Employers Must Continue to Provide Annual Disclosure to Certain Optionees; Employers Must Also Begin Reporting Some Option Exercises To IRS, With First Reports Due in 2011 (For Exercises in 2010)
Historically, the Internal Revenue Code of 1986, as amended (the “Code”) required corporations to provide an annual informational statement to each employee acquiring stock pursuant to the exercise of an incentive stock option (“ISO”) or under an employee stock purchase plan (“ESPP”). Congress changed this rule back in 2006 to also require employers to file an information return with the IRS. (Specifically, the Tax Relief and Health Care Act of 2006 amended Section 6039(a) of the Code.)
In connection with issuing proposed regulations in 2008, the IRS waived the requirement to file a report with the IRS for 2007 and 2008, but did not waive the requirement to provide employees with an informational statement. A few weeks ago, the IRS finalized the regulations under Code Section 6039(a) and waived the requirement to file a report with the IRS for 2009, but affirmed the requirement to provide affected employees with an informational disclosure statement in connection with ISO and ESPP exercises in 2009.
You can find a link to the final IRS regulations here.
For employers, the important point is that informational disclosure statements must be provided to affected employees by January 31, 2010, with respect to ISO or ESPP exercises or transfers that occurred in 2009. Following the close of 2010, employers will need to both provide affected employees with an informational disclosure statement and also file an associated return with the IRS.
For employees who exercised options in 2009, the most important thing to realize is that the exercise of an ISO or an option under an ESPP can trigger complicated tax consequences. For example, the exercise of an ISO does not give rise to ordinary income tax, but the spread on exercise is an alternative minimum tax adjustment, which could cause considerable federal tax to be owed.