CEP Employee Stock Purchase Plans (ESPPs) 1 — Questions and Answers
Question 1: What is the maximum discount from fair market value that a Section 423 ESPP may offer to participants?
- 5%
- 10%
- 15% (Correct answer)
- 25%
Correct answer: 15%
Section 423 of the IRC permits a maximum discount of 15% from the fair market value of the stock.
Question 2: Under Section 423, what is the annual dollar limitation on the fair market value of stock an employee may purchase through an ESPP?
- $10,000
- $15,000
- $25,000 (Correct answer)
- $50,000
Correct answer: $25,000
Section 423(b)(8) limits each employee to accruing rights to purchase no more than $25,000 in FMV of stock per calendar year.
Question 3: What is the maximum length of an offering period permitted under a Section 423 ESPP?
- 12 months
- 24 months
- 27 months (Correct answer)
- 36 months
Correct answer: 27 months
Section 423(b)(7) requires that the offering period not exceed 27 months when a look-back provision is included.
Question 4: Which of the following employee groups may a Section 423 ESPP plan document NOT exclude from participation?
- Employees with less than two years of service
- Part-time employees working fewer than 20 hours per week
- Employees who own 5% or more of company stock (Correct answer)
- Highly compensated employees as defined under IRC Section 414(q)
Correct answer: Employees who own 5% or more of company stock
Section 423(b)(3) prohibits excluding employees who own 5% or more of the company's stock from participating in a qualified ESPP.
Question 5: What is a 'look-back' provision in the context of an ESPP?
- A provision allowing employees to review prior payroll deductions before enrollment
- A feature that sets the purchase price as the lower of the FMV at the offering date or purchase date (Correct answer)
- A rule requiring a 6-month review of plan participation rates
- A mechanism to adjust the discount based on stock price performance
Correct answer: A feature that sets the purchase price as the lower of the FMV at the offering date or purchase date
A look-back provision allows the purchase price to be based on the lower of the FMV at the beginning of the offering period or the FMV at the purchase date, maximizing the employee's benefit.
Question 6: Under a Section 423 ESPP, the same rights and privileges must be granted to:
- Only full-time employees
- All employees who have been with the company for at least one year
- All participating employees equally (Correct answer)
- Only employees below a specified compensation threshold
Correct answer: All participating employees equally
Section 423(b)(5) requires that the same rights and privileges be extended to all plan participants, ensuring non-discriminatory treatment.
Question 7: Which of the following is a valid basis for setting the purchase price under a Section 423 ESPP?
- 85% of the FMV on the purchase date only
- 85% of the FMV on the offering date only
- 85% of the lower of FMV on the offering date or the purchase date (Correct answer)
- The average daily closing price over the offering period
Correct answer: 85% of the lower of FMV on the offering date or the purchase date
Section 423 allows the purchase price to be as low as 85% of the FMV on either the offering date or the purchase date, whichever is lower, when a look-back is used.
CEP Employee Stock Purchase Plans (ESPPs) 1
What is the maximum discount from fair market value that a Section 423 ESPP may offer to participants?