Correction of Discounted Stock Options

[401 Chaos]

This is more in the realm of executive compensation than some of the other posts with regard to Notice 2005-1 but I am curious about everyone's thoughts on curing discounted stock options. I cannot say I found the broad definition of deferred compensation or the lack of grandfathering for previously granted but unvested discounted options a surprise given earlier IRS discussions but I think it is unfair to loop in unvested discounted options granted before 2005. Okay if you want to do away with that going forward but rewriting the rules for previously granted options raises a lot of questions and concerns.

I also appreciate the IRS allowing us to cure this by letting companies reissue options as fair market value options and giving us until the end of 2005 to get that done but am curious if others have thought of other alternatives that cure this problem without setting a fixed exercise / distribution date. Also, is there any variation on the general rule in Q&A-18(d) where the current stock price is less than the FMV of the shares at the time of grant? Is there any consideration for discounted options held by executives in very thinly traded companies that are not able to immediately sell all their shares received from options, etc?

I see the distinction the Service draws between stock-settled SARs and discounted options but it seems highly unfair for individuals with discounts on options (some not that great) to be so heavily penalized compared to SARs that in many ways equate to 100% discounted options.

[Kirk Maldonado]

401 Chaos:

Submitting that comment to the IRS will be infinitely more productive than posting it here.

[Guest Harry O]

How do SARs "equate to 100% discounted options"???

[401 Chaos]

Kirk, I would love to get IRS guidance on these issues and hope more will be said about discounted options on the January 6th call. In the interim I was just hoping that some of the insiders closer to the process might have more insight or creative thoughts on these issues.

Harry O, please forgive me. I was being flip and exaggerative. I simply meant that some equity comp arrangements where participants have no real money of their own at stake are treated very differently from others. Obviously the overall economics of those arrangements vary and I appreciate the distincitions the Service draws with respect to SARs, options, and restricted stock. I just think it is particularly unfair to loop in previously granted but unvested dicounted options under the new 409A rules, particularly where such options were granted as one componenty of multi-faceted compensation agreements put in place years ago. Please excuse my ranting.

[Kirk Maldonado]

401 Chaos:

I guess I wasn't as clear as I could have been. My point was that if you want the IRS to address your specific situation in the written guidance or even to mention it at the next teleconference, you should bring it to their attention.

If they don't know about the issue and your concerns, it is unlikely that they will address them.

Thus, if you really want official or semi-official guidance on your issue, your time will be better spent sending your comments to them, rather than posting them here on BenefitsLink.

I don't mean to imply that you shouldn't raise the issues here (as well), but the odds of the IRS guidance addressing issues that are only raised on BenefitsLink isn't too good. They probably would think, "We have enough already that people want guidance on; we don't need to go searching for more issues." Also, they may feel that if the issue was that important to you, you would have brought it to their attention. Because you didn't, it must not be very important to you.

Although I don't like to bring this up very often (I think I've only done it two or three times before), but I should point out to you that I spent a number of years at the IRS in Washington drafting regulations, etc. on retirement plan matters, so I understand how the process works from the inside.

[401 Chaos]

Kirk,

Thanks for your post. I appreciate your suggestion of submitting this to the IRS and your perspective on how the process works. I know the IRS folks are swamped with many many questions. I am planning on submitting this issue as well as the severance plan issue, at least informally via email, over the weekend. It has been helpful to me to have others confirm my reading of the Notice and see others' thoughts on these issues. I will attempt to work the various comments and suggestions into the submission. Thanks again.