CEP Employee Stock Purchase Plans (ESPPs) 3

Question 1

What is the primary distinction between a Section 423 ESPP and a non-qualified ESPP?

Accepted Answer

Section 423 plans offer tax-favored treatment if IRS requirements are met; non-qualified plans do not

Answer

Section 423 plans have no discount limit, while non-qualified plans are capped at 15%

Answer

Non-qualified plans must cover all employees, while Section 423 plans may be selective

Answer

Section 423 plans require employer matching contributions, while non-qualified plans do not

Question 2

Under a Section 423 ESPP, when is income typically recognized by the employee for federal income tax purposes?

Accepted Answer

At the time of sale or other disposition of the shares

Answer

At enrollment in the plan

Answer

At the time payroll deductions are withheld

Answer

At the time of purchase

Question 3

What typically happens to an employee's ESPP payroll contributions when they terminate employment during an offering period?

Accepted Answer

Accumulated contributions are refunded to the employee without interest

Answer

Contributions are forfeited and credited to the plan trust

Answer

Accumulated contributions are used to purchase shares at the next purchase date

Answer

Contributions are converted to a deferred compensation arrangement

Question 4

Which IRS code section governs tax-qualified Employee Stock Purchase Plans?

Accepted Answer

Section 423

Answer

Section 401(k)

Answer

Section 409A

Answer

Section 422

Question 5

Under a Section 423 ESPP, the $25,000 annual accrual limit is based on the FMV of the stock measured at:

Accepted Answer

The first day of each offering period in which the right is granted

Answer

The end of each purchase period

Answer

The date the employee enrolled in the plan

Answer

The average FMV across all purchase dates in the calendar year

Question 6

Which of the following is a permissible exclusion under a Section 423 ESPP?

Accepted Answer

Employees who have completed less than two years of service

Answer

Employees who own exactly 5% of company stock

Answer

All part-time employees regardless of hours worked

Answer

Directors who are also employees

Question 7

If a company's Section 423 ESPP uses a 24-month offering period with quarterly purchase dates, and the stock price drops significantly after the offering starts, what benefit does a look-back provision provide?

Accepted Answer

It allows shares to be purchased at 85% of the lower offering-date FMV, maximizing the employee discount

Answer

It allows employees to extend the offering period by an additional 3 months

Answer

It resets the offering date FMV to match the current purchase date price

Answer

It permits employees to withdraw and re-enroll at a new, lower offering price