Tax Relief for Non-Executive Employees with Backdated Options

The Internal Revenue Service has announced a new voluntary correction program that offers potential benefits to non-executive employees who exercised discounted (i.e., what might be considered as backdated) options during 2006. Companies have until February 28, 2007 to sign up to participate .

Under the new program, companies can pay the additional federal taxes imposed under Code Sec. 409A on behalf of certain employees who exercised backdated options or other discounted stock rights during 2006. The IRS intends the program to minimize the financial burden on employees who are not top executives or other corporate insiders, while ensuring that all applicable taxes are paid.

The following relief applies to employers that comply fully with the requirements of the program:

• The employer will not be required to report the Code Sec. 409A inclusion amount with respect to the exercise of stock rights on the employee's Form W-2. If the employer has already done so, the employer may a file a Form W-2c that does not treat the amount as includible.
• The employee will not be required to pay the Code Sec. 409A taxes with respect to the amounts covered in the employer's submission.

In order to participate, employers must comply with the following deadlines:

• February 28, 2007: Submit a notice of intent to the IRS.
• Within the next 15 days: Notify affected employees of the company's participation and report to the IRS how many employees are affected.
• June 30, 2007: Make a submission to the IRS that includes payment of the taxes due (including additional interest if the payment is made after April 17, 007) and provides specified details regarding the employees covered. Additionally, the employer must agree to treat the tax payments as compensation paid to the affected employees in 2007 and make certain other representations.
• July 15th: Provide a further notice to the affected employees.

For a copy of the complete new IRS regulation, click here.