Tax Deferral on Stock Options and RSUs: Bloink & Byrnes Go Thumb to Thumb

Bloink: The new guidance created additional problems and complexities for employers who were already on the fence about the strict requirements of the new Section 83(i) deferral option. Offering stock options to at least 80 percent of employees was already a steep ask for many of the start-up type employers that would benefit most from this new compensation option, and the IRS guidance made this hurdle much more difficult to cross.

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Byrnes: The guidance provides specific and detailed rules for what employers have to do to satisfy the 80 percent requirement. The rule isn't bad just because it isn't necessarily the easiest to satisfy—and it's designed to make sure that the deferral option is offered to a broad range of employees within an offering company.

Bloink: The administrative difficulties imposed by the rules the IRS created make it nearly impossible for smaller, start-up businesses to offer equity grants under Section 83(i). The rules don't allow the company to look at equity grants made over past years when considering whether the 80 percent requirement is met in any given year.  Imagine companies who are trying to expand, and want to offer grants to all new employees over time—they'd have to offer options to 80 percent of all employees each year, which can be very unattractive for a small start-up.  We're cutting out exactly the companies that the rule was supposed to benefit.

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Byrnes: But this rule is designed to protect all employees, not just those higher level executives who got in on the ground floor.

Bloink:  I agree with Professor Byrnes that the deferral option should encourage equity grants for all employees, but the administrative difficulties of how the 80 percent rule has been interpreted will make it so that only larger private companies can offer these grants. Additionally, the employer can't use a single day "snapshot" approach to determining how many employees it has for the year—making it necessary to constantly monitor the number of employees to make sure that the 80 percent requirement is satisfied for the overall one-year period.

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Byrnes: It shouldn't be impractical for a company to know how many employees that it has at any given time during the year. I don't think that the administrative burdens outweigh the potentially powerful benefits of tax deferral on this one—the new rule transforms these equity grants into an actual benefit for the employee, who may not have had the resources to cover the tax liability the way things stood in the past.  Employers should look to this value when evaluating whether the administrative requirements are worth taking on.

Bloink: I think that employers will conduct the cost-benefit analysis and determine that the 80 percent requirement makes it administratively impossible to continue to offer equity grants under this new rule in many circumstances. Maybe they'll consider it for a single year, but then determine it's too difficult to continue to offer the benefit to newer employees—considering that each year, 80 percent of employees would have to be offered the benefit if a single new hire is given access in a later year. The continuous monitoring requirement is just one more piece in the puzzle that I believe will tip the scale against offering the 83(i) deferral benefit.

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• Should 2017 Tax Changes Be Permanent?
• Is the Proposed Child Tax Credit Even Needed?
• Is Inflation Indexing of Capital Gains Good?
• Are New USA Plans a Boon to Savers?
• Was It Right to Kill the DOL Fiduciary Rule?
• Is DOL Rule on Health Plans Bad?
• Trump's RMD Rule Change