The Employee Ownership Update
June 25, 2002
IRS Delays Payroll Tax Rules on ESPPs, ISOsThe IRS has delayed implementation of its proposal to impose payroll taxes on incentive stock option and Section 423 employee stock purchase plan exercises "indefinitely." The Treasury Department has been under increasing pressure from industry and a number of members of Congress, including a Republican high-tech task force, to delay implementation of the new rules. In an IRS press release, Pam Olson, acting Assistant Secretary for Tax Policy, stated that the IRS had "decided to extend the moratorium indefinitely. Given the significant administrative changes that would be required of employers to implement the proposed withholding, it is clear that a delay in the effective date is necessary to provide employers with adequate time to make the required changes. In addition, Treasury and the IRS need additional time to consider the many comments we received on the proposed regulations and to decide on an appropriate course of action. Consequently, employers will not be required to implement the changes until at least two years after the regulations have been issued in final form."
The release went on to say that "Under Notice 2002-47, the IRS will not assess FICA or FUTA taxes, or impose federal income tax withholding, on the exercise of any statutory stock option or the disposition of any stock acquired by exercising a statutory stock option. This moratorium will remain in place until the IRS completes its review of comments on recent proposed regulations and issues future guidance, which would apply only on a prospective basis."
The delay in the regulations will give Congress more time to consider legislation to block implementation of the tax. Such a proposal passed the House as part of legislation to reform retirement plan laws, but no action has been taken in the Senate. Some observers suggest that the IRS' use of the term "indefinitely" means the regulations will never be imposed, although that is purely speculative.
For a copy of the entire statement, go here on the U.S. Treasury site.