CPM Executive Compensation & Equity Plans 2 — Questions and Answers
Question 1: Under a qualified Employee Stock Purchase Plan (ESPP) that meets Section 423 requirements, the maximum discount that may be offered to employees is:
- 10%
- 15% (Correct answer)
- 20%
- 25%
Correct answer: 15%
Section 423 ESPPs may offer up to a 15% discount from the lower of the stock price at the beginning or end of the offering period.
Question 2: When RSUs vest and shares are delivered to the employee, the employer is required to withhold:
- Federal income tax, Social Security, and Medicare taxes (Correct answer)
- Only federal income tax at the flat supplemental rate
- Only FICA taxes with no income tax withholding
- Nothing, because equity awards are not subject to withholding
Correct answer: Federal income tax, Social Security, and Medicare taxes
RSU vesting triggers ordinary compensation income subject to mandatory federal income tax withholding plus Social Security and Medicare (FICA) taxes.
Question 3: The 'sell-to-cover' method for RSU tax withholding means that:
- The employee submits a personal check to the payroll department before shares are released
- The company loans the employee money to pay the tax due
- A portion of the vesting shares is automatically sold to generate proceeds equal to the required withholding taxes (Correct answer)
- The employee elects to defer all tax liability to the following April
Correct answer: A portion of the vesting shares is automatically sold to generate proceeds equal to the required withholding taxes
Under sell-to-cover, the company sells enough newly vested shares on the employee's behalf to fund the withholding tax obligation, with net shares delivered to the employee.
Question 4: For NQSO exercises paid as supplemental wages (separately from regular wages), the mandatory flat federal income tax withholding rate is:
- 10%
- 15%
- 24%
- 22% (Correct answer)
Correct answer: 22%
The mandatory flat supplemental withholding rate is 22% for supplemental wages up to $1 million in a calendar year, including NQSO spread income.
Question 5: To receive preferential long-term capital gains treatment on ISO shares, an employee must satisfy which holding periods?
- Hold at least 6 months from the exercise date
- Hold at least 1 year from the exercise date AND at least 2 years from the original grant date (Correct answer)
- Hold at least 2 years from the exercise date only
- Hold at least 1 year from the original grant date only
Correct answer: Hold at least 1 year from the exercise date AND at least 2 years from the original grant date
Both conditions must be satisfied: shares held at least 1 year from exercise AND at least 2 years from grant date; failing either requirement results in a disqualifying disposition.
Question 6: A 'disqualifying disposition' of ISO shares occurs when:
- The employee sells the shares at a loss
- The employee forfeits the options upon termination before exercise
- The exercise price is greater than the current market price at exercise
- ISO shares are sold before satisfying both the 1-year-from-exercise and 2-year-from-grant holding periods (Correct answer)
Correct answer: ISO shares are sold before satisfying both the 1-year-from-exercise and 2-year-from-grant holding periods
A disqualifying disposition converts the ISO gain to ordinary income because the shares were sold before meeting both statutory holding period requirements.
Question 7: IRS Form 3922 is used by employers to report:
- Incentive Stock Option (ISO) exercises
- RSU vesting and share delivery events
- Transfers of stock acquired through a Section 423 Employee Stock Purchase Plan (ESPP) (Correct answer)
- Non-qualified stock option exercises
Correct answer: Transfers of stock acquired through a Section 423 Employee Stock Purchase Plan (ESPP)
Form 3922 is the information return filed for each transfer of ESPP stock acquired under a Section 423 plan, while Form 3921 covers ISO exercises.
CPM Executive Compensation & Equity Plans 2
Under a qualified Employee Stock Purchase Plan (ESPP) that meets Section 423 requirements, the maximum discount that may be offered to employees is: