PeopleSoft Stock Administration 9.1 PeopleBook

Understanding Stock Purchase Plans

This chapter discusses:

The stock purchase business process.
Section 423 (IRC) plans.
Antidilution issues.
Stock purchase reports.

The Stock Purchase Business Process

Stock Administration enables you to create and manage your company's employee stock purchase plan in compliance with several IRS and SEC rules. These rules include the Section 423 annual maximum purchase amount, share discount amount, purchase holding periods, and offering holding periods.

Employee stock purchase plans allow eligible employees to purchase company stock, often at a discounted price. Employees enroll in a company's plan during certain periods or intervals, authorizing the company to place payroll deductions in a trust to purchase company stock. If the collected funds are in a foreign currency, they must be converted into the stock currency for purchase. Most stock purchase plans are qualified IRC 423 stock purchase plans in which employees participate, including those who are not administered by HR.

The stock purchase price is determined based on your plan rules. At predetermined periods, the stock is purchased for participating employees. The value of the stock and the amount of funds collected determine the amount of stock purchased, and employees can sell or transfer these shares. When employees sell shares, any ordinary income is sent to payroll.

Section 423 (IRC) Plans

The majority of stock purchase plans in the United States are qualified IRC 423 Plans. In general, the participants do not recognize ordinary income when they purchase stock, but they do at the time of sale. The following IRS Section 423 eligibility rules are supported in the Governing Body Rules Table:

Only employees of the company are eligible to participate in Section 423 plans. This includes employees who are not administered by HR.
Employees who are major shareholders (those who hold 5 percent or more of the company's stock) may not participate in the plan.
The maximum purchase discount is no more than 15 percent.
The maximum offering length is no more than 27 months.
An employee may not purchase more than $25,000 of stock in any calendar year (based on the value at participation). PeopleSoft supports the two most common interpretations of the IRC 423 maximum purchase value limit: 1) a $25,000 limit applies to purchases within a calendar year, and 2) a $25,000 limit applies to the years that the offering is outstanding. You select one of these purchase limit rules when you define the stock purchase plan rules.

Example: Calendar Year Interpretation of $25K Rule

The system calculates the value of purchases made by a participant in a calendar year and applies the purchase limit to any amount over the $25,000 by adjusting the value so that it is below the limit. For example:

Offering Period: 12 months

Begin: 01/01/1999

End: 12/31/1999

Purchase Periods: 6 months

Begin: 01/01/1999

End: 06/30/1999

Begin: 07/01/1999

End: 12/31/1999

Date	Activity	Value	Adjusted Value
06/30/1999	Purchase #1	$17,500	$17,500
12/31/1999	Purchase #2	$8,500	$7,500
Calculated Totals		$26,000	$25,000

The second purchase exceeds the $25,000 limit, so the purchase is adjusted.

Example: Years Offering is Outstanding Interpretation of $25K Rule

The Years Offering is Outstanding interpretation is more complex and allows the participant to accumulate the $25,000 value per year that the offering is outstanding. This allows a participant to purchase stock up to a $25,000 value for each year the offering remains outstanding. If the offering extends to more than one calendar year, the unused portion of the limit is added to the next year's limit. For example:

Offering Period: 24 months

The offering period is as follows:

Begin	End
7/1/1999	6/30/2001

Purchase Periods: 6 months

The purchase periods are as follows:

Begin	End
7/1/1999	12/31/1999
1/1/2000	6/30/2000
7/1/2000	12/31/2000
1/1/2001	6/30/2001

Purchase Date	Activity	Value
12/31/1999	Purchase #1	$17,500
6/30/2000	Purchase #2	$18,500
12/31/2000	Purchase #3	$12,000
6/30/2001	Purchase #4	$17,500

Year 1999 Calculation

This is the 1999 calculation:

Limit	$25,500
Value	$(17,500)
Remaining	$7,500

Year 2000 Calculation

This is the 2000 calculation:

Limit	$25,500
Remaining from 1999	$7,500
	$32,500
06/30/2000 Value	$(18,500)
12/31/2000 Value	$(12,000)
Remaining	$2,000

Year 2001 Calculation

This is the 2001 calculation:

Limit	$25,000
Remaining from 2000	$2000
	$27,000
06/30/2000 Value	$(17,500)
Remaining	$9,500

Antidilution Issues

A stock purchase can potentially flood the market with newly issued shares if the purchase fair market value (FMV) is much lower than the grant FMV. To protect shareholders, the IRS limits the number of shares that an individual participant can purchase. In addition to the IRS limit, corporations can implement additional rules to further limit the number of shares that participants can purchase. One of the ways that a corporation can limit the potential diluting effect of its stock purchase plan is to implement an antidilution rule, which is used when the purchase FMV is much lower than the grant FMV. There are many ways to define an antidilution rule, but all are designed to determine a price to use in calculating the maximum number of shares to purchase.

Stock Purchase Reports

The system delivers numerous stock purchase reports, including the following:

Stock Activity Details (STOK001)
Stock Activity Summary (STOK002)
Option Plan Summary (STOP001)
Participant Contributions (STES002A)
Expected Volatility (STFS002)
Purchase Valuation Audit (STFS006)
Estimate Contributions (STFS005)
FAS 123 Purchase Expense (STFS008)
Stock Purchase Valuation (STFS012)
Potential Diluted (STRR001)