Employees, in particular executives, may be covered by a wide range of compensation arrangements. These compensation arrangements may involve, for example, tax-qualified pension and retirement plans, health and welfare plans, nonqualified deferred compensation, life insurance and stock-based compensation.
The federal income taxation of stock-based compensation is complex. Minor structural differences can dramatically change the tax consequences associated with the receipt of stock and stock options. In addition to losing the ability to control the timing of taxation, employees also run the risk of suffering severe penalties and having to pay interest on tax owed. This is also an issue for employers—striving to attract talent while keeping current employees happy—to consider when designing the terms of such grants.
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