We’ve gotten a two-week reprieve from the risk of a U.S. government shutdown, leaving everyone to worry over what a shutdown would mean exactly. First, it certainly doesn’t mean that everyone working for the government just stays home and that the machine of the U.S. governmental infrastructure comes to a screeching halt. Only non-essential functions would be suspended. In the world of stock plan administration, we are most interested in whether or not the SEC and the IRS will still function normally. Most importantly, will we be able to file required forms through the SEC’s EDGAR and the IRS’s FIRE system? I’m sure our partners in the Payroll department are also wondering if they will still be able to submit payroll withholding through EFTPS (or, more likely, that the service provider they are using will be able to), but don’t worry, I’m sure that the government will consider functions that bring tax money in are essential.
The truth is that nobody really knows, but we can all speculate. There hasn’t been a government shutdown since 1995 and the rules for determining which government positions are considered nonessential haven’t been updated since the 80’s. One section that is already covered is that all “activities essential to the preservation of the essential elements of the money and banking system of the United States, including borrowing and tax collection activities of the Treasury” are included in the list of essential government functions. This could potentially cover the personnel required to run both the electronic filings for the IRS, including the forms 3921 and 3922 if you haven’t taken care of that already. What probably won’t be deemed “essential” are personnel to help answer any questions you might have. According to this article, the SEC is already working on a contingency plan that would include stopping all audit processes, but I assume would keep EDGAR up and running. So, we are in a “wait and see” mode right now, both on whether or not a shutdown will take place and what exactly that would mean for stock plan managers.
On a related note, one of the fears expressed in this article is the threat posed by a lack of cyber-security in the event of a government shutdown; the list of critical-need computer security employees hasn’t been updated since 1995. With how much we rely on electronic filing in the world of equity compensation, that also has me a little concerned.
Electrifying Section 6039
Speaking of electronic filing, many companies that had originally planned on submitting paper returns the IRS have either requested an extension or decided to go ahead and file electronically. If you either missed the February 28th deadline to file for an extension or have decided to brave the electronic filing, you’re now faced with the problem of actually creating the file to submit through the IRS’s FIRE system.
Unfortunately, if you weren’t expecting to file electronically, then I suspect you didn’t send a test file to the IRS while the test files were still being accepted. This means that you have two choices: 1) engage a service provider to create and/or submit file on your behalf or 2) create the file yourself and hope you get it right. The first choice is, of course, the easiest. To make it even easier, the NASPP has a great matrix of service providers who are prepared to help you through this from our November 18th webcast. If you decide to go it alone without a test file, we can still help. Stock & Option Solutions recently provided NASPP members with an example of what the files for forms 3921 and 3922 should look like. Whatever your decision, the NASPP has got you covered!
As the deadline for Section 6039 returns and information statements gets closer, the activity on the NASPP Discussion Forum regarding them increases. This week, I’d like to highlight some of the issues that have been coming up for stock plan administrators and give a couple reminders.
If you don’t already peruse the Discussion Forum, submit your questions, or share your experience there, you really should check it out. It is a great place to bounce ideas off other stock plan professionals before you confirm with your own advisors.
Paper Forms
If you planning on ordering Forms 3921 and/or Forms 3922 for paper filing with the IRS, they aren’t yet available. (Thanks to Bruce Brumberg of myStockOptions.com for bringing this to my attention!) It’s my understanding that you should be able to place an order by the end of January, giving you plenty of time to complete them even with the 7-10 day processing period. Alternatively, you may choose to do an electronic filing even if your company is eligible for paper filing.
If you are planning on ordering the forms to use for employee information returns and are concerned about the timing, consider using a substitute form. We have examples available on the Section 6039 portal. To order official IRS forms or to check on the status of availability, call 1-800-TAX-FORM (1-800-829-3676).
Same-Day Sales
Unlike W-2 reporting, a disqualifying disposition of ISO shares does not impact your Section 6039 reporting. Even if the exercise is a same-day sale, you are required to report the exercise on Form 3921. (See Topic 6689.)
Multiple Transactions
If you have multiple transactions for an employee to report, you may choose to create a substitute form that consolidates all ISO exercises into one substitute Form 3921 and all ESPP transfers into one substitute Form 3922. However, you may not report multiple transactions on a paper filing of either form with the IRS. Electronic filing, of course, is not impacted by the format you choose for the employee statements. Also, if you have more than one transaction for an employee, you will need to include a unique account number for each transaction on the filing to the IRS and most likely also need to include it on any substitute form that you use for employee communications. (See Topics 6782, 6778, and 6710.)
Foreign Nationals
You will most likely need help to identify any foreign nationals for whom a Form 3921 or 3922 is required because of the complexity surrounding resident status. You do not need to file for foreign nationals who are considered nonresident aliens and who have not received a Form W-2 from the company between the grant and the ISO exercise or ESPP transfer. However, you should file a return and send an employee statement to all U.S. citizens with applicable transactions regardless of their current location. (See Topics 6790, and 6713.)
Unusual Situations
For ISOs that are treated as an NQ at the time of the exercise (e.g. more than three months after termination), you should not have a Section 6039 reporting obligation for the exercise. (See Topic 6787.)
If you have an ISO that was exercised in 2010 by the beneficiary or estate of a deceased employee, it would be safe to file Form 3921 and provide an information statement to the beneficiary or estate for the exercise. There is nothing in the Section 6039 regulations to indicate that there is an exemption for these types of transactions, a you would absolutely want to check with your advisors if you are leaning towards not filing in this situation. (See Topic 6773.)
Reminder #1: The returns are due to the IRS by February 28 (if filing on paper) or March 31 (if filing electronically). You can, however, receive an automatic 30-day extension by filing Form 8809, which can be filed electronically or on paper by the applicable deadline for filing returns.
Reminder #2: If you are filing electronically and haven’t already sent a test file, the FIRE system is accepting test filings through February 15th. IRS Publication 3609 details the electronic filing process. If you still need a TCC Number, you must apply for one 30 days prior to the filing deadline.
This week I explain the account number box on Forms 3921 and 3922, which will be used to file returns with the IRS for ISO and ESPP transactions. For those of us that are new to filing returns of this sort with the IRS, this box has been causing a fair amount of consternation, as the instructions for its use aren’t completely clear.
Account number isn’t mentioned under the final regulations for Section 6039, so most of us weren’t expecting this box on the forms. It is included because it is a standard box that is part of all of the forms in the 1098 and 1999 series, as well as other similar forms. I, and several practitioners that I spoke to about the forms, had a number of questions regarding what should be reported in this box and whether or not it was required, so I emailed a contact I have at the IRS. Last week, I got a response via phone and email from the IRS tax law specialist that originated the forms.
(Can I mention how unnerving it is to check your voicemail and find that someone from the IRS has left you message? Your first thought is: “Oh no! They’ve found out about the funds in that illegal tax shelter in the Cayman Islands.” Then you remember that you don’t have any funds in any illegal tax shelters anywhere in the world, much less the Cayman Islands. At this point, you aren’t sure whether you should be relieved or disappointed. But, I digress…)
What the Heck is the Account Number?
The Instructions for Forms 3921 and 3922 state: “The account number is required if you have multiple accounts for an employee for whom you are filing more than one Form 3921 [or Form 3922]. Additionally, the IRS encourages you to designate an account number for all Forms 3921 [or Form 3922] that you file. See part L in the most current version of the General Instructions for Certain Information Returns.”
This makes it sound like the account number probably isn’t applicable for our purposes, since employees aren’t likely to have more than one account in their company’s ESPP or stock option plan. This impression is incorrect–the account number is important and, in some circumstances, may be required.
What Purpose Does the Account Number Serve?
The account number serves two purposes, the most important of which is to help the IRS match any corrected forms that are submitted to the original forms that they are intended to correct. The second, less critical, purpose is to help employees match the form to other reports or records they may have of the reported transaction, and, if they are audited, to the IRS’s records. I say that this purpose is less critical because, in these circumstances, I think there are other ways that the forms and records could be matched. But, if multiple forms are submitted for an employee during a calendar year, the system that matches corrected forms to their originals relies solely on the account number.
Say that an employee purchases stock twice in one year in the company ESPP and that the purchases are the triggering event for Section 6039 purposes. The company will file two Forms 3922 for the employee with the IRS. If the company then has to file a corrected Form 3922 for one of the employee’s purchases, the only way the IRS will be able to match the corrected form to the original will be via the account number. Ditto for Form 3921 if an employee has multiple ISO exercises during a year.
The IRS system is not capable of matching the corrected and original forms based any of the other transaction-related fields (grant date, exercise date, etc.). Even if it could, if one of these fields had to be corrected there would be no way to match the two forms without a unique number identifying the transaction.
When Is an Account Number Required?
Where an employee has more than one transaction that must be reported, an account number is required and a unique number should be used for each transaction.
What Number Should be Used as the Account Number?
The account number must be unique to the transaction, not just to the employee. For our purposes, it’s really more of a transaction number than an account number. If you have a system that assigns a unique number to each option exercise or ESPP purchase, you could use that number. If you don’t, you’ll have to devise a system for assigning a unique number to each transaction. You could use employees’ ID or broker account numbers with an additional number or code appended onto the end. For example, if an employee’s ID number is 88888, you could use 8888801 for her first transaction and 8888802 for her second transaction.
The account number should not be longer than 20 digits and can contain letters, numbers and even special characters (dashes, spaces,etc.)
When is an Account Number Optional and Should I Use One Anyway?
Account number is not required if an employee has only one transaction that must be reported during a year. In this case, the IRS system can match the correct form based on the employee’s name or tax ID number and the company’s EIN.
But even in this circumstance, the IRS encourages companies to use an account number. What if the employee’s Tax ID Number is wrong on the original form and there is another employee with the same name? Then, even though every employee has only one form, the account number would still be necessary for the IRS to be able to match the corrected form to the original form. (And, let’s face it, Murphy’s Law demands that the employee whose TIN you get wrong is going to have the same name as another employee.)
Free Conference Session Audio If You Renew by Dec 31 All NASPP memberships expire on a calendar-year basis. Renew your membership by Dec 31 and you’ll qualify to receive the audio for one NASPP Conference session for free!
Join Now and Get Three Months Free and Free Conference Session Audio! If you aren’t currently an NASPP member, now is the time to become one! Join the NASPP for 2011 and you’ll get the rest of 2010 for free. If that’s not enough, you’ll also get the audio for one NASPP Conference session for free. Tell all your friends!
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
Renew your NASPP membership for 2011 (if you aren’t an NASPP member, join today). Renew or join by Dec 31 to qualify for the audio of one NASPP Conference session for free.
Rachel won’t be blogging on Thursday in light of the Thanksgiving holiday. Hopefully you will all be spending time with your families and friends and wouldn’t have been reading the blog anyway. Happy Thanksgiving!
Last week I announced that the IRS had posted the final versions of Forms 3921 and 3922 and discussed a few action items companies can take now to prepare for filing these returns. This week I discuss a few more ways in which companies can get ready.
Make New Friends
As I mentioned last week, your friends in Payroll probably won’t be much help with filing these returns, since the filing system they use for Forms W-2 is completely different. Forms 3921 and 3922 will be filed using the same procedures, and for electronic filing, the same system, that is used to file Forms 1099-MISC. Typically the Accounts Payable group is responsible for filing Forms 1099-MISC, so my guess is that these folks could be very helpful as you try to figure the process out. If you don’t know them, now would be a good time to introduce yourself. Maybe schedule a lunch date so that everyone can get to know one another.
Know the Risks (and Make Sure Your Boss Does Too)
At the recent Silicon Valley NASPP chapter meeting, Alison Wright of Baker & McKenzie pointed out that the penalties for late filings and failures to file were recently increased–news to me.
If the form is filed late by 30 days or less, the penalty is $30 per form, up to a maximum of $250,000 per year.
If the form is late by more than 30 days but is filed by August 1, the penalty is $60 per form, up to $500,000 per year.
If the form is filed after August 1 or not at all, the penalty is $100 per form, up to a maximum of $1.5 million per year!
The penalty for intentional disregard now starts at $250 per form with no maximum.
The penalties for late participant statements (or failures to distribute participant statements) are now aligned with the penalties for late or omitted returns. This means that if you fail to file or are late with both the return and the participant statement, the penalties listed above are doubled.
These penalties are a lot steeper than they used to be; it would be a good idea for everyone involved to be aware of the financial risks to the company.
Submit a Test File
You don’t want to wait until your live filing to figure out if you’ve made a mistake. The FIRE system will accept test filings until February 15, 2011–take advantage of this opportunity.
Be Ready to Request an Extension
The returns are due to the IRS by February 28 (if filing on paper) or March 31 (if filing electronically). You can, however, receive an automatic 30-day extension–no questions asked–by filing Form 8809, which can be filed electronically or on paper. The request for an extension must be filed by the applicable deadline for filing the returns (either Feb 28 or Mar 31) and you still have to distribute the participant statements on time.
As far as I can tell, there are no penalties for requesting the extension. If it gets down to the wire and you aren’t ready to go with the returns, you can always get a 30-day reprieve.
Comparing Solutions for Section 6039 Compliance Don’t miss this Thursday’s webcast on “Comparing Solutions for Section 6039 Compliance,” which will present a side-by-side comparison of the third-party solutions available for Section 6039 compliance. This is a great way to kick off your search for a vendor.
Free Conference Session Audio If You Renew by Dec 31 All NASPP memberships expire on a calendar-year basis. Renew your membership by Dec 31 and you’ll qualify to receive the audio for one NASPP Conference session for free!
Join Now and Get Three Months Free and Free Conference Session Audio! If you aren’t currently an NASPP member, now is the time to become one! Join the NASPP for 2011 and you’ll get the rest of 2010 for free. If that’s not enough, you’ll also get the audio for one NASPP Conference session for free. Tell all your friends!
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
Renew your NASPP membership for 2011 (if you aren’t an NASPP member, join today). Renew or join by Dec 31 to qualify for the audio of one NASPP Conference session for free.
As of yesterday, the final versions of Forms 3921 and 3922, as well as the associated instructions, are available from the IRS. These are the forms that will be used to file the returns required under Section 6039 for ISOs and ESPPs with the IRS. No surprises–the forms are largely unchanged from the draft versions that the NASPP obtained earlier this year. See our alert on the final forms for more information and background.
Getting Ready for Electronic Filing of 6039 Returns – Part I
Based on the last Silicon Valley NASPP Chapter meeting, I think we are starting to get to panic mode on these returns. Alison Wright of Baker & McKenzie and Jessica Carbullido of Con-way, gave a great presentation on the nuts and bolts of filing the returns, particularly on the electronic filing process.
Here are few action items that I came away with. This is only Part I; I’ll have a few more action items for you next week. For general overview of the electronic filing process, read IRS Publication 3609 (look how happy the woman on the cover is, now that she files electronically with the IRS–that could be you!)
Figure Out Your Transmitter Control Code
If you are submitting the returns electronically, you need a TCC. Chances are, your company already has one, but now would be a good time to make sure.
If you are outsourcing the filing to a vendor that is going to submit the returns to the IRS on your behalf, the vendor will likely have their own TCC, so you won’t need to worry about this (but verify this with your vendor).
If you are working with a vendor that is going to create the submission file for you but you will have to submit it (or if you are creating the file yourself), you’ll need your company’s TCC code. If your company submits Forms 1099-MISC electronically (and there’s a pretty good chance that you do), your company already has this code. You just need to find out who has it and what it is. You don’t want to request a new TCC if your company already has one–the IRS frowns on this.
If you need a TCC and you’ve determined that your company doesn’t already have one, you need to apply for one using Form 4419. Might as well get started on this now.
Set Up Your FIRE Account
Electronic filings of Forms 3921 and 3922 will be submitted to the IRS via the FIRE system. (FIRE stands for “Filing Information Returns Electronically”–those IRS folks are so clever!) This is not the same system that is used to file Forms W-2 electronically (those are filed with the Social Security Administration, not the IRS), thus, your friends in payroll and your payroll service providers aren’t going to be much help here. It is, however, the same system that is used to file Forms 1099-MISC electronically. Accounts payable, which is typically the group that files this form, may be your new BFF.
If you are submitting the electronic filing yourself, then you’ll need a FIRE account as well as a TCC. You can (and probably should) set up your own FIRE account even if someone else at your company already has one. To set up your account, go to http://www.irs.gov/efile/article/0,,id=165534,00.html and follow the instructions under “Create Your Account.” (You’ll have to wait until after 8:00 AM Eastern today to do this–until then, the FIRE system is down for maintenance. It’s been down since last Thursday; that’s a lot of maintenance!)
Find a Vendor
If you were thinking that you could just download some data to Excel and create the submission file yourself, think again. Publication 1220 includes the specifications for the submission file. And, while at 136 pages, this publication is no picnic, the kicker is that the files must be in a fixed-width ASCII format, which requires some advance programming skills to create from Excel. Why the IRS couldn’t use a nice, easy, comma-delimited file–which anyone can create using the Save As function in Excel–is a mystery.
If you haven’t already, you probably want to get started on finding a vendor that can help you create these files (either that, or start making friends with your IT department). The NASPP’s just announced webcast on November 18, “Comparing Solutions for Section 6039 Compliance,” is a great place to begin your vendor search.
Free Conference Session Audio If You Renew by Dec 31 All NASPP memberships expire on a calendar-year basis. Renew your membership by Dec 31 and you’ll qualify to receive the audio for one NASPP Conference session for free!
Join Now and Get Three Months Free and Free Conference Session Audio! If you aren’t currently an NASPP member, now is the time to become one! Join the NASPP for 2011 and you’ll get the rest of 2010 for free. If that’s not enough, you’ll also get the audio for one NASPP Conference session for free. Tell all your friends!
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
Renew your NASPP membership for 2011 (if you aren’t an NASPP member, join today). Renew or join by Dec 31 to qualify for the audio of one NASPP Conference session for free.
Don’t miss the local NASPP chapter meetings in Boston, the Carolinas, Orange County, San Diego, and Seattle. Robyn Shutak, the NASPP’s Education Director, will be attending the San Diego meeting; be sure to say hello!
Today I discuss two completely unrelated, but blog-worthy, developments: 1) A recent development in the accounting treatment of share withholding under IFRS 2 and 2) Updated electronic filing specifications for Section 6039 returns.
Share Withholding: The More Things Change, the More They Stay the Same We received an alert from PricewaterhouseCoopers reporting that the interpretations committee of the IASB, or IFRIC, recently met to consider the accounting treatment of share withholding transactions.
As I’m sure our readers are aware from the numerous memos posted in our IFRS 2 Portal, share withholding is subject to liability (mark-to-fair value) treatment under IFRS 2. This is a significant divergence from U.S. GAAP, where liability treatment is not required. According to the NASPP’s 2010 Domestic Stock Plan Design Survey, over three-fourths of respondents indicate that share withholding is used to cover the taxes due on more than 75% of RS/RSU transactions. That’s a lot of companies that are going to be subject to share withholding once IFRS 2 is required in the United States (and that may already be subject to it for their foreign subsidiaries).
The good news is that this issue is on the IFRIC’s radar, but the bad news is that they decided they couldn’t do anything about it. They’ve referred the matter up to the IASB for consideration. Stay tuned…
Electronic Filing Specs for 6039 Returns The IRS has finally updated Publication 1220 with the specifications for electronic filing of Forms 3921 and 3922, which will be used to file the returns required for ISOs and ESPPs under Section 6039. (I know the cover says it was updated in July, but the update wasn’t posted to the IRS website until August 26, so I’m not as late with this announcement as it looks).
If you are planning on creating your own files for electronic filing (rather than outsourcing this) or if you are a service provider that will be creating these files for your clients, you’ll want to get cracking on the files right away. Test filings can only be submitted in the fourth quarter of the calendar year–if you wait until the last minute, i.e., the March 31 deadline, you won’t be able to submit a test filing.
It’s Here (Almost)! It’s hard to believe, but the 18th Annual NASPP Conference is just a week out. With Conference registrations going strong–on track to reach nearly 2,000 attendees–and Say-on-Pay looming, you don’t want to be caught unprepared as we head into 2011. There’s still time to register but don’t wait any longer.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
Last month I wrote about divorce and stock plan management, and today I’m going to tackle the other big “d”…death. Although (thankfully) the death of an employee is a relatively unlikely scenario, it’s one that warrants preparation. None of the issues surrounding the death of an employee can be addressed without an underlying consideration for what the decedent’s family will coping with. Not only is the death of a family member an emotional period, there is also a pretty intense amount of paperwork to be completed.
When it comes to handling equity compensation after the death of an employee, there are issues that are straightforward and those that are subject to interpretation and company policy. This week, I’m only going to cover the tax withholding and reporting since the IRS has made this relatively clear.
ISO and ESPP
For both ISOs and 423 ESPP shares transferred to the estate or beneficiary upon the death of an employee, the statutory holding periods for preferential tax treatment no longer apply. When it comes to tax withholding, this means the company is off the hook. However, there remains a reporting obligation both to comply with Section 6039 and to report ordinary income on discounted ESPP. The transfer of ESPP shares is considered a qualifying disposition. The compensation income, which is the lesser of the discount at purchase or the actual gain at the disposition, is reported on the employee’s final Form W-2. For ISOs, because any sale of shares by the estate or beneficiary is treated as a qualified disposition, the company generally has no income reporting or tax withholding obligation.
Section 6039 Considerations
The exercise of an ISO triggers the 6039 reporting obligations regardless of whether the exercise is made by the employee or by the employee’s estate or beneficiary. This means that the company should still furnish an information statement. In addition, for any exercises beginning in 2010, the company must file Form 3921 with the IRS. (Catch up on the latest regarding Forms 3921 and 3922 in Barbara’s post from Tuesday.)
For ESPP, however, the 6039 considerations hinge on how the company issues ESPP shares at purchase as well as the company’s policy regarding the current offering period both come into play. According to the final regulations, if the purchased shares are immediately deposited into the employee’s brokerage account, this is considered the “first transfer of legal title”. Since this is the prevalent practice for ESPP shares, many companies will provide 6039 information statements to employees and file a Form 3022 (for purchase beginning in 2010) to the IRS subsequent to each purchase. In addition, most companies do not permit the estate or beneficiary to purchase shares in the current offering period, refunding accumulated contributions instead.
This means that for most situations involving the death of an employee, the event that triggers 6039 reporting obligations on ESPP shares has already taken place. If, however, the ESPP shares are issued in certificate form or otherwise held in the employee’s name, or if the employee is not automatically withdrawn from the current offering upon death, the company may still have outstanding 6039 reporting obligations when it comes to ESPP shares.
NQSOs
For NQSOs, the company’s withholding and reporting obligations differ depending on whether the exercise by the estate or beneficiary takes place in the same year as the death of the participant or not. In either case, the company’s obligation to withhold income tax no longer applies. If the exercise takes place in a subsequent year, the company generally has no withholding obligation and reports the income on a Form 1099-MISC issued to the employee’s estate or beneficiary. However, if the exercise takes place in the year of the employee’s death, then the company withholds FICA taxes (but no FIT) on the exercise and reports the income and FICA withholding on the employee’s final Form W-2.
If diving into the latest updates on tax withholding and reporting is on your list, then you won’t want to miss the session, “The IRS and Treasury Speak: Hot Tax Topics and Updates” . In fact, we’ve got all the hottest topics lined up for you this year. If you haven’t already, register today! If you’re already registered, don’t forget to let us know which sessions you’ll be attending.
-Rachel