ERISA Strategist
December 2009

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click here: Final ESPP Regulations Issued

The Internal Revenue Service (“IRS”) recently issued
final regulations that govern the terms of employee stock purchase
plans (“ESPPs”) under Section 423 of the Internal Revenue Code. These
final regulations will be effective January 1, 2010 and apply to
statutory options granted before that date. The final regulations
retain most of the rules in the proposed regulations as well as provide
new guidance and clarification in some areas. The regulations clarify
that the plan document requirements (under which the written plan
document must contain certain information) may be satisfied by the
terms of the plan document or of the offering under the plan.

One of the major issues that the final regulations
clarified is the determination of the “grant date” of an ESPP “option,”
which was of particular interest because of the one-year and two-year
holding period issues. While ideally the “grant date” would be the
first day of the offering period, it can only be the first day of the
offering period if the plan or offering under the plan designates a
maximum number of shares that may be purchased during the offering
period or uses a specific formula to determine, on the first day of the
offering period, the maximum shares that employees may purchase. If the
maximum is not “fixed or determinable,” the “grant date” will be the
purchase date.

The regulations also addressed the “fixed or
determinable” purchase price issue. Setting the purchase price as a
percentage of the stock’s value at the end of the offering period or a
lower price at the beginning will not be deemed “fixed or determinable”
unless the plan limits the number of shares that can be purchased
during the offering period. Additionally, the $25,000 per year limit
imposed by Section 423 will not sufficiently satisfy the “fixed or
determinable” requirement.

The IRS also provided guidance on a plan’s ability to
make multiple offerings. The regulations clarify that not only can
multiple offerings be made, but they can be consecutive or overlap.
Additionally, the terms of the offerings do not have to be identical.

If you have any questions regarding the ESPP final
regulations, please contact Dana Thrasher (205-226-5464), Dave Pearson
(813-222-1367), Bob Ellerbrock (205-226-5462), or Jay Turner
(205-226-5468).