As The New York Times reports, there's a new levy on such plans.
The National Center for Employee Ownership estimates that 4,000 companies offered stock-purchase plans last year.
But the government quietly decided in January that working people in these plans should be taxed on the difference between the discounted price at which they buy the shares and the prevailing market price.
So as of January 2003, workers and companies offering the plans will have to pay payroll tax, currently 7.65 percent, on the difference.
Add that cost to the administrative nightmare of managing such payments and some people think companies will dump the plans.
"This would make the plans too burdensome," said Sandra Sussman, executive director of the National Association of Stock Plan Professionals in Concord, Calif. "I've heard from several companies that they would likely not implement new plans."
The new tax goes against the original idea behind the plans, Ms. Sussman added. "The legislative intent was for these incentive vehicles not to be taxed ever, at all," she said.
Karen Field, senior tax manager at KPMG, said the IRS considers the discount on the shares to be compensation, and therefore subject to payroll taxes. But no money changes hands, so the tax would have to be paid out of wages.
And the Times points to another problem: What if the stock fell after a worker paid the tax when he bought it? Then the employee would have paid taxes on a paper profit that vanished later.
When payroll taxes, known as Federal Insurance Contributions Act taxes, were low, the money that could have been generated by applying the taxes to stock purchase plans was small. Now, with FICA taking 7.65 percent a year on wages up to $80,400, the money is too big for the IRS to ignore.
Taxing the plans,. Field said, "is not fair, not good and hits all the wrong people."
Only new legislation can stop the tax, according to the Times, which notes that Rep. Amo Houghton, a New York Republican, wants to introduce a bill soon that would exempt stock purchase plan discounts from taxes.
To view the New York Times story, click here. Registration required.
l employees not to spend that tax-rebate check yet, especially if they've taken advantage of stock purchase plans.