H'ship WD/12-Month Suspension/Stock Options

[Guest jgferrei]

Treas. Reg. section 1.401(k)-1(d)(2)(iv)(B)(4) provides that the 12-month suspension of "elective contributions and other employee contributions" that is required as part of the safe harbor for a deemed immediate and heavy financial need includes contributions under "a stock option, stock purchase or other similar plan." Question: Does this apply to any exercise of an option, or only to those which require an actual cash outlay by the employee (such that where an option plan permits "cashless exercise," options under such a plan could be exercised during the 12-month suspension period)? Anyone know of any definitive IRS authority on this issue?

[Guest Harry O]

There is no definitive IRS authority on this question.

But - a cashless exercise involves a loan from a broker to exercise the option. The loan is repaid by the proceeds of the sale of the option stock. The IRS could construe this repayment as effectively a contribution.

Again, there is nothing out there on this. This is why they pay lawyers to exercise their judgment and to make the close calls!

Good luck.