Missed Your 83(b) Election Deadline? Options and Remedies
You received your startup stock grant, maybe as a founder getting shares when the company was formed, or as an employee stepping into a new role.
Either way, the 30-day clock on your 83(b) election started ticking. And with everything else demanding your attention, it was easy to miss.
Now the deadline has passed, and you’re left wondering what it means and what, if anything, you can do next.
The truth is, a late 83(b) election leaves you with fewer choices, and the cost of doing nothing can be high. But depending on your situation, there may still be paths worth exploring, which I’ll break down for you in this article.
Important note: This is not legal or tax advice. Just a high-level discussion. Reach out to us for a tailored discussion on your 83(b) or for 409A valuation services. Tax liability will vary depending upon each taxpayer’s circumstances.
Why Meeting the 83(B) Election Deadline Matters
The key thing to understand here is that if you receive restricted stock from your startup, the IRS taxes you on that stock as it vests each year. This is true for shares that are subject to vesting over time, typically over a 4-year period.
So if your company increases in value over those years, you will be taxed on the “spread”, the difference between the fair market value on the vesting date and your original exercise price.
This can create a significant tax bill year after year as the stock vests and increases in value. Even worse, since the stock is still restricted and illiquid, you may not be able to sell shares to pay the tax, so it comes out of pocket.
However, if you make a timely 83(b) election within 30 days of receiving the stock grant, you can elect to be taxed up front on the entire grant based on the fair market value on the grant date. Since often this value matches the exercise price, there is no immediate tax due.
More importantly, you avoid that mounting tax liability each future period as the stock vests. You’ve paid your taxes already on the entire grant up front. As the startup increases in value over time, you avoid paying ongoing tax on that appreciation.
Missing the 83(b) filing deadline or trying to make a late 83(b) election means you lose the huge tax benefits of electing early taxation. You take on potentially significant tax bills year after year as the stock vests that could exceed what you paid up front.
It’s always best to consult legal and tax experts, but generally it’s in your interest not to miss this 30-day window.
It’s also worth noting that 83(b) elections aren’t limited to restricted stock grants. In some cases, employees who hold incentive stock options choose to exercise them early, before they vest.
When that happens, the exercised shares are treated as restricted stock, and filing an 83(b) election for these incentive stock options may lock in today’s lower value for tax purposes. Without the election, shares would be taxed as they vest, just like any other restricted stock.
When Exactly Does the 83(b) 30 Days Window Start?
You may be unsure if you’ve already missed the 83(b) election deadline or when the clock even started.
The 83(b) election 30 days rule starts on your grant date, sometimes called the issuance date or date of transfer. That day is “Day 0,” and the next day is “Day 1.” From there, you count forward 30 calendar days.
You can usually find your grant date in the board consent, stock purchase agreement, stock certificate, or the company’s cap table (if maintained by counsel or the equity team). If those dates don’t match, the board consent takes precedence.
If Day 30 falls on a weekend or a federal holiday, the 83b filing deadline moves to the next business day.
To meet the requirement, your election doesn’t need to be processed by the IRS within that period. What matters is that it’s mailed and postmarked on time. Without a postmark, the IRS may treat it as a late 83(b) election.
What Happens if You Miss a 83(b) Deadline?
Unfortunately, if you fail to file within the 83(b) election 30 days window, the IRS will not accept the election after the deadline, rendering it invalid. And once the 83(b) election timing has passed, your choices become very limited.
It’s also imperative to stress that trying to fix the problem by backdating forms or altering records is not only unethical but also nearly impossible to pull off given today’s electronic trails.
At this point, it’s especially important to work with experts. At Eton, we have worked with clients to explore what limited remedies may still be available after a late 83(b) election. Contact us today to learn more about how we can help.
Potential Remedies for a Missed 83(b) Deadline
There are sometimes ways to remedy an unintended lapse:
- Examine the specifics of the stock grant. Read the fine print closely. The shares may not have actually been issued yet if a condition wasn’t met. For example, the employee may not have paid the nominal purchase price, or the board may have delayed its approval.
- Consider reissuance if the grant wasn’t final. If the stock wasn’t truly issued, one could argue the 30-day clock never started. Reissuing the shares now would open a new 30-day window to file the 83(b) election using the stock’s current value.
Potential “Partial Fixes” for a Late 83(b) Election
Even if the 83(b) election 30 days window has truly closed, partial fixes may be possible with cooperation:
- Consider resigning. Stepping away can stop the stock from further vesting and prevent taxes from accumulating as company value grows. For successful startups, obligations may balloon beyond earnings. While halting accrual, unemployment results with lost potential upsides. Prior vested stock remains problematic.
- Return unvested shares for an equivalent new grant. Handing back unvested shares in exchange for a new grant at current fair market value is another choice.Though it terminates future liability, the higher present price ensures lost profits. Handling requires care to avoid illegality. Appearances on funding documents mandate explanation. Advisers question effectiveness as IRS or courts may not accept the process.
- Accelerate the vesting of all shares immediately. This treats the current stock value as taxable income but avoids future taxes until sale. Though it removes vesting, changing the economic deal should not be done without scrutiny. Accelerating remaining vesting provides clarity now on full tax impact. However, taxes immediately due on spread at acceleration could be substantial. Future objections from investors or potential acquirers seem possible, as full vesting could facilitate departure because “handcuffs” are removed. Timing this fix with a rigorous Section 409A valuation may significantly reduce the overall tax burden.
- Alter the repurchase price. Adjusting the repurchase price from the original grant to current value eliminates substantial risk, as the company pays full worth upon buyback. Yet investors may dispute, and incentive to remain diminishes as employees keep unvested stock upon leaving or force an expensive company repurchase.
- Alter the transferability of the stock. A more nuanced approach leverages tax rules: stock is taxable to the employee either when it is no longer at substantial risk of being forfeited, or when it is substantially vested. In practice, this is the point at which the employee can transfer the stock to a third party, once restrictions on transfer have been lifted. By amending the arrangement to give the employee this transfer right, the tax can be accelerated to the time of amendment and based on the fair market value of the stock at that time. This has a similar effect as if the stock’s vesting was accelerated earlier. The actual transfer does not need to take place – it is enough that the employee has the right.
It is important to note that as long as the employee owns the stock, the vesting restrictions remain in effect.
The company can also add contractual obligations, requiring the employee to pay a penalty equal to the fair market value of stock that would have been forfeited if they left the company before all vesting conditions were met. This discourages the employee from transferring the stock and then leaving.
Timing this fix with a rigorous Section 409A valuation may significantly reduce the overall tax burden.
While the costs of missing an 83(b) filing deadline are real, considering the grant details carefully and creatively may sometimes provide relief. The key is understanding all options and consequences before determining the best path forward.
Above all, obtain expert guidance immediately rather than acting alone in the wake of a late 83b election.
How Can Eton Help?
Navigating the intricacies of stock options and 83(b) elections can be challenging.
At Eton Venture Services, our experienced professionals are well-versed in the complexities of tax and legal implications associated with stock options and vesting.
We guide clients through making timely 83(b) elections and can offer non-legal advice on possible remedies if the deadline was missed.
If you have missed the 83(b) election deadline or require assistance with stock options and related tax matters, we’re here to support you.
Reach out today to see how our expertise and client service can make a difference.
