Named for the Internal Revenue Code section that authorizes it, the Section 83(b) election is made only (1) when you want to be taxed (federal, Social Security, Medicare, and any state or local taxes) on the value of restricted stock at grant rather than vesting; or (2) when you exercise stock options that are exercisable before vesting (very rare in public companies).
Alert: A Section 83(b) election must be filed with your local IRS office within 30 days after your receipt of restricted stock (or your stock option exercise). It must also be filed with your tax return for that year.
You also pay taxes at the time of your Section 83(b) election. Before you make the election, it's important to understand both the risks and the situations when it might be beneficial. Your company will have some type of procedure for collecting the withholding taxes. The income you recognize at grant, and the withholding, should appear on your IRS Form W-2.
What To File With The IRS
Although there are hundreds of formal IRS tax forms, no official form exists for making the 83(b) election. Your company may have developed a sample form for restricted stock grants (see an example from the law firm Pillsbury Winthrop Shaw Pittman). If your company does not do this, you make the election by sending to the IRS office where you file your return the appropriate information, which includes:
- your name, address, and Social Security number
- a description of the property/shares (e.g. X shares of my company) and the fair market value
- the date on which you received the shares and in what taxable year
- the restriction that will cause forfeiture if it is not met or the restriction that will lapse when vesting requirements are met
- any money paid for the stock
According to the Nov. 2011 issue of Tax Management Compensation Planning Journal, the IRS is expected to issue a model Section 83(b) election form in the near future. The model form will not make any substantive changes to the requirements under current regulations and will be issued simply to illustrate the current requirements. The publication says the IRS is developing the form because some of the election statements it receives do not include all the necessary information.
Alert: After you make a timely election, you still must give a copy of the election to your company and attach a copy of the document when you file your income tax return for that year. Experts believe a valid election still exists even if you mistakenly do not meet these requirements as long as you filed the 83(b) election with the IRS within 30 days after the grant of restricted stock (or the stock option exercise).
A survey in 2010 by the National Association of Stock Plan Professionals (NASPP) found that just 9% of the responding companies discourage the Section 83(b) election, and only 4% actually prohibit it. The same survey also found that 32% of companies will help with a Section 83(b) election if an employee wants to make it, and 34% provide employees with information about it. |
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