$100,000 Annual Limitation on ISOs under Code Section 422(d)

[Guest Edward McElroy]

A ISO Plan provides that employees will vest 1/36th for each month of employment following the ISO grant. To avoid having optiobns treated as NQSO because of 100,000 annual limit, may the employer and employee agree to extend vesting schedule? For instance, could the vesting schedule be amended to provide that employees would vest 1/60th for each month of employment following grant.

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[Guest bswift]

in your situation i assume that the 1/36 vesting option has already been granted and a portion of that grant exceeded the $100,000 limitation and now you wish to amend the extend the vesting to 1/60th per month? Under that situation, amending the option to extend the vesting date would probably cause the entire option to be an NQSO. Any "modification" of an ISO will be deemed to be a grant of a new option, which means that the ISO then has to be repriced. under reg. 1.425-1(e)(5)(iii) any change in the terms of an option to qualify it as an ISO is deemed to be a modification. You are probably better off sticking with the original grant (unless of course the option is underwater then you might think about the regrant thing). hope that helps.

[Guest Harry O]

BSWIFT -

I'd have to dissent from the conclusion that extending the vesting schedule on an ISO would be a prohibited modification. Section 424(h)(3) limits a modification to any change which "gives the employee additional benefits under the option." In our case, the employee is in fact getting *less* benefits under the option -- delayed vesting from 3 years to 5 years.

I would look at Notice 87-49 which appears to indicate that ISOs must satisfy the $100,000 rule both at grant and at the time the vesting schedule is subsequently modified.

[Guest bswift]

harry o - i understand that generally a modification is one that gives the optionee more, not less benefits, but i thought that reg. 1.425-1(e)(5)(iii) provides that ANY change made to qualify all or any portion of an option that doesn't qualify as an ISO into an ISO is a modification. those are my thoughts.