Incentive Stock Options and Employee Stock Purchase Rights

Any employer who passed January 31, 2012 without delivering information statements to their employees, and then to the IRS, that report 2011 exercises of incentive stock options (“ISOs”) and transfers of stock under employee stock purchase plans (“ESPPs”) may be in for some trouble for not following Internal Revenue Code Section 6039. Failure to distribute copies of the forms to employees can result in the assessment of $100 per statement, up to a maximum of $1.5 million per year. Failure to submit either the information statement to the IRS may result in a penalty of $100 for each return that has not been timely filed, with the aggregate assessment not to exceed $1.5 million in a calendar year.

Section 6039 of the Internal Revenue Code first required information statements to be delivered to employees in 2011 for exercise or transfer activity that happened during 2010. There was uncertainty on how employers were to follow these requirements before and during the first year of implementing Section 6039. Much of that confusion has been resolved with Forms 3921 and 3922. Forms printed from the IRS website are not scannable. Employers need to order official scannable forms from the IRS.

For ISOs, employers must deliver an information statement to employees by using IRS Form 3921. The form goes to all employees except nonresident aliens who have exercised options in the prior taxable year by January 31 of the following year. After delivering the form to the employees, the business must file the form with the IRS by either the last day of February (for paper filings) or March 31 (for electronic filings).

The information statement for ISOs needs to contain identifying information about the issuing company and employee, and:

  • Date of grant;
  • Date of exercise;
  • Exercise price per share;
  • Fair market value per share on the date of exercise; and
  • Number of shares transferred to the employee resulting from the exercise.

For ESPPs, the information statement should be made on Form 3922. Form 3922 is required when the shares of stock transferred are acquired at an exercise price that is less than 100% of the value of the stock on the grant date or which is not fixed or determinable on the grant date. The distribution and filing deadlines are the same as the requirements for Form 3921.

The information statement for transfers of stock under an ESPP requires this information:

  • Date of grant;
  • Date of purchase;
  • Fair market value per share on the grant date;
  • Fair market value per share on the date of purchase;
  • Purchase price; Number of shares purchased; and
  • Date the legal title was transferred.

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