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 ESPPs provide favorable tax treatment (no ordinary income at purchase) when IRC requirements are satisfied, whereas non-qualified ESPPs trigger ordinary income at the time of purchase.

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

Under Section 423, no income is recognized at enrollment or purchase; income is deferred until the employee disposes of the shares.

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

Most Section 423 plans require that upon termination, accumulated payroll deductions be returned to the employee as a cash refund since eligibility to purchase is lost.

Question 4

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

Accepted Answer

Section 423

Answer

IRC Section 423 specifically governs qualified Employee Stock Purchase Plans and sets out the requirements for favorable tax treatment.

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 $25,000 limit is calculated using the FMV on the first day of the offering period, regardless of the actual purchase price or the price on the purchase date.

(CEP) Certified Equity Professional Practice Test

(CEP) Certified Equity Professional Practice Test

CEP Employee Stock Purchase Plans (ESPPs) 3