to attract and retain key talent,” Heller said.

“When workers feel valued and appreciated, the sky’s the limit for both the employee and employer,” he said.

Under current law, employees are required to pay taxes on the difference between the amount paid and the fair market value of the stock. The employer receives a tax deduction on the date the employee exercises the option.

But for privately held companies, there is not usually a market for employees to sell shares to cover their tax liability so many employees are unable to exercise their stock options.  

For companies that are publicly traded, employees can sell all or a portion of their shares on the public market to pay for their taxes. 

The measure also requires employers to provide information, such as a drop in the stock price after an employee chooses deferment, or risk a penalty for failing to provide notice.

Also, if the company’s stock becomes readily tradable on an established market, or the employee decides to sell or transfer part or all shares to another person before the seven-year time period ends, the employee will have to pay tax. The employee also can decide to revoke the deferral and pay their income tax at any point. ​

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