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Sonoco Products Employees: How to Use Options Collars to Manage Appreciated Stock Without Triggering Taxes

Healthcare Provider Update: Healthcare Provider for Sonoco Products Sonoco Products, a global packaging solutions company, collaborates with various healthcare providers to manage the health benefits of its employees. While specific providers may vary by location and plan selections, many large employers like Sonoco typically partner with prominent insurance carriers such as UnitedHealthcare, Anthem, and Cigna. Potential Healthcare Cost Increases in 2026 In 2026, healthcare costs for employees of Sonoco Products may experience significant increases due to anticipated premium hikes related to the Affordable Care Act (ACA). With projections indicating that premiums could rise by as much as 18% to 66% in certain states, many employees may face sharp out-of-pocket costs, particularly if enhanced federal subsidies expire. These increases will be driven by soaring medical costs and insurers' need to adjust for both economic inflation and the potential loss of critical financial support, raising concerns about accessibility and affordability for many subscribers. Click here to learn more

'Sonoco Products employees navigating concentrated stock positions should view strategies like collars as part of a broader wealth and tax planning discussion that requires careful coordination with qualified professionals.' – Paul Bergeron, a representative of The Retirement Group, a division of Wealth Enhancement.

'Sonoco Products employees with significant stock holdings can benefit from understanding how thoughtful planning techniques provide both flexibility and time to make informed decisions about future diversification.' – Tyson Mavar, a representative of The Retirement Group, a division of Wealth Enhancement.

In this article, we will discuss:

How an options collar can help manage concentrated stock positions without triggering immediate taxes.
Key considerations for constructive sale treatment under Section 1259.
Practical examples and alternatives for Sonoco Products employees holding appreciated stock.

By Tyson Mavar, advisor at Wealth Enhancement

The Difficulty of Keeping Valuable Stock

Many Sonoco Products employees hold highly valued company stock, which may have been built up over years of employment or from investments that performed better than expected. Leaving these shares without a hedge exposes them to downside risk if the stock price falls, but selling would create a significant capital gains tax liability.

One method of limiting potential losses without selling outright is an options collar. Even if the stock is not sold, certain hedging techniques can be treated as taxable sales under Section 1259 of the Internal Revenue Code, which governs 'constructive sales.'

The Operation of an Options Collar

A collar strategy combines shares already owned with two option positions:

Put option: Purchasing a put option gives you the right to sell shares at a set strike price. For example, if you own stock at $100 and buy a $90 put, you can still sell at $90 even if the price falls further.
Covered call: Selling a call requires selling at a higher strike price. For instance, selling a $120 call limits gains above $120.

When paired, the call premium can offset the put’s cost. This creates a range where downside is limited and upside is capped. Additionally, with careful planning, the collar can often be cost-neutral.

The Use of Collars by Investors

Sonoco Products stockholders and others might use collars in the following cases:

Concentrated positions: A large portion of wealth tied to one company.
Market uncertainty: When downside management is needed but selling isn’t desirable.
Estate and legacy planning: Preserving value while postponing capital gains.

The Problem of Constructive Sales

Section 1259 defines some hedges as constructive sales, including:

- Short sales of stock you already own.
- Contracts for future delivery of the stock.
- Deep in-the-money calls and puts that eliminate both risk and reward.

If the IRS views a collar as removing nearly all economic exposure, it can be treated as a constructive sale, triggering immediate recognition of capital gains.

Collar Design to Steer Clear of Constructive Sales

To reduce the risk of Section 1259 issues, Sonoco Products employees can structure collars with careful attention:

- Keep strike prices wide enough to allow both risk and reward.
- Use out-of-the-money calls and puts rather than in-the-money options.
- Roll collars forward instead of holding outdated positions.
- Document investment intent with an advisor.

An Example

Suppose you hold $2 million in stock purchased years ago for $200,000. Selling outright could result in over $400,000 in federal taxes, depending on your state.

Instead, you might sell calls at 120% of the stock’s value and purchase puts at 80%. In this design:

- Losses are limited to 20%.
- Gains are capped above 120%.
- The position retains risk and reward, so it generally avoids being classified as a constructive sale.

This approach can provide time to manage sales across multiple tax years or to wait for a more favorable tax environment.

Considerations

Sonoco Products employees considering collars should note:

Liquidity: Large-cap companies usually have strong options markets.
Rolling: Positions can be extended as expiration approaches.
Alternatives: Other hedging tools include donor-advised funds, charitable remainder trusts, gifting strategies, or exchange funds.
Advisory guidance: Given the complexity of constructive sale rules, consulting tax and legal professionals is critical.

The Bottom Line

Options collars can help Sonoco Products employees preserve the value of appreciated stock while limiting downside and postponing taxable events. This strategy allows time for thoughtful diversification while maintaining both risk and opportunity. However, collars must be carefully designed to reduce the chance of triggering constructive sale treatment under the Internal Revenue Code.

Disclaimer: This material is for educational purposes only. Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes, and potential illiquidity. Investing involves risk, including possible loss of principal. Always consult your tax professional before making decisions, as tax laws are complex and subject to change.

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Sources:

1. United States Congress. 26 U.S. Code §1259 - Constructive Sales Treatment for Appreciated Financial Positions. Cornell Law School, Legal Information Institute, 5 Aug. 1997, amended 4 Oct. 2004. https://www.law.cornell.edu/uscode/text/26/1259.

2. Internal Revenue Service. Revenue Ruling 2003-7, 2003-1 C.B. 363. 2003. https://www.irs.gov/pub/irs-drop/rr-03-7.pdf.

3. Options Industry Council (OIC). Options Strategies Quick Guide. The Options Clearing Corporation, 2021. https://www.optionseducation.org/getattachment/007fe864-029a-490d-8dc1-3b58bd558f64/options-strategies-quick-guide.pdf?lang=en-US

4. Internal Revenue Service. 2024 Instructions for Form 5227, Split-Interest Trust Information Return. 26 Nov. 2024. https://www.irs.gov/pub/irs-pdf/i5227.pdf

In the context of the retirement benefits provided by Sonoco Products Company, what are the different scenarios that could lead an employee to choose either the Normal Retirement Benefit or the Early Retirement Benefit, and what factors should be considered in making this decision? Additionally, how do these benefits interact with the vesting service and benefit service calculations specified by Sonoco Products Company?

Normal Retirement Benefit: Available at age 65, provides full monthly pension calculated by a predetermined formula. Early Retirement Benefit: Available from age 55 with 15 years of service, but monthly payments are reduced to account for the longer payment period. Employees must weigh the reduction in monthly benefits against the potential need or desire to retire early. Considerations: The choice largely depends on personal financial needs, health status, and employment circumstances. Early retirement reduces monthly benefits, which could impact long-term financial stability.

Considering the details about tax implications in the Sonoco Pension Plan, what steps should employees take to ensure they understand the taxation of both monthly annuity payments and lump sum payments when they retire from Sonoco Products Company? What resources does Sonoco offer to assist employees in navigating these tax obligations effectively?

Monthly Annuity Payments: Subject to federal income tax; state and local taxes may also apply. Employees can choose whether or not to have taxes withheld. Lump Sum Payments: Subject to mandatory 20% federal withholding if not rolled over into another qualified plan. Employees must consult with tax professionals to understand the taxation and potential penalties, especially if under age 59½. Resources: Sonoco provides access to benefits specialists through their Benefits Center and recommends consultation with tax advisors to manage tax obligations effectively.

How does Sonoco Products Company define and calculate the "Maximum Plan Benefit," and what impact do IRS limits have on the benefits that employees may receive upon retirement? Furthermore, how does this ensure that employees understand their entitlements under the plan?

Defined by IRS limits, which cap the annual benefits an employee can receive. For 2018, the limit was $220,000. Impact: Ensures high earners are aware of the maximum pension they can draw annually, and helps in planning additional retirement savings if necessary.

For employees at Sonoco Products Company who may be considering reemployment after retirement, what are the potential impacts on their pension benefits, and what guidelines does the company provide regarding how these benefits are recalculated upon re-entering the workforce?

Pension benefits cease during reemployment and resume upon re-retirement, recalculated based on additional service. This could affect decisions on returning to work post-retirement. Guidelines: Sonoco outlines how benefits are recalculated and emphasizes consulting with the Benefits Center to understand the specific impacts.

In what ways can employees of Sonoco Products Company calculate their required service years to determine pension eligibility, and what nuances exist in the vesting and benefit service calculations? How do these calculations affect the retirement planning process for long-term employees?

Vesting Service: Determines eligibility for a pension. A minimum of five years is required for a vested pension benefit. Benefit Service: Used to calculate the amount of pension. It includes periods of employment but may exclude certain leaves or breaks in service. Implications: Understanding these definitions helps employees plan their career and retirement timing to maximize benefits.

Employees at Sonoco Products Company are often curious about the various forms of payment they can choose for their pension. What are the available options, and how do these options differ in terms of financial implications for the retiree and their beneficiaries?

Options: Single life annuity, joint and survivor annuities (50%, 75%, 100% survivor benefits). Financial Implications: Each option impacts the monthly benefit amount and the security it provides to beneficiaries, necessitating careful consideration based on marital status and financial needs.

Understanding the process of applying for plan benefits can be complex for many employees. What are the specific steps that Sonoco Products Company employees need to follow to apply for their pension benefits, and what resources are available to help streamline this process?

Process: Initiated via Sonoco Benefits Center, involving choosing a retirement date, understanding benefit options, and completing necessary paperwork. Resources: Detailed support through retirement specialists aids in navigating the process smoothly.

Many employees may not be aware of their rights under ERISA as participants in the Sonoco Pension Plan. What specific rights and protections do employees have, and how can they assert these rights if there are disputes or issues regarding their pension benefits at Sonoco Products Company?

Provides specific rights regarding plan information, appeal processes for denied claims, and protections against plan abuses. Asserting Rights: Outlines steps to take if there are disputes over pension benefits, including the right to sue after exhausting administrative remedies.

If a Sonoco Products Company employee experiences a significant life change, such as divorce or a domestic relations order, what procedures must they follow regarding their pension benefits, and how does Sonoco manage such situations under the guidelines laid out in the plan documentation?

Procedures: Employees must follow specific procedures for dividing pension benefits in the event of divorce, under a Qualified Domestic Relations Order (QDRO). Management: Sonoco’s Benefits Center provides guidance and necessary documentation to ensure compliance with legal requirements.

For employees looking to learn more about their retirement options and benefits at Sonoco Products Company, what contact information is available for them to reach out for assistance? How can employees utilize these resources effectively to gain a clearer understanding of their retirement planning?

Available through the Sonoco Benefits Center, offering comprehensive support for retirement planning and benefit queries, essential for effective retirement planning.