Employers Must Sign Up To Pay 409A Taxes For Backdated Options

Employers face a deadline of February 28, 2007 to take part in a new compliance resolution program designed to allow them to may 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 initiated the program to minimize the burdens of compliance on employees who are not corporate insiders while ensuring that all applicable taxes are paid. In order to participate in the program, the employer must submit a notice of its intent to participate to the IRS by February 28, 2007.

No more than 15 days later, the employer must provide notices of its participation to the affected employees and must notify the IRS of how many employees are affected.

By June 30, 2007, the employer must make a further submission to the IRS which includes payment of the taxes due (including additional interest if the payment is made after April 17, 2007), and provides specific and specified information regarding the employees covered.

The employer must also agree to treat the tax payments as compensation paid to the affected employees in 2007 and make certain other representations.

No later than July 15th, the employer must provide a further notice to the affected employees.

If an employer complies fully with the requirements of the program, the following relief will apply:

  • 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.

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