Stock Options and Determining a “Five-Percent Owner”
“One of my clients in a 401(k) plan has been given stock options, which have not been exercised. When determining a five percent owner for plan purposes, does ownership of stock options count?”
ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
Highlights of Discussion
- The answer to your question is clearly addressed in Internal Revenue Code Sections (IRC) §§416 and 318 and underlying regulations.
- Under IRC §416(i)(1)(B)(I), the term “five-percent owner” means the following:
- If the employer is a corporation, any person who owns (or is considered as owning within the meaning of IRC § 318) more than five-percent of the outstanding stock of the corporation or stock possessing more than five-percent of the total combined voting power of all stock of the corporation, or
- If the employer is not a corporation, any person who owns more than five-percent of the capital or profits interest in the employer.
- A person might be a more than five-percent owner through the “constructive ownership” rules of IRC § 318. IRC §318(a)(4) states: If any person has an option to acquire stock, such stock shall be considered as owned by such person. For purposes of this paragraph, an option to acquire such an option, and each one of a series of such options, shall be considered as an option to acquire such stock.
When determining ownership for plan purposes, if any participant has an option to acquire stock, such stock shall be considered as owned by such person.