On July 12, 2016, the Empowering Employees through Stock Ownership (EESO) Act (S. 3152) was introduced to the U.S. Senate by Sens. Mark R. Warner (D-VA) and Dean Heller (R-NV). The Act is intended to make it easier for startups and private companies to give their employees an ownership stake by awarding stock options or restricted stock units (RSUs). Under current law, employees are often required to pay taxes on their stock options or RSUs long before they are able to sell and realize the economic value of such stock options or RSUs. This is due to the fact that private company employees do not have the ability to sell their stock because there is no public market (or liquid secondary market) for the stock. As a result, many private company employees cannot cover the cost of taxes at the time of the exercise of stock options or the settlement of RSUs through the sale of stock, but rather must pay those costs out of pocket. The Act, however, promotes broad-based employee ownership in private companies by extending the time period in which employees are required to pay tax upon the exercise of stock options or the settlement of RSUs that are settled for stock up to seven years. In order to be eligible for the tax deferral, stock options or RSUs must be extended to 80% of the workforce, and 1% owners, the chief executive officer and the chief financial officer, and the four highest compensated officers will not be eligible for the tax deferral. Employers must provide employees with information, through a written notice, on the tax consequences of the tax deferral, and the failure to provide such notice will result in a penalty. Employers also must report the future tax liability on the employee's Form W-2. In addition, if the stock of the company becomes readily tradable on an established market, or the employee sells, exchanges or transfers his or her stock before the seven-year period ends, the tax deferral is no longer permitted.
The complete text of the Act is available at: https://www.congress.gov/bill/114th-congress/senate-bill/3152/text
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
© Morrison & Foerster LLP. All rights reserved