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Tax.appeal.168, Tax Accountant
Category: Tax
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Experience:  3+ decades of varied tax industry exp. Tax Biz owner
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What are the individual tax consequences of lowering an exercise

Customer Question

What are the individual tax consequences of lowering an exercise price on a stock option plan? for example, our plan is currently 25 dollars and we want to lower it to 5 dollars. if a participant has not exercised, we plan to just let the old plan fade away or should we amend and restate the old plan or adopt a new plan and cancel the old paln??
Submitted: 2 years ago.
Category: Tax
Expert:  Tax.appeal.168 replied 2 years ago.
Welcome. Thank you for choosing us to assist you. My name is ***** ***** my goal is to help make your life, a little... less taxing.
Q: What are the individual tax consequences of lowering an exercise price on a stock option plan?
A: There is no specific language indicating that the old plan should be revised or a new plan created, but based on the following information, that is what is sounds like needs to be done to keep the company out of hot water. In my opinion, it is best to create a new plan. Otherwise, not implementing a new plan to reflect the correct exercise price could be considered fraudulent and deemed as Plan Mismanagement. SEE BELOW:
Plan Mismanagement
Under federal law, the people responsible for overseeing a stock option plan must provide information about plan features and funding, provide a grievance and appeals process, and act in the best interests of the plan participants. Fraudulent information concerning an employee’s entitlement to options, number of assigned shares, exercise price, or vesting schedules is a violation of the act and a common source of litigation. Choose your plan administrators wisely.
Let me know if I can be of further assistance to you regarding this matter.
Expert:  Tax.appeal.168 replied 2 years ago.
Information relating to individuals:
A company may reprice its options, allowing employees to exchange underwater options for ones that are in the money. For example, if options were originally exercisable at $50, and the stock's market price dropped to $30, the company could cancel the first option grant and issue new options exercisable at the new $30 share price.