How to Extend a Period of Exercise for a Stock Option

When an individual works for a company and uses the stock option as a means of investing in the company, he creates financial security within the business. Some businesses require the person upon leaving the company to sell the stock options. This creates a new game plan for the invested money since there are laws and regulations requiring reinvesting of the stock options.

Upon leaving employment, contact an investment counselor to get the advice as to how to extend the period of exercise. The investor counselor knows the current laws and can provide you with the most current laws.

Before the appointment with the investment counselor, collect all the information regarding your stocks, including the names of the businesses you have invested with, the amounts of the investments, and any statements you may have about the stocks.

If you have any physical stock paperwork or certificates, make sure to take the stock certificates with you to the appointment, as there is information on the stocks the investment counselor may need to have to give you proper advice.

Consult the Internal Revenue Service (IRS) regarding the laws and possible restrictions for extending the time for reinvesting. You want to know what you are going to be able to do with your stocks before you meet with the investment counselor so you are prepared to ask educated questions.

Ask your employer if they have an extended exercise on record for their stocks. There may be documentation that will help you with your financial decisions that include an extended grace period. If there is documentation, be sure to get a copy.

Understand that to have an extended exercise for the stocks within the company, a written plan must be approved by the stockholders within 12 months before or after the new plan is adopted. This new option will increase the exercise period so know if the business has this on record or plans to make this new plan for their business.

References

• More about stock options

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Tips

In the matters of stock, whether buying or selling, always consult a professional for advice. Tax professionals know the updated laws and regulations so they can provide you with all the right information and techniques to avoid paying taxes and possible penalties. Non-qualifying stocks are treated differently than qualifying stocks. To verify the type of stock that is held as an investment is important. The tax benefit of the exercise for individuals means they do not have to pay ordinary tax nor employment taxes on the differenced of the exercise price and the fair market value of the shares issued. An alternative minimum tax does need to be paid for the stock and gains.

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Warnings

When you leave your employment, you have a specific amount of time according to Section 409A that specifies you have three months to reinvest the stock option proceeds yet up to 10 years from the original date of grant. Under the final regulations there is not a limit to the ability to extend the exercise period for a stock right that has an exercise or base price that is excessive of the current fair market value of the company stock. It the extension exceeds the allowed period, the stock right is treated as a deferred feature from the original date of the grant right. This then results in falling into the Section 409A becoming retroactive to the original date of grant. In other words, invest the stock options within the grace period or face penalties and taxes on the gain from the sale of the stocks. Steps to provide the extension of the period of exercise fall strictly under Federal guidelines and are to be adhered to closely. There are penalties for not exercising the lawful extension of time.

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