Incentive Stock Option Requirements

An incentive stock option is a type of stock option that is provided by companies to their employees. The tax provides a tax benefit for the employee. There are specific, qualifying requirements that must be met in order to keep the tax benefit. Otherwise, the incentive stock option will become a non-qualified stock option. Here are a few of the requirements associated with incentive stock options.

Employees Only

Incentive stock options are a benefit that are only available to employees of a company. Companies can offer other benefits to non-employees, but when employees receive stock options. Most of the time, these options are also reserved for upper-level executives. Regular employees typically receive non-qualified stock options instead. In addition to receiving this incentive stock option as an employee, the individual also has to exercise the option while they are employed with the company. If the employee is terminated, they have to exercise their option within three months of the termination.

Decade Rule

The incentive stock option must be granted within 10 years of adoption, or shareholder approval. This means that once the shareholders of a corporation authorize the incentive stock options to be distributed, they have to give them to the employees within a decade. Once the option is provided to the employees, it has an expiration date of 10 years from that date as well. 

Written Plan

In order to issue incentive stock options, the company has to have a written plan associated with these stock options. A written plan has to spell out everything in clear detail. It has to describe how many shares can be distributed to each employee and it also must specify which employees are eligible to receive the incentive stock options. After a written plan is devised, the shareholders of the business have to approve the plan within 12 months of adoption.

Exercise Price

There are also rules associated with what exercise price can be used for the option. When an option is authorized, the exercise price has to be equal to, or greater than, the fair market value of the stock price on that date. The company cannot provide the employees with a discount, when compared to what is in the market.

No Transfers

Another rule associated with incentive stock options is that they cannot be transferred to another individual. The only exception to this rule is if an individual passes them on through a will, or if they die and their assets go through probate court. Otherwise, these options cannot be transferred to another individual under any circumstances. This also has to be covered in the written plan associated with the company's incentive stock option program.

$100,000 Rule

The incentive stock options cannot exceed $100,000 per calendar year, for each individual. If the individual cashes in more stock than this, it will be counted as a non-qualified stock option.

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