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423b

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A 423b plan refers to an employee stock purchase plan (ESPP) which provides employees the option to purchase company stocks at a discount. The discount is dependent upon the specific 423b plan for each company, but is generally in the 10%-15% range below the current market price (i.e. stock's fair market value). A 423b plan limits discounting the stock price to the lesser of 85% of the stock's fair market value when (1) the 423b option was granted or (2) the option to buy is exercised. Company owners (those owning 5% or more of the company) are not able to participate in the 423b plan, nor can an individual purchase more than $25,000 of stock per year.
Most 423b plans allow for payroll deductions, which makes contributing to such plans fairly easy for most employees. Payroll deductions are accumulated until the end of the offering period at which point the employee is given the option to purchase the stock. When shares purchased as part of a 423b plan are sold, they will be classified as either qualified or not qualified. A qualified 423b plan is based upon the length of time the shares of the 423b plan were held prior to being sold (i.e. holding period). If shares of the 423b plan are sold more than one year after the purchase date and at least two years after the offering date, the sale is considered qualified and gain on the sale benefits from a preferred tax treatment. On the other hand, if the 423b plan shares are sold prior to the one year holding period or within two years of the offering date, those shares will be deemed not qualified 423b shares and will be taxed as non-statutory stock options. 423b refers to Section 423 of the Internal revenue Code (i.e. Title 26/Subtitle A/Chapter 1/Subchapter D/ Part II/Sec. 423b - "Employee stock purchase plans") which governs stock options issued under an employee stock purchase plan.



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