Case of the Week: Stock Options and Determining a 5-Percent Owner

John Carl

The ERISA consultants at the Learning Center Resource Desk, which is available through Columbia Threadneedle Investments, regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans.

A recent call with an advisor in Pennsylvania is representative of a common inquiry on determining ownership for plan purposes. The advisor asked:

“One of my clients in a 401(k) plan has been given stock options, which have not been exercised. When determining a 5-percent owner for plan purposes, does ownership of stock options count?”

Highlights of Discussion

The answer to your question is clearly addressed in Internal Revenue Code (IRC) §§416 and 318 and underlying regulations.

Under IRC §416(i)(1)(B)(I), the term “5-percent owner” means the following:

  • if the employer is a corporation, any person who owns (or is considered as owning within the meaning of IRC § 318) more than 5 percent of the outstanding stock of the corporation or stock possessing more than 5 percent of the total combined voting power of all stock of the corporation; or
  • if the employer is not a corporation, any person who owns more than 5 percent of the capital or profits interest in the employer.

A person might be a more than 5-percent owner through the “constructive ownership” rules of IRC § 318. IRC §318(a)(4) states: “If any person has an option to acquire stock, such stock shall be considered as owned by such person. For purposes of this paragraph, an option to acquire such an option, and each one of a series of such options, shall be considered as an option to acquire such stock.”

Conclusion

When determining ownership for plan purposes, if any participant has an option to acquire stock, such stock shall be considered as owned by such person.

The Learning Center Resource Desk is staffed by the Retirement Learning Center, LLC (RLC), a third-party industry consultant that is not affiliated with Columbia Threadneedle. Any information provided is for informational purposes only. It cannot be used for the purposes of avoiding penalties and taxes. Columbia Threadneedle does not provide tax or legal advice. Consumers consult with their tax advisor or attorney regarding their specific situation.

Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed by Columbia Threadneedle.

Columbia Threadneedle Investments (Columbia Threadneedle) is the global brand name of the Columbia and Threadneedle group of companies.

©2017 Columbia Management Investment Advisers, LLC. Used with permission.

Add Your Comments

One Comment

  1. David J. Kupstas
    Posted March 9, 2017 at 1:52 pm | Permalink

    Do you have an opinion on the use of options in determining majority owners for PBGC plan termination purposes? Some say this is a great way to get more majority owners who can elect to reduce their benefits from an underfunded plan. Others say this approach is questionable.

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