confused by terminology

[Guest cac1134]

i have an on the money stock option granted in 2005 structured to be exercisable under a fixed schedule. is this option exempt from 409A or does it comply with 409A? i want to be precise, but am going in circles. thanks.

[Everett Moreland]

Whether an option complies with or is exempt from 409A is a complicated analysis. You cannot rely on any analysis you get here. The best person to answer your question is the employer who granted the option to you.

[Just Me]

The best person to answer your question is the employer who granted the option to you.

...which, if it is smart, will advise you seek your own tax counsel's advice.

[Guest Harry O]

No employer is going to tell the employee to consult their tax advisor on whether an option the employer granted is subject to 409A. An employer needs to know the answer to that question in order to properly report, withhold taxes, etc.

[Steelerfan]

No employer is going to tell the employee to consult their tax advisor on whether an option the employer granted is subject to 409A. An employer needs to know the answer to that question in order to properly report, withhold taxes, etc.

Note that there is no withholding obligation on the employer for [the excise tax portion of] amounts that must be reported [some day] in box 12 code Z due to 409A failures. The excise tax is really the employee's problem (for which he will ultimately blame the employer who did not know what the heck to do). But even if an employer fails to report an amount that is subject to 409A, only the employee is liable to the IRS for the penalty taxes. [For options that violate 409A and have already been exercised] the employer will report and withhold on the spread at exercise as Form W-2 box 1 wages just as it would have prior to 409A [and eventually additional reporting in box 12 code Z of the amount subject to tax due to 409A failure]. [if an outstanding option is in violation of 409A, the "amount vested" will be taxable and subject to reporting and withholding after '07, but only the employee will be liable for the additional excise taxes]

Of course an employee may have recourse against the employer [for the excise tax], but that is really (iin my mind) unclear as of yet

[Guest Harry O]

SF -

If the option is subject to 409A the employer must withhold income taxes when the option vests regardless of whether (or even if) it is exercised. You are correct that until the transition relief expires there is no income tax withholding required prior to exercise, but that goes away 12/31/07. On January 1, 2008, employers will need to withhold income taxes from any mispriced option that has not been "fixed" even if unexercised. I understand that the 20% penalty tax is not "wages" but the vesting of noncompliant options is income treated as wages subject to withholding. That is why employers need to know whether an option is 409A compliant or not.

"CowboysFan" Harry O

[Steelerfan]

HarryO

You're exactly right, that's why I'm in favor of placing language in all 409A plans to provide for accelerated distributions in the event of a 409A failure--technically you could be scrwed because there is no $ to withhold from if you couldn't accelerate. [This the reason 409A will obliterate discounted options--because pre-selecting the date of exercise is completely against everything that an option is supposed to be--and if you have to accelerate the exercise of an option you have to violate what you promised the employee in the first place]

I was merely attempting to point out that there is no obligation on the employer to withhold the excise portion of the tax (20%+interest) upon a 409A failure. This amount is up to the employee to pay unless an employer chooses to gross up the employee or to go through the ridiculous "fixing" procedure of IRS Ann 2007-18. The announcement fixes nothing and merely allows the employer to pay the excise tax (which it could do anyway) despite the fact that some misdated options may not be in violation of 409A. BTW I realize by "fix" you are probably referring to repricing the option. But if an honestly mispriced outstanding option isn't subject to 409A (as I would posit) you shouldn't have to "fix" or reprice the option or worry about any 409A issue at vesting or later. Of course this analysis cannot work with intentionally backdated or legitimately discounted (in the money) options.

[Note the edits in brackets in my above post to clarify what HarryO pointed out]

"CowboysFan"--Oh no!!! We use cowboys fans as spare auto parts here in the 'burgh.