Making the Sec. 83(i) election.

• Author: Young, Patrick L.

In some cases, employer stock may be transferred to an employee in settlement of restricted stock units (RSUs). An RSU is an arrangement under which an employee has the right to receive at a specified future time an amount determined by reference to the value of one or more shares of employer stock. The receipt of employer stock in settlement of an RSU is subject to the same rules as other receipts of employer stock with respect to the timing and amount of income inclusion by the employee and the employer's deduction.

Sec. 83(i) provides an election that allows a qualified employee to defer the inclusion of income from the exercise of an RSU or option of the qualified stock of a nonpublicly traded corporation for up to five years from the date of vesting. The election can be made for stock options exercised and RSUs settled after Dec. 31, 2017, even if the stock options or RSUs were granted before 2018.

Note: A plan does not become subject to the nonqualified deferred compensation rules of Sec. 409A solely because of an employee's Sec. 83(i) election (Sec. 409A(d)(7)).

Tax year of inclusion

If a Sec. 83(i) election is made, then the tax year of inclusion is the employee's tax year that includes the earliest of:

1. The first date the qualified stock becomes transferable (including to the employer) (Sec. 83(i)(1)(B)(i));

2. The date the employee first becomes an excluded employee (defined below) (Sec. 83(i)(1)(B)(ii));

3. The first date on which any stock of the corporation that issued qualified stock becomes readily tradable on an established security market (Sec. 83(i)(1)(B)(iii));

4. The date that is five years after the first date the employee's rights in the stock are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier (Sec. 83(i)(1)(B)(iv)); or

5. The date on which the employee revokes (at the time and in the manner the IRS provides) the Sec. 83(i) election with respect to the stock (Sec. 83(i)(1)(B)(v)).

   The qualified stock for which a Sec. 83(i) election is made is treated as wages received on the earliest date above for the tax year of inclusion, and the income tax withheld must be at the maximum income tax rate in effect for individuals under Sec. 1 (37% for calendar year

   2021) (Sec. 3402(t)(1)). The tax owed is calculated when the employee makes the Sec. 83(i) election and is due at the end of the deferral period regardless of the stock value. If the stock value has declined, tax is not...