Companies offering executives a painless way to own a piece of the company by exercising stock options might find their help costs employees dearly, if a provision in President Clinton's budget outlined earlier this year gets enacted.
The provision - which faces stiff opposition from the Republican majority on Capitol Hill - would require individuals selling stock or shares in mutual funds to add up all of their holdings and average the cost of the stock they sell. The proposal, which could rake in big bucks for U.S. government coffers, aims to prevent people from minimizing their tax bite by selling the costliest shares they own first.
But as an unintended consequence, the provision could make it more expensive for employees to take their employers' help in trading in stock options for company stock. The provision could shoot holes through programs many companies now offer employees to help them exercise the options by lending them the cash to buy the stock.
Companies routinely offer these "cashless exercise" programs. As part of these programs, companies sell some of the stock purchased through the exercise of the options to pay down the original loan; employees keep the remaining stock for themselves.
Because the president's budget proposal requires individuals, when they sell shares, to compute the profit on the average cost of all of their holdings, employees taking advantage of the cashless exercise programs would have to take into account the cost of all of the stock options granted them over time.
The provision would prevent employees from assuming that they sold their priciest shares to repay the company loan.
"This provision would take away your ability to identify shares turned back to the company as part of the cashless exercise," noted Jim Malloy, principal at Arthur Andersen & Co. in Washington and previously assistant chief counsel for financial institutions and products at the Internal Revenue Service.
"It wouldn't prevent cashless exercise, but it would have different tax results on the person exercising it," he noted. In other words, employees exercising the stock options through the cashless exercise could end up with a bigger tax bite than if they used their own cash to buy company stock.
Dozens of large corporations, including PepsiCo Inc. and General Electric Co., now offer broad-based stock option plans to employees outside of the executive suites.
A recent National Association of Manufacturers survey found 14% of 2,000 companies offer broad-based stock option programs to employees, according to Laura Brown, a spokeswoman.
To be sure, few people in Washington expect the provision to be part of any budget package, given the strong sentiments against it on Capitol Hill. Even if the provision were included in any budget bill, the Treasury Department has the authority to exempt certain applications of the provision, sources said.
A Treasury Department official declined to comment.