Feds Extend Moratorium on Stock Plan Tax

June 25, 2002 (PLANSPONSOR.com) - The US Treasury Department and Internal Revenue Service have extended the moratorium on employment tax withholding on stock plans.

The proposed tax withholding rules were previously scheduled to go into effect at the start of 2003.

The extension gives employers and policy makers more time to find a permanent solution to an issue that will have a huge effect on rank and file workers, the predominant participants in stock purchase plans.

The rules would subject employees to taxes on the difference between the market price and the purchase price of company stock made available through employee stock purchase plans (ESPPs) and incentive stock options (ISOs), which are stock option plans provided for by legislation.

Until final rules are published, the IRS won’t assess the Federal Insurance Contributions Act (FICA) tax or the Federal Unemployment Tax Act (FUTA) tax, or apply federal income tax withholding obligations on:

  • the exercise of an ISO
  • or an ESPP
  • or the disposition of the stock acquired through these plans.

The agencies added that any final guidance that would apply employment taxes to ESPPs or ISOs will not apply to the exercise of such options that occurs before the January 1 of the year that follows the second anniversary of the publication of the final guidance.

James Delaplane, Vice President of Retirement Policy of the American Benefits Council commented:

“While we are pleased with the extended moratorium, we also recognize that the prospect of a $23 billion tax increase on stock ownership plans remains. The imposition of employment tax withholding also will impose administrative costs on companies that offer ESPPs and ISOs, thereby providing a disincentive for companies to continue to offer these plans. “