Financial Professionals Features of each stock plan type

Features of each stock plan type
Features of each stock plan type
Stock options
  Qualified and incentive stock options (ISOs) Nonqualified stock options (NQSOs)
Who participates All or select employees
  • Executives
  • Management
  • Key talent
  • Non-employees, including directors, officers, contractors, and consultants
How awarded
  • Company grants to recipient
  • Employee must pay exercise price
  • Company grants to recipient
  • Recipient must pay exercise price
Type of payout Equity Equity
Considerations
  • More favorable tax treatment than nonqualified options.
  • NOT subject to Social Security, Medicare, or withholding taxes at exercise.
  • Potential alternative minimum tax (AMT), depending on personal financial situation.
  • Exercised at election of holder.
  • Must have at least fair market value (FMV) exercise price to be exempt from IRC 409A.
  • Income from the exercise of NQSOs is subject to withholding of federal income tax, Social Security and Medicare taxes and (if applicable) stat income tax.
Restricted stock
  Restricted stock awards (RSAs) Restricted stock units (RSUs)
Who participates Usually key talent Usually key talent
How awarded Company grants Company grants
Type of payout Equity or cash equivalent Equity or cash equivalent
Considerations
  • Multiple grants can occur.
  • Holder is beneficial owner of shares at grant.
  • Taxation for employee and deduction for employer can occur either:
    • When stock is issued and employee makes a Sec. 83(b) election (before risk of forfeiture has lapsed) OR
    • When risk of forfeiture has lapsed and employee is vested in stock—employee pays ordinary income.
  • Holder receives dividend and voting rights.
  • When risk of forfeiture has lapsed and employee is vested in stock—employee pays ordinary income.
  • Restricted stock units are not subject to a Sec. 83(b) election.
Performance stock
  Performance stock award (PSAs) Performance stock unit (PSUs)
Who participates Usually key talent Usually key talent
How awarded Company grants Company grants
Type of payout Equity Equity or cash equivalent
Considerations
  • Actual number of shares granted is based on goals met during the agreed performance period.
  • Considered regular income when targets are reached and shares are vested.
  • Capital gains on difference between tax when vested and sale.
  • Same as PSA
Employee stock purchase plan
  Qualified employee stock purchase plan (ESPP) Nonqualified employee stock purchase plan (ESPP)
Who participates All employees All or select employees
How awarded Employee purchases with after-tax dollars—usually at a discount. Employee purchases with after-tax dollars based on plan terms.
Type of payout Equity Equity
Considerations
  • Offers discounts up to 15% from the stock’s fair market value (FMV) price.
  • No company match allowed.
  • Must be available to all employees with limited exceptions.
  • No caps for discounts.
  • Company match allowed.
  • No non-discrimination requirements.

Learn more

Contact your local Principal® representative or your support team, or call  800-952-3343.

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The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment or tax advice. You should consult with appropriate counsel, financial professionals, and other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.

Insurance products and plan administrative services provided through Principal Life Insurance Co., a member of the Principal Financial Group®, Des Moines, IA 50392. Certain investment options and contract riders may not be available in all states or U.S. commonwealths.