House Passed Retirement Reform Bill Precludes IRS Withholding Rules

The retirement reform bill passed by the House includes a provision that prohibits the IRS from imposing planned withholding requirements for ISOs and ESPPs. The IRS has proposed regulations, effective 2003, that would require employers to withhold payroll (but not income) taxes on stock option exercises or purchases under incentive stock option (ISO) plans or employee stock purchase plans (ESPPs). Employer groups have argued the withholding would be at best very burdensome and at worst impractical. They have also noted that the tax would be imposed even though employees might later sell the stock at a loss or might exercise their options when no longer on the payroll. Some employers have said they might stop offering some of these plans if they had to withhold.

Prospects for the provision remain uncertain, especially given its $20 billion price tag. The strong support, however, suggests passage is a possibility.