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Use of 83b elections

As an academic, I'm curious about whether the practitioner community can enlighten me on how common are the use of 83(b) elections, and whether you've detected an increase in recent years.  I appreciate any insights you can provide.  Thanks

 

Steven Balsam

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My evidence is only anecdotal, but in general I have found the use of 83(b) elections VERY rare and decreasing of late rather than increasing. Many companies are granting RSUs now rather than RSAs for a number of reasons. And some companies even disallow the use of 83(b) elections by putting a clause in their grant agreement.

As an Equity Plans Expert for 27 years, I find that filing the 83(b) Election forms are a common practice for private companies who grant Restricted Stock Awards and/or allow early exercise of stock options.  Filing the Election starts the IRS holding period that must be satisfied in order to receive long-term capital gain treatment on shares that are sold.  Public corporations that grant Restricted Stock Awards typically do not allow, or the recipient is not filing, the 83(b) Election because the risk of paying more taxes is higher when the company has a high rate of stock price volatility.

Marianne Brannock-Hill, CTP CEP

In case it is of any use to you, here is an international perspective.

As part of the UK legislative changes introduced in 2003 (partly to prevent planning to accelerate tax liabilities on "conditional" shares through transfers to connected persons), an election was introduced (a section 431(1) ITEPA election) that has broadly the same impact as section 83(b) (it is an election made jointly by employer and employee, within 14 days of the acquisition of the interest, and does not need to be filed with the tax authorities).

In my experience, elections are almost never made by executives of public companies.  These companies will in most cases have a relatively high market capitalisation, so the election has the effect of accelerating a potentially expensive tax liability (67% of the market value of the shares when the tax rate is 40%, 100+% of market value at a 50% tax rate - on the basis that the tax is paid out of after-tax income).  On the basis that the re are likely to be performance-related conditions (performance relative to per group, TSR, EPS, etc) that could cause shares to be forfeit in addition to continuous employment, and that there is no income tax relief for any loss (a capital loss would arise that can can only be set against capital gains) the economics of the risk/reward equation means that the "option" to accelerate the tax would not be taken by a rational person.

The opposite is true of private companies at start up or at an early stage; the share values are likely to be low, so the option to accelerate the tax is likely to have a low cost in relative terms (a percentage of a "hope value) for a high potential reward if the enterprise is successful. If the company has assets of less than £8m at the acquisition date, a loss in respect of the shares can also be set off against income, which further supports the decision.

There are some tax-favoured solutions in the UK that also skew the analysis to some extent (the prime example being the EMI option, which affords a deferred (to exercise) income tax liability to the extent that the option was granted at a discount to market value at the grant date, a corporation tax deduction for the value of the shares on exercise (but no income tax consequences) and capital gains tax treatment on disposal.

Potentially, the most complex position is for large private companies.  In such situations, there is little incentive for an executive to accept a tax charge at award or on vesting (especially if the shares are illiquid). This has led to a number of alternative strategies being developed and adopted that seek to defer tax to an exit (or longer), perhaps with a view to appreciation being taxed as capital gain (in my experience, potential acquirers discount the potential for corporation tax relief to nil).

I hope this helps.

I frequently see situations where 83(b) elections are not being used properly.  Public company executives use them on high value shares or where there is great risk of forfeiture either for insufficient service or insufficient performance.  On the hand, private company employees often fail to make a timely 83(b) election on low value shares (e.g., a start-up) because there is no one to advise them about it. 

My experience continues to be that private company stock awards (option, restricted stock) provide for the possibility, but only a limited number of people actually take the plunge.  For publicly-traded companies, as Elizabeth noted, the trend is toward RSUs, but the risk/benefit considerations generally don't favor making the election in those instances in which it is possible.

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