Saturday, August 6, 2011

IRS Code 6039(a): Incentive Stock Options and Employee Stock Purchase Plans

by Malinda Winkle

Seal of the Internal Revenue ServiceImage via WikipediaBusinesses that administer an incentive stock option program or an employee stock purchase program (ESPP), sometimes called Section 423 plans, must comply with Internal Revenue regulations in Code 6039(a), first enacted in 1986. It has been repeatedly revised regarding the plan administrators' requirements related to reporting to both the Internal Revenue Service (IRS) and to affected employees.

2004 Revisions

In the 2004 amendment, when the employee exercised an incentive stock option or the employee transfers stocks in an ESPP, the new regulations mandated that corporations provide a written statement to each employee about these transfers by January 31 of the following calendar year. At that time, the requirements did not require a filing of information returns to the IRS.

2006 Revisions

Code 6039(a) was amended again by Section 403 of the Tax Relief and Health Care Act of 2006, modifying the reporting requirements again. This time, it required employers to file an information return with the Internal Revenue Service. It also required plan administrators to track exercised options as described in Section 422 of IRS Code and employee stock transfers as described in Section 423 of IRS Code. Since that time, the IRS waived these 2006 requirements for years 2007, 2008 and 2009 only.

Current Requirements

Under the current Internal Revenue Code 6039(a), effective January 2009, plan administrators must report all transfers to the IRS on Form 3922, either on paper or electronically.  They must also provide participants the option of receiving electronic statements. (See References 1) In the last amendment, while reporting requirements on incentive stock options plans remained unchanged, there were some changes in requirements for ESPP transfers. Section 6039(a)(2) clearly requires plan administrators to file an information return on ESPP transfers. For each such transfer reported, an employee statement is also required. Only the initial transfer is recorded. When the employee sells or transfers a stock previous purchased under an ESPP, the reporting requirements does not apply.

Equity Compliance Software

If manually managing incentive stock option and/or employee stock ownership plans becomes cumbersome, consider some equity compliance software. From every stage, from enrollment through options, purchases, statements and reporting requirements, the use of software may minimize your compliance problems and streamline the complex tracking requirements the plan administrators face. The software has built-in options for employees wishing to opt for electronic rather than paper statements, for instance. Software solutions can simplify an otherwise intricate process, saving required compliance data and with an auditing option.


Option Ease; OptionEase Delivers First End-to-end Employee Stock Purchase Program (ESPP) Solution; December 2010

Cooley; Special Reporting Requirements Regarding Incentive Stock Options and Employee Stock Purchase Plans; January 2009

Internal Revenue Service; Information Reporting Requirements Under Internal Revenue Code Section 6039; December 2009

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