Will my ISOs become NQSOs three months after retirement?
March 23, 2005
Subject: ISO’s become NQSO’s?
Date: Mon, 07 Mar 2005
I recently terminated my employment with my former employer by retiring. My employee option plan document says that “In order to retain the favorable income tax treatment of ISOs, the ISOs must be exercised on or before three months after retirement.” Under the Code, do ISOs revert to NQSOs after some period after term of employment? What is the reference? If they do, then income tax withholding and employment tax withholding would apply on exercise, correct?
Date: Mon, 14 Mar 2005
According to Internal Revenue Code Section 422(a)(2), in order to qualify as an ISO, at all times during the period beginning on the date of the granting of the option and ending on the day 3 months before the date of the exercise, the individual holding the option must have been an employee of the corporation granting the option or a parent or subsidiary of the corporation, or a successor corporation.
If the option isn’t “qualified” as an ISO or an employee stock purchase plan, it is a “non-qualified” option, and taxed accordingly. As a former employee, the exercise will be subject to income tax withholding and employment tax withholding.