Groups Hope for Two-Year Option Tax Delay

June 21, 2002 (PLANSPONSOR.com) - Although government officials remain mum on the issue, business groups say they expect the US Treasury Department and the Internal Revenue Service (IRS) to delay collection of payroll taxes on certain stock-option plans.

Up until now, the IRS has said publicly that the 15.3% tax to fund Social Security and Medicare would kick in as of January 1, 2003. However, business groups such as the American Benefits Council (ABC) say government officials have told them the effective date will be sometime after that, but have not yet specified a date.

The government hasn’t yet collected the tax on incentive stock options or employee stock purchase plans (ESPPs).

James Delaplane, ABC vice president for retirement policy, said his group has requested at least a two-year hiatus from the tax because of what it says are numerous difficulties with its collection and administration.

“There are tremendous practical problems in trying to implement the tax so more years (of a delay) is better and fewer years is worse,” Delaplane told PLANSPONSOR.com . “We prefer more than two years.”

Keeping Track of Former Employees

One particularly vexing problem, according to Delaplane: how companies granting the options keep track of former employees who may exercise the options when they no longer work for the granting company.

Also, Delaplane said, companies won’t have wages from which it can deduct the payroll tax with a former employee so such workers may be forced to immediately sell the shares they’ve just purchased on order to pay the tax.

Mark Nebergall, president of the Software Finance and Tax Executives Council in Washington, also said he believes a two-year moratorium is imminent.

Pam Olson, Treasury’s acting assistant secretary for tax policy, wouldn’t confirm that the agency will extend the moratorium, according to the Wall Street Journal. But she said that “one of the things we have to sort out and sort out very quickly is the time period that is necessary to implement a system that would allow employers to comply.”

She acknowledged the proposal to collect payroll taxes on stock options hasn’t been well received by large employers, because of concerns over how to administer the tax.

Some lawmakers oppose the tax, and have asked the Treasury Department to delay its plans to give Congress more time to craft a legislative alternative.

IRS officials have argued that a 1983 law requires them to impose payroll taxes on the stock options.

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