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W-2 income from employer stock buy-back


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An employer is buying back stock from employees, which it will be reporting as taxable income on their W-2s. It seems clear that this is includable for plan purposes (including deferral contributions) for a plan using "W-2" compensation definition (if the plan doesn't specifically exclude it) -- similar to an exercise of non-qualified stock options (NSOs).

But for employees who terminate employment prior the transaction (if the transaction happens within the later of 2.5 months or end of the year), is such compensation NOT treated as "regular pay after severance from employment" and so excluded? (It's clearly not part of optional "post-severance compensation.)

Treas. Reg. §1.415(c)-2
(ii) Regular pay after severance from employment.— An amount is
described in this paragraph (e)(3)(ii) if—
(A) The payment is regular compensation for services during the
employee's regular working hours, or compensation for services
outside the employee's regular working hours (such as overtime or
shift differential), commissions, bonuses, or other similar
payments; and
(B) The payment would have been paid to the employee prior to a
severance from employment if the employee had continued in
employment with the employer.
(iii) Leave cashouts and deferred compensation.— An amount is
described in this paragraph (e)(3)(iii) if the amount is either—
(A) Payment for unused accrued bona fide sick, vacation, or
other leave, but only if the employee would have been able to use
the leave if employment had continued; or
(B) Received by an employee pursuant to a nonqualified unfunded
deferred compensation plan, but only if the payment would have
been paid to the employee at the same time if the employee had
continued in employment with the employer and only to the extent
that the payment is includible in the employee's gross income.

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Are you certain the stock repurchase will generate W-2 income? Generally it's a capital transaction if the employee is selling stock he/she owns outright (unless the employer's repurchase is at a significant premium or is otherwise some form of disguised compensation). 

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31 minutes ago, EBECatty said:

Are you certain the stock repurchase will generate W-2 income? Generally it's a capital transaction if the employee is selling stock he/she owns outright (unless the employer's repurchase is at a significant premium or is otherwise some form of disguised compensation). 

I'm glad someone else posted this. I kinda wanted to do so, but was questioning myself. Didn't seem right.

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3 hours ago, EBECatty said:

Are you certain the stock repurchase will generate W-2 income? Generally it's a capital transaction if the employee is selling stock he/she owns outright (unless the employer's repurchase is at a significant premium or is otherwise some form of disguised compensation). 

That's my thought also, but the employer definitely has stated it will generate taxable W-2 income. Maybe they're not communicating it to us accurately, or they're handling it wrong. But we have to go with it and advise them on how to apply deferral elections.

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On 11/20/2020 at 6:00 PM, AndrewZ said:

That's my thought also, but the employer definitely has stated it will generate taxable W-2 income. Maybe they're not communicating it to us accurately, or they're handling it wrong. But we have to go with it and advise them on how to apply deferral elections.

Or tell them it seems wrong and ask for their legal or CPA back up. The time to make it right is now, not after it happens.

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7 hours ago, Bill Presson said:

Or tell them it seems wrong and ask for their legal or CPA back up. The time to make it right is now, not after it happens.

AndrewZ, the CPA's explanation as to why this is compensation income and not capital gain (if he or she has one, which I doubt) might be important to the classification of the compensation for purposes of the plan document and Section 415 regs.

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