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What They Are – How They Work

By LaVerne L. Dotson; JD, CPA

A hospital employee stock-purchase plan qualified under Code § 423 allows eligible employees to purchase stock of an employer under special tax rules and favorable prices.

Intent and Purpose

An employee stock-purchase plan is intended to benefit virtually all employees, not just exceptional ones or limited groups.

Because the granting of options to purchase employer stock under an employee stock-purchase plan cannot discriminate in favor of key employees, usually the plan will appeal only to an employer who simply wants to provide, as a general benefit of employment, the right to buy employer stock, or believes that owning employer stock will act as an incentive to employees to perform well.

Requirements

A hospital employee stock-purchase plan must meet the following requirements:

• Options may be granted only to employees of the employer corporation, or its parent or subsidiary corporations, to purchase stock in the employer, parent, or subsidiary.
• The stockholders must approve the plan within 12 months before or after the date the plan is adopted.
• The plan must provide that an employee cannot be granted an option if the employee, immediately after the option is granted, owns 5% or more of the total voting power or value of all classes of stock of the employer corporation, or its parent or subsidiary, computed using special attribution rules.
• The plan must require that the options be granted to all employees on a nondiscriminatory basis. However, the options granted to different employees may bear a uniform relationship to the total compensation or the basic or regular rate of compensation of employees. The plan may also provide for a ceiling on the amount of stock to be purchased by any employee.
• The exercise price must be at least 85% of the fair market value of the stock on the date the option is granted.

Wide Ownership

The broad participation requirements of employee stock-purchase plans mean that the stock is likely to be widely owned. Problems of marketing the employer stock and the securities problems inherent in issuing shares of stock to a number of employees will probably discourage employers who do not have an established market for their stock, and who do not want to face the securities problems related to public trading in their stock.

NQSOs and DSTs

Nonqualified stock options [NQSOs] and the direct stock transfers [DSTs] are both available to the employer as potentially less cumbersome means of obtaining the results of an employee stock-purchase plan.

Since a nonqualified plan is not subject to the restrictions of the qualified plan, normally the main reason for the employer choosing to implement an employee stock-purchase plan is to gain for the employees the favorable tax consequences of such a plan and thereby create a widespread base of company stock ownership among employees.

Taxation

On receipt of an option to purchase stock under an employee stock-purchase plan, the employee does not report any income, even though the exercise price of the stock may be less than the fair market value at the time; nor will the employee recognize income on the exercise of the option and acquisition of the stock at a subsequent date. Only on disposition of the stock will the employee recognize taxable income. As long as the disposition occurs two years or more after the date the option is granted to the employee, and the employee has held the stock at least 12 months after exercising the option, any profit will be treated as capital gains.

Assessment

There is a minor exception to this favorable tax treatment. Upon disposition of stock purchased under the plan, a portion of the gain will be treated as ordinary income equal to the discount of 0% to 15%.

Conclusion

Your comments and experiences with hospital stock purchase plans are appreciated?

Related Information Sources:

Practice Management: http://www.springerpub.com/prod.aspx?prod_id=23759

Financial Planning: http://www.jbpub.com/catalog/0763745790

Risk Management: http://www.jbpub.com/catalog/9780763733421

Healthcare Organizations: www.HealthcareFinancials.com

Administrative Terms: www.HealthDictionarySeries.com

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Filed under: Investing, Retirement and Benefits |