Non qualified stock option plan and its effects on HCE determination

[Guest smhjr]

I'm having a tough time finding information on how to calssify employees that are a part of a non-qualified stock option plan.

A closely held corporation implemented a stock option plan during 2003 in which 40% of the company was optioned out to 4 employees. The shares are vested over a 5 year period and no more than 20% may be excercised each year.

The only real bit of info I have found is one line in the control group section (subheading of constructive receipt) of a pension resource book we have that says:

"An option to acquire stock causes the option holder to be treated as owning the stock."

If this is true to determine highly compensated or not for 2003, then the 4 employees are considered highly compensated for 2003 because they were all given at least 5% of the overall company. If I apply the vesting schedule to the amount of shares though, a couple of them are not vested in 5% of the overall value of the company. 3 of the 4 employees would not be considered highly compensated based on their annual salary.

Anyone have any thoughts on this? It of course makes a big difference in the testing of their profit sharing plan.

[BeckyMiller]

The concept of ownership for highly compensated is found in the top heavy rules. For attribution purposes, these rules rely on IRC Section 318. IRC Section 318(a)(4) does attribute ownership to an individual from options. But, I can't prove the answer with respect to non-vested options. So, I suggest you do some research on that point. Note, the regulations are no help at all. you will have to go deeper than that.