IRS Issues Final Regulations Relating to Employee Stock Purchase Plans and the Reporting Requirements for Employee Stock Purchase Plans and Incentive Stock Options - February 17, 2010

Sep 19, 2026

Summary of Internal Revenue Service final regulations issued in November 2009 and effective as of November 17, 2009 for employee stock purchase plans (ESPPs) and related incentive stock options (ISOs). The rules govern when options granted under ESPPs qualify for favorable treatment, clarify treatment of options with terms inconsistent with ESPP or offering terms, address multiple and separate offerings, and specify how grant dates are determined. It also covers annual $25,000 limitations and reporting requirements for option exercises and stock transfers, including retroactive application for certain ISO provisions.

LanguageEnglish

CategoryForms

FormatPDF

Pages7

Reading Time3 min

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Executive Summary

Final Regulations Relating to Options Granted Under Employee Stock Purchase Plans

Background

Options with Terms Inconsistent with ESPP or Offering Terms

Multiple Offerings

Determination of Grant Date

Annual $25,000 Limitation

IRS Issues Final Regulations Relating to Employee Stock Purchase Plans and the Reporting Requirements for Employee Stock Purchase Plans and Incentive Stock Options February 17, 2010 EXECUTIVE SUMMARY In November 2009, the Internal Revenue Service (the “IRS”) issued final regulations relating to options granted under an employee stock purchase plan (“ESPP”) as defined under Section 423 of the Internal Revenue Code, as amended (the “Code”) . These final regulations are effective as of November 17, 2009, but will only apply to ESPP options granted on or after January 1, 2010. In addition, in November 2009, the IRS issued final regulations relating to the return and information statement requirements applicable to the exercise of options intended to qualify as“incentive stock options” under Section 422 of the Code (“ISOs”) and the transfers of stock acquired under an ESPP, pursuant to Section 6039 of the Code. These final regulations are also effective as of November 17, 2009, but will apply retroactively as of January 1, 2007. FINAL REGULATIONS RELATING TO OPTIONS GRANTED UNDER EMPLOYEE STOCK PURCHASE PLANS Background Section 423 of the Code provides favorable tax treatment for stock acquired through an option granted under an ESPP that meets the statutory requirements set forth therein. Under Code Section 423, there is no tax to an employee or deduction for an employer when an option exercised under an ESPP (i) has a discounted purchase price of at least 85% of the lesser of the fair market value of the underlying stock on the date the option is granted or exercised; (ii) is held by the employee for at least two years from the date of grant and one year from the date of exercise; and (iii) satisfies the other requirements of Code Section 423. Instead, any appreciation in excess of the discounted purchase price is taxed at the time of sale of the stock at long-term capital gains tax rates. While the regulations under Section 423 of the Code were last updated in 2004, proposed regulations were issued by the IRS in July 2008. The current final regulations largely adopt the proposed regulations and provide a comprehensive set of rules relating to options granted under an ESPP, the key provisions of which are set forth below. Memorandum – February 17, 2010 Options with Terms Inconsistent with ESPP or Offering Terms The final regulations clarify that an option will not be treated as being granted under an ESPP if its terms are inconsistent with the terms of the ESPP or an offering under the ESPP. However, an option may still qualify for favorable ESPP tax treatment, even if the terms of the ESPP are inconsistent with any of the requirements of Code Section 423, if the option is granted under an offering with terms that comply with such Code requirements. Multiple Offerings The final regulations also add a concept of separate offerings. An employer may make multiple offerings under an ESPP and these offerings may be consecutive or overlapping. The terms of each offering need not be identical. Accordingly, the employer may determine with respect to each offering whether part-time employees and/or highly compensated employees should be excluded and what the rights and privileges applicable to the employees participating in the offering will be (for example, as to the level of permitted contributions) . However, such exclusions and rights and privileges must be applied in an identical manner to all employees participating in that offering and the ESPP and the offering, together, must satisfy the requirements of Code Section 423. Under the final regulations, an employer may designate which subsidiary corporations of the parent corporation may participate in a particular offering as well, as long as the terms of each offering, together with the ESPP, satisfy the requirements of Code Section 423. Determination of Grant Date Under the final regulations, the date of grant of options under an ESPP will be the first

FAQs

When do the final ESPP regulations apply for options granted under an employee stock purchase plan?

They are effective as of November 17, 2009, and apply only to ESPP options granted on or after January 1, 2010.

How do the final regulations address options whose terms are inconsistent with an ESPP or offering terms?

An option is not treated as granted under an ESPP if its terms are inconsistent. However, the option may still qualify for favorable ESPP tax treatment if granted under an offering whose terms comply with the relevant Code requirements.

What determines the grant date for ESPP options under the final regulations?

The grant date is the first day of the offering period only if the ESPP or offering either designates a maximum number of shares per employee or requires a formula to establish that maximum. Otherwise, the date of exercise becomes the grant date.

Sep 19, 2026

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