Employer Reporting of ISO Exercises and ESPP Stock Transfers Required in Early 2011

Beginning in 2011, employers must file annual information returns with the Internal Revenue Service (IRS) to report exercises of incentive stock options (ISOs) and transfers of stock purchased by employees pursuant to employee stock purchase plans (ESPPs) during 2010.  This requirement is in addition to the information statements that employers are already required to provide to current and former employees pursuant to Internal Revenue Code section 6039.  The IRS recently issued Forms 3921 and 3922 to satisfy the reporting obligations to employees and to the IRS for transactions occurring in 2010 and later years.  For prior years, employers were required to provide information only to employees.

Form 3921 must be filed with respect to each transfer of stock to an employee pursuant to that employee’s exercise of an ISO during a calendar year.  Form 3922 must be filed with respect to each transfer by an employee to a third party of legal title of stock acquired at a discount by the employee under an ESPP.  Reporting is not required for the transfer of stock to an employee at the time of purchase under an ESPP, but is required for the first transfer from an employee to a third party of legal title to the stock acquired under an ESPP.  This would include the first transfer of legal title to a recognized broker or financial institution.  Transactions by certain nonresident aliens who perform services outside the United States may be excluded from these reporting requirements, as explained further in the IRS Instructions to Forms 3921 and 3922.

Although reporting is required only once per year, a separate form is required for each transaction during the calendar year.  Thus, if an employee were to exercise an ISO on March 1, 2010, and again on June 1, 2010, the employer would have to provide two Forms 3921 both to that employee and to the IRS for the 2010 calendar year.  Similarly, if an employee sells or transfers shares that the employee purchased under an ESPP on April 1, 2010, and, on November 1, 2010, the employee were to sell or transfer additional shares purchased under the ESPP, the employer would have to provide two Forms 3922 both to the employee and to the IRS for the 2010 calendar year.  However, because a Form 3922 is only required with respect to the first transfer of legal title of the stock, if shares acquired by an employee under an ESPP are immediately deposited into a brokerage account established on behalf of the employee, the employer must provide a separate Form 3922 with respect to each such deposit, but not with respect to subsequent transfers from the brokerage account to other third parties.

The deadline for furnishing employees with Form 3921 or Form 3922 for applicable transactions that occurred during a calendar year is January 31 of the following year.  The deadline for filing Form 3921 and Form 3922 with the IRS is February 28 of the following year if filing on paper, or March 31 of the following year if filing electronically.  Thus, for ISO exercises and transfers of stock acquired under an ESPP during 2010, employers must furnish the applicable forms to employees on or before January 31, 2011, and file the same forms with the IRS on or before February 28, 2011 (if filing on paper) or March 31, 2011 (if filing electronically).

In general, the IRS will impose on employers a penalty ranging from $30 to $100 for each form that is not timely filed with the IRS or that is incomplete or incorrect, and a penalty of $50 for each statement that is not timely furnished to an employee or that is incomplete or incorrect.

The IRS has provided on its Web site a sample Form 3921, available at http://www.irs.gov/pub/irs-pdf/f3921.pdf, and a sample Form 3922, available at http://www.irs.gov/pub/irs-pdf/f3922.pdf.  The IRS has also provided a single set of instructions for both forms, available at http://www.irs.gov/pub/irs-pdf/i3921.pdf.  Employers may order the official IRS forms on the IRS Web site or by calling 1-800-TAX-FORM.

Contact Information 

If you have any questions regarding this alert or other executive compensation or employee benefits issues, please contact—

Bruce E. Simonetti
bsimonetti@akingump.com
212.872.8023
New York 

Rolf Zaiss
rzaiss@akingump.com
212.872.1050
New York 

Robin M. Schachter
rschachter@akingump.com
310.728.3363
Los Angeles 

Jessica Cherry
jcherry@akingump.com
212.872.7437
New York 

Michael Gerald 
mgerald@akingump.com
310.728.3246
Los Angeles