Are my ISOs now NQSOs since I retired?
October 10, 2014
Subject: Stock Options Question
Date: 29 Feb 2012
I am ready to exercise my stock options that were incentive stock options when they were granted. I took early retirement a couple of years ago. The stock options administration department at my former employer has informed me that the options are now non- qualified stock options, and will be subject to income tax withholding.
Is this true? Have the rules changed?
Date: 12 Mar 2012
Yes, it’s true.
The rules haven’t changed.
Under Internal Revenue Code Section 422(a)(2), in order for an option to be an incentive stock option at the time of exercise, the individual must have been an employee of the corporation granting the option or a parent or subsidiary of the corporation during the period from the grant of the option to the date three months before the date of exercise.
You are actually fortunate that your former employer allowed you to convert the options to non-qualified stock options and keep them beyond the three-month period after terminating employment. In most cases, ISOs lapse after that period.
Count your blessings.