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Subject:   NQSO tax treatment of severed employee
Date:   Fri, 7 Dec 2001
From:   Chris

Hi Mike-

I am wondering what is the company tax treatment of NQSO for employees who have been laid off?

For example, a company is considering a reduction in force, but is considering extending the vesting and exercise period beyond the severance multiple so that employees may have time to vest in what would have been unvested options.

My thought is they would receive variable accounting treatment because of "non-employee" status. Could the company accelerate the vesting and require the options be exercised and sold within the severance multiple period?

Thanks-
Chris

Answer

Hello Chris,

There is no tax consequence when an employee holding NQSOs is laid off.

The consequences relate to the terms of the plan.

You are correct that the option holder may no longer be considered an employee. However, the consequences of exercising the option for employment taxes, etc. will probably depend on the requirements for keeping the options. As deferred compensation, NQSOs granted to employees continue to be subject to employment taxes.

There are probably legal implications of this situation that I’m not aware of, so consider consulting with an employment law attorney.

Good luck!

Mike Gray

For more information about non-qualified stock options, request our free report, Non-Qualified Stock Options - Executive Tax and Financial Planning Strategies.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.