This is a reminder to public and private companies that grant incentive stock options (“ISOs”) or maintain a tax-advantaged employee stock purchase plan (“ESPP”) of certain year-end reporting requirements.
Under IRS regulations, these companies must provide information statements on Forms 3921 and 3922 (or statements reflecting the same information) no later than January 31, 2017, to any employee or former employee who exercised an ISO during 2016 or transferred shares of stock during 2016 that were previously acquired pursuant to an ESPP. Companies that fail to provide such statements on a timely basis may be liable for penalties of up to $260 per statement, up to a maximum of $3,218,500 per year (higher penalties are possible for companies that intentionally disregard the rules).
In addition, companies must file information returns with the IRS on Forms 3921 and 3922 no later than February 28, 2017 (if filed on paper), or March 31, 2017 (if filed electronically). Companies that are required to file 250 or more of either type of form must file those returns electronically. A 30-day extension of the deadline may be requested by filing Form 8809 with the IRS prior to the original deadline. Companies that fail to timely file these information returns with the IRS may be liable for penalties of up to $260 per information return, up to a maximum of $3,218,500 per year (higher penalties are possible for companies that intentionally disregard the rules).
Content of Information Statements and Returns
The returns provided to the IRS need to be made on a specified form. Form 3921 is used for ISO exercises and Form 3922 is used for ESPP share transfers. The information statements provided to employees may alternatively reflect the information specified on the applicable form. Sample Forms 3921 and 3922 are available on the IRS website for informational purposes but cannot be used for filing. The official forms to be used for filing may be ordered from the IRS by calling 1-800-TAX-FORM (1-800-829-3676) or visiting the IRS website. Only one transaction can be reported on each Form 3921 or 3922, so more than one Form 3921 or 3922 must be filed for any participant that effected more than one ISO exercise or more than one ESPP share transfer in 2016.
Form 3921 provides the following information regarding the exercise of an ISO:
ESPP Share Transfers
Form 3922 provides the following information regarding the first transfer of shares of stock acquired by an individual pursuant to an option granted under an ESPP, where the exercise price was less than 100 percent of the fair market value of the shares on the date of grant or was not fixed and determinable on the date of grant:
The “first transfer of legal title” that triggers the ESPP share transfer reporting requirements includes an immediate deposit of the shares acquired under the plan into a brokerage account established on behalf of the employee, which may occur on the ESPP purchase date. If shares acquired under the ESPP are issued in certificate or book-entry form, the “first transfer of legal title” will occur when the employee subsequently sells the shares or transfers them to a brokerage account.