Post-termination exercise period
Also: PTEP, post-termination exercise, PTE period, post-term exercise window
The time a departing employee has to exercise vested options before they expire. The ISO default is 90 days after termination; some companies offer extended windows of five to ten years.
The post-termination exercise period, PTEP, governs how long a former employee keeps access to vested options. For ISOs, any exercise later than three months after termination converts the option to NSO treatment, losing the preferential AMT handling. Section 422 does extend this to 12 months for disability and has no cap on exercises by the estate of a deceased holder. NSOs have no statutory rule, only the plan’s term.
Example: a product manager with 8,000 vested ISOs at a $10 strike leaves on June 1. FMV at departure is $45. To preserve ISO treatment, she must exercise and pay the $80,000 strike plus handle the $280,000 AMT preference by August 30. After day 91, the ISOs convert to NSOs and the next exercise triggers ordinary income plus payroll tax on the spread.
Common mistake: treating extended PTEP (five or ten years) as a risk-free gift. Under Section 422, any ISO exercised more than three months after termination is taxed as an NSO. The extended window extends access but not ISO tax treatment.
PTEP matters at resignation, layoff, and severance negotiation. Verify it in the grant agreement before the last day, not after.