CEP Client Advisory Services 2 — Questions and Answers
Question 1: A participant asks their equity plan advisor whether they should exercise ISOs before an anticipated IPO. Which consideration is MOST critical to address first?
- Current stock price versus exercise price
- Alternative Minimum Tax (AMT) exposure from exercising ISOs (Correct answer)
- The participant's overall portfolio diversification
- The company's expected post-IPO trading volume
Correct answer: Alternative Minimum Tax (AMT) exposure from exercising ISOs
AMT exposure is the most critical first consideration when advising on ISO exercises because the spread at exercise is an AMT preference item that can trigger significant tax liability.
Question 2: Which of the following best describes the 'same-day sale' (cashless) exercise method for stock options?
- The participant exercises options and holds shares for at least one day before selling
- The participant sells enough shares immediately upon exercise to cover the exercise price and taxes, retaining any remaining shares
- The participant borrows funds from the broker, exercises options, sells all shares, and repays the loan on the same day (Correct answer)
- The participant uses already-owned shares to pay the exercise price and receives net shares
Correct answer: The participant borrows funds from the broker, exercises options, sells all shares, and repays the loan on the same day
A same-day sale (cashless) exercise involves the broker extending credit to exercise the options, then selling all shares on the same day to repay the loan and cover taxes.
Question 3: Under SEC Rule 144, which condition must an affiliate of a public company satisfy when selling restricted or control securities?
- A minimum holding period of 30 days
- Volume limitations capping sales at the greater of 1% of outstanding shares or average weekly trading volume (Correct answer)
- Prior written approval from the company's board of directors
- Filing a Form 4 within 48 hours of the sale
Correct answer: Volume limitations capping sales at the greater of 1% of outstanding shares or average weekly trading volume
Rule 144 imposes volume limitations on affiliates, capping sales at 1% of outstanding shares or average weekly trading volume over the prior four weeks, whichever is greater.
Question 4: A client received RSUs that vested on December 15. They ask if they can defer income tax by delaying settlement to January of the next year. What is the advisor's correct response?
- Yes, the client can elect to defer settlement and taxation to January under Section 409A
- No, RSU income is generally recognized at vesting, and delaying settlement post-vesting typically does not defer taxation without a valid 409A deferral election made well in advance (Correct answer)
- Yes, any settlement date after vesting qualifies as a valid deferral under IRS rules
- No, all RSU income must be recognized on the grant date regardless of vesting
Correct answer: No, RSU income is generally recognized at vesting, and delaying settlement post-vesting typically does not defer taxation without a valid 409A deferral election made well in advance
RSU income is typically recognized at vesting, and a last-minute settlement delay does not defer taxation; a valid Section 409A election must generally be made at least 12 months before the payment date.
Question 5: When a company implements a 10b5-1 plan for an executive, which of the following is a key requirement for the plan to provide an affirmative defense against insider trading allegations?
- The plan must be approved by the SEC before trading begins
- The plan must be established when the insider is not aware of material non-public information (Correct answer)
- The executive must notify shareholders before each planned trade
- The plan must limit sales to open trading windows designated by the company
Correct answer: The plan must be established when the insider is not aware of material non-public information
A 10b5-1 plan provides an affirmative defense only if it was established at a time when the insider did not possess material non-public information.
Question 6: A participant forfeits unvested RSUs upon resignation. From a tax perspective, what is the consequence?
- The participant must repay taxes already paid on previously vested RSUs
- There is no tax consequence because no income was ever recognized on the forfeited unvested RSUs (Correct answer)
- The participant recognizes a capital loss equal to the grant date fair market value of forfeited RSUs
- The company must issue a corrected W-2 for the grant year
Correct answer: There is no tax consequence because no income was ever recognized on the forfeited unvested RSUs
Unvested RSUs have not yet triggered income recognition, so forfeiture of unvested awards results in no tax consequence to the participant.
Question 7: Which holding period rule applies to shares acquired through an ESPP qualifying disposition?
- Shares must be held at least 6 months from purchase date
- Shares must be held more than 2 years from the offering date AND more than 1 year from the purchase date (Correct answer)
- Shares must be held at least 1 year from the offering date only
- Shares must be held more than 1 year from the purchase date only
Correct answer: Shares must be held more than 2 years from the offering date AND more than 1 year from the purchase date
A qualifying disposition under Section 423 ESPP requires holding shares for more than two years from the offering date AND more than one year from the purchase date, both conditions must be met.
CEP Client Advisory Services 2
A participant asks their equity plan advisor whether they should exercise ISOs before an anticipated IPO.
Which consideration is MOST critical to address first?