Reporting and Withholding

[Oh so SIMPLE]

A stock appreciation right vested in 2006 and was not in compliance with 409A. (It is subject to 409A because it doesn't fit the reg 1.409A-1(b)(5)(i)(B) exception to deferred compensation). Part of the violation included the employee having the right to elect and in fact electing to postpone payout until 2008.

For 2006, there was 409A income subject to withholding and reporting in an amount equal to value in 2006 (stock value less exercise price), when the employee first had the immediate right to exercise the stock right. However, the employer did not realize its reporting and withholding obligation with respect to the amount that vested in 2006.

The stock price has gone up since 2006.

Does the employer have to report and 'withhold' on the 2007 increase? or just wait until 2008 when actual payout will take place?

Also, any suggestions about how to handle the missed 2006 reporting and withholding at this late date?

[J Simmons]

It would seem to me that once the EE has paid income tax on the value, 2006 in your example, that the EE then has a capital asset and would not realize capital gain until 'sold', 2008 in your example, as the price could vary in the meantime. That's what would happen under section 83, and you're asking about 409A. It seems that the same treatment, post-income taxation, ought to apply under 409A as it does under 83.