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Help on misdated discounted option subject to 409A


Guest okok2k@yahoo.com.cn

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Guest okok2k@yahoo.com.cn

Hi,

I have stock option granted in 2004 and is subject to 409A because of discount. The company is trying to fix the issue by fixing the price and is waiting for SEC's approval, so called tender offer.

I get a very good offer from a another company but may lose it if I sit here and wait for the tender offer. so i am thinking to quit before the tender offer is presented and exercise all my vested share within one month after the termination (the term of the grant).

I never exercised my option except a few hunder shares in 2005. Nothing in 2006 and 2007.

My questions are:

a) Will that subject to 409A penalty tax? As termination of employement is the allowed event of distribution per 409A, i think it should be fine, but not very sure.

b) Do i need to amend the plan before quit? Or can this consider a reasonable, good-faith compliance with 409A wiithout the need to amend the plan.

c) Will my exercise in 2005 has any impact? Are my option tainted because of exercise in 2005? Will aggregation rule apply?

Thank you very much for help,

Michael

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Guest okok2k@yahoo.com.cn
Was the option fully vested before January 1, 2005?

No, my option vest 20% every year from 03/2004. i.e. 20% on 03/2005, and 1/60 every month thereafter.

thanks,

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a) Will that subject to 409A penalty tax? As termination of employement is the allowed event of distribution per 409A, i think it should be fine, but not very sure.

b) Do i need to amend the plan before quit? Or can this consider a reasonable, good-faith compliance with 409A wiithout the need to amend the plan.

c) Will my exercise in 2005 has any impact? Are my option tainted because of exercise in 2005? Will aggregation rule apply?

a) Probably subject to penalty tax, a discounted option would currently violate 409A if you can exercise at any time, even though you in fact exercise on termination.

b) If the option violates 409A, it needs to be fixed before you exercise, but your employer must decide what action to take (which it seems to have done)

c) No, your options exercised in 2005 do not taint the rest of your options--there is no 409A penalty on that exercise. The aggregation rule would apply to exercises after 2005.

It seems that if you exercise these options, you would have to take whatever 409A consequences occur. It's not the end of the world, an additional 20% tax is better than leaving all the vested options on the table if you leave.

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