Employers are deluged with annual reporting requirements for their compensation and benefit plans.  One requirement that often flies under the radar is the obligation to furnish and file Form 3921 for exercises of incentive stock options (“ISOs”) and Form 3922 for certain shares purchased under an employee stock purchase plan (“ESPP”).  The deadline for furnishing these forms to employees is right around the corner: January 31, 2013.  The deadline for filing these forms with the IRS is a month or two later.

Background

If, when it is granted, a stock option satisfies the requirements to be an ISO, then─

  • at exercise, the optionholder generally recognizes any appreciation from the grant date to the exercise date for purposes of the alternative minimum tax; and
  • when the optionholder subsequently sells the underlying share, the optionholder owes income tax on any appreciation after the grant date.  (The income tax is paid at capital gains rates if certain holding period requirements are met.)  Stock options that are intended to be ISOs are not subject to employment tax.

Similarly, shares purchased under an ESPP are not subject to income tax until the employee sells the underlying shares, and any compensation from ESPP shares is not subject to employment tax.  (There is no alternative minimum tax liability arising out of ESPP shares.)

The Reporting Requirements 

Companies have no withholding obligations with respect to ISOs or shares purchased through ESPPs.  This is likely for the practical reason that income tax is not owed until the underlying share is sold, and the company cannot track those sales or withhold tax from any sales proceeds in a timely manner.  For ISOs, companies also cannot determine whether an employee owes alternative minimum tax.

However, to enable the employee to track shares acquired through the exercise of an ISO or purchased under an ESPP for income (and, for ISOs, alternative minimum tax) purposes, companies are required to report ISO exercises on IRS Form 3921 and ESPP share purchases on IRS Form 3922 in the year after the exercise or purchase─

  • Notice to Optionholder.  Copy B of Form 3921 must be furnished to any individual who exercised an ISO during the preceding year, except for a nonresident alien to whom the company is not required to provide a Form W-2.  The deadline for providing these forms for ISO exercises that occurred in 2012 is January 31, 2013.
  • Notice to Purchaser Under ESPP.  Copy B of Form 3921 must be furnished to any individual who purchased shares under an ESPP during the preceding year at less than 100% of their fair market value, except for a nonresident alien to whom the company is not required to provide a Form W-2.  The deadline for providing these forms for purchases that occurred in 2012 is January 31, 2013.
  • Notice to IRS.  Copy A of Form 3921 or 3922, as applicable, must be furnished to the IRS with respect to any individual who exercised an ISO or purchased shares under an ESPP during the preceding year, except for a nonresident alien to whom the company is not required to provide a Form W-2.  The deadline for providing these forms for ISO exercises or ESPP purchases that occurred in 2012 is February 28, 2013 (or April 1, 2013 for any companies that file electronically).  Employers filing more than 250 forms must file electronically (additional information about electronic filing is available here).

Obtaining the Forms

Form 3921, as well as the official instructions, can be found here.  Form 3922 and its official instructions are here.  Employers are permitted to use these on-line versions to provide Copy B to employees; however, because the IRS scans Copy A, companies cannot use the on-line version of Copy A and must obtain an official version of Copy A from the IRS.  As of today, the official version of Copy A can be obtained only by calling the IRS at 1-800-TAX-FORM (1-800-829-3676).  However, the official version of these forms could become available electronically at a later date here.

Penalties 

Companies that fail to satisfy these reporting obligations are subject to penalties that range from $30 per statement (up to $250,000 maximum per year) up to $250 per statement with no maximum, depending on when the forms are furnished and whether the failure was intentional.  Because these penalties apply separately to Copy A and Copy B of Form 3921 and Form 3922, an employer could be liable for almost a double penalty if it fails to provide both copies of either form.