The IRS has issued an internal procedural update that shortens the deadline for depositing employment taxes for certain stock-settled awards from three business days after exercise (T+3) to two business days after exercise (T+2), and expands the application of the administrative waiver of late employment tax deposit penalties for stock options to stock-settled restricted stock units (RSUs) and stock-settled appreciation rights (SARs).

This update comes on the heels of the IRS’ release of a Generic Legal Advice Memorandum (GLAM 2020-004) that discussed the timing of the withholding and taxation of payroll taxes on nonqualified stock options, SARs, and RSUs. The GLAM clarified that:

  • Options and SARs are taxable when exercised, even though shares may not appear in an employee’s brokerage account for up to two days following exercise;
  • RSUs are taxable when an employer “initiates payment” of the RSUs to employees. An employer is considered to “initiate payment” by making a request to a transfer agent to transfer shares to an RSU holder;
  • Employers that have accumulated more than $100,000 in employment taxes during a monthly or semi-monthly deposit period must deposit payroll taxes within one business day (the “One-Day Rule”); and
  • The existing administrative waiver period continues to apply, and deposits are treated as timely if deposited within one day of settlement, so long as settlement occurs within three days of the exercise date.

In the unpublished internal procedural update to IRM, the IRS revised its conditions for the application of the administrative waiver of late deposit penalties as follows:

SARs and RSUs: In addition to stock options, the administrative waiver of late deposit penalties now applies to SARs and RSUs.

T+2: When the next-day deposit rule applies, deposits will be treated as timely if deposited within one day of settlement as long as the settlement occurs within two business days of the option or SAR exercise date or the RSU payment initiation date.

Employers should be aware that not meeting the next-day deposit rule obligations within one business day following the payment initiation date of an RSU or exercise of a SAR could result in the following penalties:

  • 2% of the unpaid deposit for payments that are 1 to 5 days late
  • 5% for tax payments that are 6-15 days late
  • 10% for deposits that are more than 15 days late or made within 10 days of receiving the first IRS notice requesting a tax payment
  • 15% for deposits not received within 10 days after receiving the first IRS notice demanding payment

In addition, a 10% penalty may apply for deposits not made by electronic funds transfer (EFT).

The ERISA attorneys at Hall Benefits Law help our clients manage legislative and regulatory changes to employee benefit plans. To get help making changes to your plans today, call 678-439-6236.