“super stock option” bill moving through the U.S. House of Representatives is designed to make stock option plans more ubiquitous than ever. Introduced by Rep. John Boehner (ROhio), the super stock option will allow employers to deduct the cost of the options when the employees exercise them while allowing workers who exercise those options to defer taxes on profits until shares are actually sold.
Currently, there are two types of stock options: incentive stock options, which provide preferential tax treatment for employees who have to pay only a flat capital-gains tax on the appreciation of the stock; and nonqualified plans, in which employees get taxed when the stock is exercised and again with a capital-gains tax on appreciation in values.
“Incentive stocks are [preferred by] employees, but there are two reasons why companies don’t typically grant them: (1) there’s a limitation on how much can be granted to an individual, and (2) the company does not get a tax deduction associated with an incentive stock option,” explains Carl Weinberg, a principal with Pricewaterhouse-Coopers in Westport, Conn.
The super stock option attempts to combine the best tax elements of the two existing types of plans. “This bill is the 401(k) of stock options,” explains Ira Kay, with Watson Wyatt Worldwide in New York. “The beauty of it from a corporate perspective is that the company gets the tax deduction now and there is no commensurate taxable income for the employee until the money is taken out.”
Super stock options offer good tax advantages for companies looking for a broad-based employee grant, says Jane Irwin, a principal with Hewitt Associates LLC in Chicago. “I’ve talked to clients who were thinking of a broad-based plan, and when they heard about this, they said, ‘This is even better.’” The bill passed through the House Education and Workforce Committee, but faces opposition from union forces that say it leaves out the lesser compensated.
Steve Bergsman is a freelance writer.