The IRS has been busy on projects related to stock compensation lately (see “Dividends and Section 162(m),” July 10, 2012, and “Section 83 Update,” June 12, 2012). Their latest project is a sample Section 83(b) filing, something Stephen Tackney and Thomas Scholz, both of the IRS, had alluded to being in the works at last year’s NASPP Conference.

Rev. Proc 2012-29 provides a sample Section 83(b) election, along with examples clarifying the tax treatment that applies when the election is filed. See the NASPP alert “IRS Issues Sample 83(b) Election Form” for more information.

A Quick Review

Section 83(b) elections can be filed by employees when they receive stock that is subject to forfeiture and transferability restrictions.  The most common arrangement in which employees would receive stock like this is a restricted stock award. A less common arrangement is an early-exercise stock option, under which employees are allowed and choose to exercise prior to vesting.  Normally stock acquired under these arrangements is taxed at vest; filing a Section 83(b) election accelerates the taxable event to the grant/exercise date.

The election has to be made relatively quickly–within 30 days of when the stock is transferred to the employee–and must contain specific details about the transaction for which it is made.  There’s not a lot of room for error here–miss the 30-day deadline and you are out of luck.   

Incomplete Filings?

I was surprised at last year’s Conference to hear that the IRS was working on a sample 83(b) election.  I had assumed most companies assisted employees wishing to make the election, ensuring that their elections are complete. But, given the Rev. Proc, now I’m not so sure.

I don’t know this for a fact, but I have to believe that the IRS issued the sample election because they receive a high number of incomplete filings and this is an effort to mitigate the problem.  This is an area where you may want to take action to protect your employees. I think it’s a best practice for companies to provide a form that employees can use to make the election and to review their elections before they file them, just to make sure they’ve completed the form correctly.  An incomplete or incorrect filing could be a mess if the error isn’t caught before the 30-day deadline.  In a worst case scenario, the entire election could be considered invalid.

Note, however, that I never recommend that companies make the election on behalf of employees.  Leave the responsibility for actually submitting the election in employees’ hands so that you don’t bear any responsibility if (or should I say “when”) elections aren’t mailed on time. 

I’ll never forget a stock plan administrator telling me about starting a new job and opening a drawer in the prior stock plan administrator’s desk only to find a folder filled with Section 83(b) elections that the company had promised to file on behalf of employees over the past year and that had never been mailed. It was a private company and the elections were for early-exercise options that had been exercised at grant. If they had been filed on time as the company had promised, the employees would not have recognized any compensation income on their options.  It still makes me a little sick to my stomach to think about it. Don’t do that! Make the employees mail their own elections.

More at the NASPP Conference

Attend the panel, “The IRS Speaks,” at the 20th Annual NASPP Conference to hear more about this Rev. Proc. as well as other rule-making activity that the IRS has completed this year–and hear what’s on tap for next year.