The Advisors' Blog

– Broc Romanek

A few months ago, Liz blogged about new Section 83(i) of the Internal Revenue Code – it allows private company employees to defer taxes for up to five years from the exercise of a stock option or settlement of a RSU. Last week, the Treasury Department & IRS issued this notice about this new provision. This memo from Davis Polk outlines the key takeaways (we’re posting memos in our “Restricted Stock” Practice Area):

– The measurement period to determine whether the employer satisfied the eligibility requirement that 80% of U.S. employees received grants is measured on a single calendar year basis and does not take into account grants made in prior years

– Employers must withhold taxes at the maximum individual rate in effect at the time the stock with respect to which a Section 83(i) election has been made (deferral stock) is treated as received in income and will be treated as a noncash fringe benefit, which will provide employers additional time to collect amounts required to be withheld from employees

– The employee and employer must agree to place deferral stock in escrow to ensure that applicable withholding taxes are deducted

– An employer may opt out of Section 83(i) by not establishing an escrow arrangement