December 13, 2010

New Filing and Reporting Requirements: Incentive Stock Options and Employee Stock Purchase Plans

Arnold & Porter Advisory

By Edward A. Frueh

Effective for transactions completed in 2010, employers must begin filing reports with the Internal Revenue Service ("IRS") with information about the exercise of incentive stock options ("ISOs") and the transfer of shares acquired at a discount under employee stock purchase plans ("ESPPs"). Employers must also provide related information statements to employees.


Section 6039 of the Internal Revenue Code (the "Code") establishes requirements that employers must meet when an employee exercises an ISO or transfers stock acquired under an ESPP. Prior to 2010, employers were only required to provide information statements to employees; Section 6039 did not require that employers file statements with the IRS. However, due to amendments to Section 6039 and new final regulations which are first effective for transactions completed in 2010, employers now must file information statements about these transactions with the IRS.

Filing Requirements with the IRS: Forms 3921 and 3922

Employers must satisfy the new filing requirement by using Form 3921 for the exercise of an ISO and Form 3922 for the transfer of ESPP stock. Both forms are new this year.

An employer must file Form 3921 when it issues shares to an employee when that employee exercises an ISO. Section 6039 provides that an employer must file Form 3922 when the employer records the first transfer of legal title of shares purchased by an employee under an ESPP if the purchase price is less than the fair market value on the date of grant or the purchase price is not fixed on the date of grant. For filing purposes, the essential notion is the first transfer of legal title. For example, if shares purchased under an ESPP are immediately transferred into an account established on the employee's behalf at the employer's captive broker, then a first transfer of legal title has occurred. In other instances, if the shares are merely held in book entry or issued in the employee's own name, for example, and there is no transfer of legal title, then the employer does not file Form 3922. The employer will file Form 3922 only when a first transfer of legal title later occurs.

The employer must file a separate Form 3921 and 3922 for each transaction. For example, if an employee exercises seven different ISOs during 2010 and transfers legal title to stock from two separate ESPP purchases, the employer must file seven separate Form 3921s and two Form 3922s for that employee. The employer may file the forms electronically or by paper (but only if the employer has less than 250 transactions to report). The deadline for paper filing is February 28. The deadline for electronic filing is March 31.

Participant Statements

The employer must provide an information statement to the employee for each transaction no later than January 31. This statement can be an actual copy of Form 3921 or 3922. (The IRS has designated Copy B of each form as "for the Employee.") Alternatively, the employer may provide a substitute form to the employee; however, the requirements for a substitute form are very rigid: the substitute must meet the requirements in IRS Publication 1179 which provides exhaustive details.

The employer may provide additional employee communication materials with the information statement.

2011 Deadlines

  • January 31, 2011: For employee information statement.
  • February 28, 2011: For paper filing with IRS.
  • March 31, 2011: For electronic filing with IRS.


Employers may obtain copies of Forms 3921 and 3922 on the IRS website. Note, however, that the forms displayed on the IRS website are for informational purposes only. Employers must order the official forms on the IRS website or by calling the IRS at 1-800-TAX-FORM.

Next Steps

  • Review Forms 3921 and 3922.
  • Determine which departments will supply necessary information.
  • Determine whether to use an outside third party administrator.
  • Develop employee communication materials.

If you have questions about any of the issues raised in this alert, contact Edward Frueh at 415.677.6557 or your usual Howard Rice attorney.

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