HCE Determination and 318 Stock Options

[Guest rewarmus]

"This issue deals with determination of an HCE. Here's the scenario: 1) Company has authorized 1000 shares of stock; 2) There are currently 800 shares of outstanding stock and an option on the remaining 200 shares; 3) EE A owns the 800 shares of outstanding stock; 4) EE B (unrelated) has the option on the remaining 200 shares; 5) The stock option plan is designed to allow EE B to exercise his/her right to acquire the 200 shares during the next 5 year period in equal amounts (i.e. Current yr - 40 shs, yr 2 - 40 shs, ..., yr 5 - 40 shs). The question is whether or not EE B is an HCE? In reviewing 414(q), 416(i) and Section 318 constructive ownership, I am not sure how to apply the rules of 318(a)(4) OPTIONS. What is meant by "an option to acquire such an option, and each one of a series of such options"? Possible conclusions to consider: 1) Even though the option to acquire stock is spread over a 5 year period, is this considered a "series of such options"? Does this mean you have to consider EE B as owning 200 shs or 20% (200/1000), thus making him/her an HCE? 2) Do you look at this on a year by year basis since 416(i) requires a 5 percent owner of the "outstanding" stock. In other words, is EE B considered owning 40 shares in the current year, thus making him a 4.76% owner (40/840)? Thanks for any thoughts.