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”). Under IRS regulations, these companies must provide information statements no later than February 1, 2010, to any employee or former employee who exercised an ISO during 2009 or transferred stock during 2009 that was previously acquired pursuant to an ESPP. Companies that fail to provide such statements on a timely basis may be liable for penalties of $50 per statement, up to a maximum of $100,000 per year.
Content of Information Statements. The IRS has prescribed the required content of the information statements. The required content of each statement differs depending on whether it relates to an ISO or an ESPP.
ISO Statements. If a statement relates to the exercise of an ISO, the following information must be provided:
ESPP Statements. If a statement pertains to the transfer of ESPP stock after the employee or former employee has acquired it, the statement must include the following:
New Information Return Requirement for 2010 Transactions. Recently finalized IRS regulations will require companies that must provide information statements to employees or former employees to provide generally the same information to the IRS with respect to ISO exercises and transfers of ESPP stock that occur beginning in 2010.
The new IRS regulations slightly alter the required content of the information statements to be provided in 2011 and beyond. Going forward, the statements provided to employees and returns provided to the IRS will generally need to be made on a specified form, Form 3921 for ISOs and Form 3922 for ESPPs. The IRS has not yet published either form. We expect the IRS to issue new forms to facilitate these obligations. We suggest that companies establish systems to collect the required information during 2010 so that it may be accurately reported beginning in 2011.
ISO Statements (2010 Transactions). If a statement relates to the exercise of an ISO, the following information must be provided:
ESPP Statements (2010 Transactions). If a statement pertains to the transfer of ESPP stock after the employee or former employee has acquired it, the statement must include the following:
The new regulations clarify that the information and return requirements will apply only to the first transfer of ESPP shares. They also permit that an immediate transfer of legal title to a recognized broker or financial institution maintaining an account for the ESPP participant can be treated as the first transfer for purpose of these rules.