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As stated on the Abbott/Hospira page of our website, there are many variables to consider when exercising options, selling stock and the related taxes and planning that goes with it. This page is meant to give you some brief understanding of the complex world of these options. Please do NOT try to apply the principles herein without first contacting us.
1. How do I determine the total cost to exercise?
ANSWER: strike price x number of options to exercise
2. What is a cashless exercise?
ANSWER: This is when you exercise and sell the newly acquired shares the same day. This is not the same as a swap or attestation, which is described in #5 below.
3. How do I exercise a cash or cashless exercise?
ANSWER: Abbott employees go to https://onesource.ubs.com/ABT. Hospira employees go to https://onesource.ubs.com/HSP. Anybody working at any of these companies can also call UBS at 312-525-4513 and talk to anybody on the Abbott team. They will have to deliver the total cost to exercise, if not cashless, to their UBS account within 3 banking days.
4. Will I always have an account with UBS?
ANSWER: Yes. UBS automatically opens an account that contains the shares you receive from an exercise. If you want to do additional investing with UBS, you have to open another account. These accounts are not interchangeable.
5. What is an exercise done by attesting (or also referred to as a swap)?
ANSWER: It involves the same cost to exercise as a cash exercise, except that instead of coming up with cash, you can attest to owning shares of ABT equivalent to the dollar amount required.
6. How do I calculate the number of shares required for exercising by attesting?
ANSWER: strike price x number of options to exercise ¸ current market price of stock
7. How do I exercise by attesting?
ANSWER: You need to complete the attached form, which you can get on the GCD website (http://www.gcdadvisors.com/Abbott.html), complete, sign and fax to the phone numbers at the bottom of the form. You don't have to physically deliver any shares. This is done on the honor system.
8. If I am attesting to owning shares to exercise a new batch, do I actually receive any new shares?.
ANSWER: Yes. Using the formula in #6 above, let's assume the strike price is $33, the number of options is 1,000 and the current market price of the stock is $42. You must own 785 shares (33 x 1000 ¸ 42, you get to round down). Since you are attesting to owning 785 shares, you receive 215 (1000 - 785) new shares.
9. What types of exercises can be done by attesting?
ANSWER: Actually, any exercise can be done by attesting but only non qualified (NQ) grants and incentive stock option (ISO) grants after 2/9/96 will be given replacement options as described in #11 below.
ANSWER: Yes. Many.
a. The shares must be either jointly owned with your spouse, owned individually or in a revocable trust account.
b. If the shares were acquired via a previous NQ exercise, then 6 months must have passed.
c. If the shares were acquired via a previous ISO exercise, then 6 months must have passed if using them for a new NQ exercise or 12 months if for an ISO exercise.
d. If you buy them in the open market, they must have settled (3 banking days must pass). Many clients will not want to buy the shares unless the stock has increased to a point beyond 25% above the strike price (see #11 below for why the 25% is a key point). By having the stock be at such a higher point, this leaves some room for the stock to fall within the 3 banking days and yet the final price on the day of exercise would still be 25% above the strike price, enabling the client to still receive the replacement options.
11. What is the taxable income when exercising NQs?
ANSWER: It is the total dollar value of the in-the-money factor on all of the NQs exercised. Example: if you exercise 1,000 options with a strike price of $31 and the current market value is $41, then the taxable income is $10,000 [ (41-31) x 1000 ].
12. What is the tax treatment for the income from exercising NQs?
ANSWER: It is added to your W-2 as ordinary income. Abbott will normally take out 25% federal withholding, 3% state withholding and FICA (which is 7.65% until you have earned the FICA max, then it drops to 1.45%).
13. What is the taxable income when exercising ISOs?
ANSWER: There is no taxable income per se unless you "disqualify" the transaction (described in #15 below). You still need to calculate the total dollar value of the in-the-money factor on all of the ISOs exercised. Example: if you exercise 1,000 options with a strike price of $31 and the current market value is $41, then the in-the-money factor is $10,000 [ (41-31) x 1000 ]. This calculated amount is a "tax preference" that is used in the federal calculation of Alternative Minimum Tax (AMT). There is no AMT in Illinois, but there is in Wisconsin and some other states. Depending on many other variables on your tax return, AMT can range from 0 - 35%. Since there is no ordinary tax, there is no withholding of any kind when exercising an ISO.
14. What is a disqualification (DQ) of an ISO?
ANSWER: This happens when you:
a. sell shares acquired by ISO exercise within 12 months
b. use such shares to attest to exercise an NQ exercise within 6 months
c. use such shares to attest to exercise an ISO exercise within 12 months
When this happens, there usually is no indication of this on your W-2. However, sometimes ABT will include this gross income on your W-2 if a same day sale is done of the ISO. Even if it is included on the W-2, there never is any withholding and FICA never applies.
15. Would I ever be required to make estimated tax payments if I exercised either an NQ or ISO or sold any shares?
ANSWER: It would all depend on whether you were "penalty proof". For federal purposes only, you would be penalty proof if your total combined taxes paid in (both from withholding, prior year overpayment and estimated taxes) for the year is greater than the lesser of 110% of your prior year gross tax or 90% of the current year tax. For Illinois, the current year withholding and estimates must be greater than or equal to the prior year gross tax. Estimates must be paid in the fiscal quarter including the transaction that caused them not to be penalty proof. This is a very difficult calculation. Please contact GCD for this.
16. What is the preferred strategy for handling the shares acquired by an NQ exercise?
ANSWER: GCD believes that these shares should be sold the same day they are exercised. Since ordinary tax was just paid on the exercise (see #12), the upside for future growth beyond the market price on the date of exercise (only to be taxed at long term capital gains rates) is far less than the downside of the stock falling after the client just paid ordinary tax rates. If you are further bullish then you should strongly consider exercising by attestation when the option gets 25% in the money and still selling the new net shares. If you are bullish, and the stock does go up, your replacements will bring additional value. But if the stock goes down, you will have pulled out the equity anyway.
17. What is the new basis for shares exercised?
ANSWER: This depends on whether you are exercising an ISO vs NQ and cash vs. attest. Here are the calculations:
*These numbers only apply to the new net shares received.
All attested shares retain their original basis.
18. How do I determine the basis of shares sold?
ANSWER: This needs to be determined by the model prepared by GCD. GCD will choose the batch that is most tax advantageous based on various variables existing at the time of sale. Shares sold that had previously been subjected to the AMT calculation may result in you getting back some, if not all, of the AMT previously paid in. GCD has learned that this refund is on average less than 70% of the original amount paid in.
19. What is the benefit of exercising by attesting?
ANSWER: There are a few.
a. If you are considering selling existing shares to raise the funds to do a cash exercise, attesting allows them to defer the potential gain on the previously owned shares until this newly received batch is sold along with the attested shares.
b. If you are not bullish, this is a way to only acquire new net shares instead of the entire quantity. In the example in #8, you are only receiving 215 shares instead of 1,000.
c. Abbott has a special program referred to as "replacements" or "reloads". In the example in #8, Abbott will give you 785 new NQ options with a strike price of $42 (the market price on the date of exercise). These new options will inherit the initial lifespan of the original option exercised, which is always 10 years from the grant date. These replacements are only given if the market price is at least 25% above the strike price. If the stock keeps going up 25%, the client can keep exercising and receive replacements an unlimited number of times within the initial 10 year period. This is such a strong benefit that options should be exercised the minute they become 25% in the money.
20. What is the preferred strategy for handling the shares acquired by an ISO exercise?
ANSWER: This needs to be determined by the model prepared by GCD. With the ABT stock currently being flat and the gap between the AMT rate and the highest tax rate being nearly 0, there is a mathematical advantage to you disqualifying the ISO exercise and doing a same-day-sale (SDS).
Please go back to the Abbott/Hospira page of our website for more information.
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