Employee Benefits Update:
2007 Disclosure Requirements for Stock Options, ESPPs and Nonqualified Deferred Compensation Arrangements
As you complete your W-2 obligations for 2006 and start thinking about the 2007 year, we are sending this alert to remind you that you may need to change your internal controls and procedures to comply with new reporting requirements for employee stock purchase, incentive stock option, and nonqualified deferred compensation arrangements:
Employee Stock Purchase Plans and Incentive Stock Option Plans
The Tax Relief and Health Care Act of 2006, which was signed into law by the President on December 20, 2006, now requires that you file information returns with the IRS if you either (1) transferred stock to an employee or former employee who exercised an incentive stock option (ISO), or (2) recorded a transfer to another person or entity by an employee or former employee of stock acquired under an employee stock purchase plan (an ESPP or 423 Plan) if such stock was acquired by the employee/former employee at a purchase price between 85% and 100% of the stock’s fair market value at date of grant. This requirement applies to both public and private companies, and applies to calendar year 2007 and later. The specific form and deadline for this return will be published in guidance issued later this year, but at this point you should make sure that you or your service providers have controls in place to track this information.
Please note that this requirement is in addition to the existing requirement that you provide information statements by January 31 to each participant who in the prior year exercised ISOs or transferred stock acquired through an ESPP.
Nonqualified Deferred Compensation Arrangements
IRS Notice 2006-100 provides guidance to employers and other service recipients as to how they should report and withhold from amounts deferred by workers under deferred compensation arrangements that violate Code Section 409A and amounts paid to workers from deferred compensation arrangements that are subject to Code Section 409A.
The new IRS Notice provides that employers and other service recipients are not required to report amounts that workers properly deferred during 2005 and 2006 under a nonqualified deferred compensation plan subject to Section 409A. However, you should expect that this requirement will apply to 2007. Thus, beginning this year, you will need to track deferrals so that you can report deferrals by employees on Forms W-2 and Form 941 and deferrals by independent contractors on Form 1099-MISC.
Please note, however, that for 2005, 2006, and future years, you should have treated and reported amounts includible in gross income under Section 409A (e.g. because of violations). If you are an employer, you are required to report such amounts on Form 941 and Form W-2. For independent contractors, report such amounts on Form 1099-MISC. If you failed to report amounts that became includible in gross income under Section 409A during 2005 or 2006, you must file corrected informational returns and furnish corrected payee statements (W-2 or 1099-MISC, as applicable). The Notice provides guidelines for determining the amount of deferrals that did not comply with Section 409A.
If you have questions or need additional information, please contact SGR’s Employee Benefits Group.