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Special Reporting Requirements Regarding Exercises of Incentive Stock Options and Transfers of Stock Acquired under Employee Stock Purchase Plans (2017 Update)

Section 6039 of the Internal Revenue Code of 1986, as amended (the “Code”), imposes reporting requirements on each corporation with respect to (i) the transfer by the corporation of stock due to the exercise of an incentive stock option (“ISO”) and (ii) the initial transfer of stock that was previously acquired pursuant to an employee stock purchase plan (“ESPP”). Specifically, Section 6039(a) requires each corporation to file information returns relating to such exercises and transfers with the Internal Revenue Service (the “IRS”), and Section 6039(b) of the Code requires each corporation to furnish the same information to each employee exercising an ISO or making an initial transfer of stock acquired under an ESPP.

Reporting Exercises of Incentive Stock Options

IRS Form 3921 is used for the reporting of exercises of incentive stock options. Copy A of Form 3921 is filed with the IRS, Copy B is delivered to the exercising employee and Copy C is retained by the corporation for its records. Form 3921 can be viewed online here. Official versions of the form must either be ordered from the IRS or a corporation can utilize the services of a vendor that creates, files and distributes the Form 3921.

The deadline for furnishing Form 3921 to an employee (or former employee) who exercised an ISO in 2016 is January 31, 2017. Corporations required to file 250 or more copies of Form 3921 with the IRS in any calendar year must do so electronically through the IRS’s FIRE system. The deadline for electronic filing with the IRS is March 31, 2017. Corporations that elect to file Forms 3921 manually with the IRS must do so by February 28, 2017. A 30-day extension for filing Copy A of Form 3921 with the IRS is available by filing Form 8809 with the IRS no later than the due date for filing such Copy A; however, filing for this extension does not provide an extension for providing Copy B of Form 3921 to the employee.

Reporting Transfers of Stock Acquired under an ESPP

IRS Form 3922 is used for the reporting of initial transfers of stock acquired by an employee (or former employee) pursuant to the terms of an ESPP. Copy A of Form 3922 is filed with the IRS, Copy B is delivered to the transferring employee and Copy C is retained by the corporation for its records. Corporations may use the fillable Form 3922 online here or utilize the services of a vendor that creates, files and distributes the Form 3922.

The deadline for furnishing Form 3922 to an employee for an initial transfer of stock in 2016 that was acquired pursuant to an ESPP is January 31, 2017. Corporations required to file 250 or more copies of Form 3922 with the IRS in any calendar year must do so electronically through the IRS’s FIRE system. (Note that the number of Forms 3921 and 3922 to be filed are considered separately for the purposes of the 250 threshold for electronic filing). The deadline for electronic filing with the IRS is March 31, 2017. Corporations that elect to file the Form 3922 manually with the IRS must do so by February 28, 2017. A 30-day extension for filing Copy A of Form 3922 with the IRS is available by filing Form 8809 with the IRS no later than the due date for filing such Copy A; however, filing for this extension does not provide an extension for providing Copy B of Form 3922 to the employee.

General Reporting Requirements

Forms delivered to employees (or former employees) must be delivered in person or mailed to the recipient’s last known address, or may be delivered electronically if the recipient consents to such a means of delivery. In order to satisfy the reporting requirements relating to ESPPs, the Code also requires that a corporation issuing stock under an ESPP identify the stock in a manner sufficient to enable it to carry out its reporting obligation (e.g., by use of special serial numbers or codes, which, in practice, are typically determined by the transfer agent).

In general, a corporation that unintentionally fails to make timely filings with the IRS is subject to penalties from $50 to $250 per form (up to a maximum of $500,000 to $3,000,000 or $175,000 to $1,000,000 for small businesses), based on the date of filing. If a corporation unintentionally fails to provide correct payee statements (e.g., Forms 3921 or 3922) to employees (or former employees), a separate penalty will apply in the same manner and amounts as the penalty for failure to timely file correct information returns described immediately above. A corporation that is required to file electronically but fails to do so without an approved waiver may also be subject to a penalty of up to $250 per return. These penalties increase (with no maximum cap) for a corporation’s intentional disregard to comply with the reporting requirements.

These reporting obligations are in addition to any reporting obligations that arise upon the disqualifying disposition of stock acquired under either an ISO or an ESPP. In particular, the IRS generally requires that the income from a disqualifying disposition be reported as “other compensation” on an employee’s Form W-2 in order for the corporation to be eligible to take a federal income tax deduction equal to the amount of income recognized as well as to satisfy the corporation’s reporting obligations.

As an aside, amounts includible in income as a result of the exercise of a non-statutory stock option (meaning a stock option that is not an ISO for purposes of Section 422 of the Code) should be reported on an employee’s Form W-2 and such exercise should result in the appropriate withholding, or reported on a Form 1099-MISC in the case of a non-employee. For Forms W-2 issued for the 2016 tax year, it is mandatory to report this income in Box 12 using code “V.”

More detailed instructions on filing requirements for Form 3921 and Form 3922 can be found here.

© 2017 Andrews Kurth Kenyon LLP

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About this Author

 Matthew B. Grunert, Andrews Kurth, Employee Benefits Implementation Attorney, Welfare Plans litigation lawyer
Partner

Matt's practice focuses on tax matters with an emphasis on employee benefits. Matt works with clients in the design, implementation, maintenance and termination of defined contribution plans, defined benefits plan, health and welfare plans and executive compensation plans. He also has experience with the employee benefits aspects of mergers, acquisitions, dispositions and spin-offs.

Matt represents clients on benefits-related matters before the Internal Revenue Service, the Department of Labor and the Pension Benefit Guaranty Corporation. He...

713.220.4429
L. Lee McMurtry III, Andrews Kurth, Drafts Incentive Compensation Lawyer, IRS Determinations Attorney
Partner

Lee concentrates his practice on employee benefits and compensation issues. Particularly, Lee designs and drafts incentive compensation, bonus, retention, change-in-control and severance plans, executive employment agreements and compensation arrangements for both public and private companies, with focus on tax issues, including those under IRC Sections 409A, 280G and 162(m). He designs and drafts employee retirement plans, such as traditional and cash balance defined benefit plans and profit sharing and 401(k) plans, obtains IRS determinations and handles corrections of compliance failures under IRS and DOL procedures. Lee also counsels clients on the administration and maintenance of employee compensation and retirement plans and on employee benefits and compensation matters in connection with mergers, acquisitions and other transactions.

713.220.4055
Kelly A. Ultis, Andrews Kurth, Executive Compensations Arrangements Lawyer, Employee Compliance Attorney
Associate

Kelly concentrates her practice in the area of Executive Compensation/Employee Benefits. She works with both private and public companies on an array of employee benefits, including qualified retirement plans, health and welfare plans, stock-based plans and other executive compensation arrangements. Her experience also includes drafting and ensuring compliance of employee benefit plans, representing clients before the IRS and DOL and assisting in employee matters related to corporate mergers and acquisition.

713.220.4462