When calculating the election's potential benefits, be sure to factor in the opportunity cost of the money that's used to pay tax now. "The funds have to come from a source other than the stock, because you can't sell it. Depending on what else can be done with that cash, the election may not make sense," Macklin says. Consider dividends, too. On restricted shares, they're generally taxed as ordinary income. But the 83(b) election permits qualified dividend treatment, he observes.
RSUs
The latest twist in the genre is restricted stock units. They are
rights to own the employer's stock (tracked as bookkeeping entries)
rather than actual stock. A primary difference: The Section 83(b)
election is not available for RSUs, says attorney Joseph S. Adams, a
partner in the benefits department of McDermott Will & Emery in
Chicago. Shares are distributed to the executive in a taxable event
when the rights vest.
Some companies permit deferring the tax-triggering distribution, even
though that subjects the RSU plan to the IRS' new deferred compensation
rules. Those strictures require the executive to decide whether to
defer at the start of employment covered by the RSU plan, Adams says.
"Companies are struggling to apply the new Section 409(a) rules," he
says.
Still, the units present an advantage over straight stock. Some foreign
jurisdictions tax individuals immediately on stock awards, whether
vested or not, Adams says. "Our big multinational clients offer their
executives RSUs for that reason."
