Washington —
TechNet, the national,
bipartisan network of innovation economy CEOs and senior executives, today applauded
the U.S. House of Representatives
for approving legislation that would make it easier for startups and businesses
to give employees an ownership stake in their company’s success by awarding stock
options.
TheEmpowering
Employees through Stock Ownership Act (H.R. 5719) was introduced by Reps.
Erik Paulsen (R-MN) and Joseph Crowley (D-NY) in order to remove burdensome tax
implications that have made exercising stock options impractical for many
employees of startups and non-public firms.
Stock options are an important tool for rewarding employees and
increasing their compensation, and this legislation would give employees new
flexibility in handling their tax obligations.
“This legislation
will accelerate startup growth by allowing small companies to properly reward
employees for their hard work,” said Linda Moore, TechNet president and
CEO. “TechNet applauds the House for approving the Empowering
Employees through Stock Ownership Act. This will help
ensure that our nation continues to have a robust startup economy. We urge the Senate to approve the legislation as well.”
The Empowering
Employees through Stock Ownership Act will:
- Reduce the
barrier to exercise stock options: The legislation extends the time period in which
employees are required to pay tax upon exercise of stock options or Restricted
Stock Units (RSUs) that are settled for stock up to seven years. The amount of tax the employee can elect to
defer is calculated in the same manner as under current law: the excess of the
fair market value of the stock, over the amount the employee pays for the
stock. - Promote
broad-based employee ownership: To qualify for the deferral of income tax, the
company is required to grant options to 80 percent or more of its employees on
an annual basis; must offer employees stock options on similar terms; and the
stock cannot be traded on an established market. The legislation is not intended to benefit
the most compensated employees or the largest owners of a company. Individuals who own one percent or more of
the company and those who control the company, such as the Chief Operating
Officer, the Chief Financial Officer, and the four most highly compensated
officers, are not eligible. - Require
employees to be fully informed: There may be instances where the stock price of the
company declines after the employee elects to defer income tax liability. It is critical that employers provide
employees with information, through a written notice, on the tax consequences
of this election, and failure of the company to provide a notice to an employee
will result in a penalty. - Use existing
administrative tax rules and provide worker flexibility: Similar to
other tax elections in the stock options space, the employer will be required
to report the future tax liability on the employee’s Form W-2. Once the employee has the cash to pay the
tax, a tax deferral is no longer permitted.
In other words, if stock of the company becomes readily tradable on an
established market, or the employee decides to sell or transfer part or all
shares to another individual before the seven-year time period ends, the
employee will have to pay the tax. The
employee can also decide to revoke the deferral and pay their income tax at any
point.
A copy of
the bill text is available here.
About TechNet
TechNet is the national,
bipartisan network of technology CEOs and senior executives that promotes the
growth of the innovation economy by advocating a targeted policy agenda at the
federal and 50-state level. TechNet’s
diverse membership includes dynamic startups to the most iconic companies on
the planet and represents more than two million employees in the fields of
information technology, e-commerce, advanced energy, biotechnology, venture
capital, and finance. TechNet has offices in Washington, D.C., Silicon Valley,
San Francisco, Sacramento, Austin, Boston, Seattle, Albany, and Tallahassee.