Cashing Out Stock Options (Rather than Exercising) and 415 Compensation Definition

[401 Chaos]

401(k) Plan has elected Section 415 definition of Compensation for plan purposes. Definition (unlike others) expressly excludes "amounts realized from the exercise of a non-qualified stock option" and "amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option."

Company undergoes change in control and outstanding stock options (both NSOs and ISOs) are "cashed out" in the transaction. So technically there is no exercise of any NSOs and no stock ever acquired under an ISO. The cash is getting paid to optionees in two installments--the first at closing and will be a straight cash payment reflected in W-2 income and the second a year later pursuant to an escrow arrangement.

Are these cash payments in or out of the 415 definition of Compensation. While the cash payments do not arise from an actual exercise of any options, they are all related to the disposition (without exercise) of the options. Does the 415 definition distinguish between these situaitons?

Thanks

[QDROphile]

If you do not get a convincing answer to your question based on authority, the question becomes, "How does the plan administrator (or whoever has authority to interpret plan terms) interpret the plan provisions concerning compensation relating to options?"

The express exclusion in the plan should inform the interpretation.

[401 Chaos]

Thanks. Agree with that. We're still trying to rule out the lack of a convincing answer based on authority. So far not finding very much which seems strange as we see options getting cashed out more frequently than getting exercised (at least with private companies). Don't see the 415 definition used that much though so maybe it doesn't come up as frequently as one might think. But still . . . . cannot be all that novel a questions.

One might think that the selection of a 415 defiinition would indicate clear desire not to include anything option related but apparently in past cashout situation they included all option income. Mixed views among the company (as plan administrator) over whether that was right or wrong or which approach is most desired. Would definitely be nice to have some convincing or at least relevant guidance. . . .

[QDROphile]

You are assuming that any thought went into the choice of into the definition. If the plan is on a pre-approved document, my bet is unconsciouslness. Still, the words are there.

[KED]

Although there has been a disposition of the option, it seems the language in the definition refers to the "disposition of stock acquired under a qualified stock option." No stock was acquired -- so there was no disposition of stock and no basis to exclude the cash payment from the compensation definition?