Application of Section 423 when no discount in ESPP

[Guest AEA]

If an employer gives employees the opportunity to make payroll deductions to buy the employer's holding company's stock but there is no discount given on share price and stock is purchased once a month if the employee has enough in his or her account, does Code section 423 apply?

I am looking at the program to determine if Code section 409A applies and will admit that it is unclear from the information I have if the payroll deductions are pre-tax or where the shares are purchased (are publicly traded).

Bottom line, is it possible to have a payroll deduction like this without having either Code section 423 or Code section 409A apply?

Thank you in advance

[stephen]

While there has been some discussion on this board regarding ESPP plans this is the ESOP Message board. You may be better served by posting your question elsewhere on these message boards.

I believe Pax was involved in a ESPP plan perhaps he can help with this matter.

[Guest AEA]

I have also posted it on the Miscellaneous Benefits board, but found more discussions on this board than there. I also thought about the Securities Aspects board but felt that I should not post the same question three times. Unfortunately, these plans do not have a clear board.

Again, any help would be appreciated - even if it is someone moving this to the "correct" board.

[E as in ERISA]

Yes. I think that you can have an arrangement like this that is subject to neither 409A or 423. I don't think that someone can tell you that definitively without knowing all the terms, but here are a couple of the possibilities.

In some cases it might be possible to argue that the arrangement is not "compensatory" at all. In other words, this is not a benefit plan and does not confer any rights on employees to actually purchase stock/in no way obligates the employer to make it available. It is just that the employees are allowed to use the payroll system to purchase stock to the extent that it is available -- in the same way they might be able to use it to purchase a company shirt, make United Way contributions, purchase savings bonds or make a credit union deposit?

Alternatively, if it is considered compensatory then it must be that it confers a right on the employee that is equivalent to an option. If you don't meet the terms of the 422 or 423 rules, then you would probably be treated as an nonqualified stock option. There is an exception to 409A for nonqualified stock options under Question 4 of Notice 2005-1. If it is not discounted, then it is likely to fit within that section.

I think that it's pretty clear that there is an intent to exclude non-discounted options -- because of the exceptions for NSOs, ISOs, ESPPs. There should be some way to get there.

It doesn't seem like there is much down side to this plan -- because even if it is subject to 409A but not in compliance there is not likely any compensation to subject to tax, penalties or interest?

The greater risk is that a violation in this plan could taint other plans for participants (e.g., if some of the executives are also in other equity-based plans), then a violation of 409A under this plan could cause problems in those plans. Its worth someone glancing at the plan.