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More Year-End Updates

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December 04, 2018 | Barbara Baksa

More Year-End Updates

In late October, I blogged about updates to the Social Security wage cap, Form 1040, and late filings of Form 1099-MISC. Here are a few other year-end tax updates to be aware of.

Highly Compensated Employees for Section 423 Purposes

Under Section 423, one class of employees that can be excluded from your ESPP is highly compensated employees. The threshold at which employees are considered highly compensated is indexed to inflation, so it usually increases every year. For 2019, the amount at which employees will be considered highly compensated is $125,000 (up from $120,000 in 2018).

Where your plan excludes highly compensated employees, this doesn’t mean that you have to exclude everyone who receives compensation in excess of this amount. This is simply the lowest threshold at which employees can be considered highly compensated; the plan can set a higher threshold. Good thing, too: according to CEO pay ratio disclosures, $125,000 is lower than the median employee pay at some companies (although, compensation for this purpose is just salary, bonus, overtime, and commissions, whereas the median employee pay for the CEO pay ratio disclosure is based on compensation as determined for SCT purposes).

Specified Employees Under Section 409A

The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employees in a top-heavy plan is increased to $180,000 (up from $175,000 in 2018). This is important for purposes of determining which officers are specified employees under Section 409A, and thus subject to the six-month delay in payments of nonqualified deferred compensation after separation from service.

Late Filing Penalties

The penalties for late or omitted filings of Form W-2, Form 1099, Form 3921, and Form 3922 are also indexed to inflation. The per form penalty doesn’t always increase annually, but the maximum penalties typically increase. Here are the penalties for tax year 2018 filings:

  • $50 per form if correction filed within 30 days (maximum of $547,000 per year)
  • $100 per form if correction filed by Aug 1 (max of $1,641,000)
  • $270 per form thereafter (max of $3,282,500)
  • At least $540 per form with no maximum for intentional disregard

Keep in mind that where the copy distributed to the employee/payee is also late or omitted, the penalty is doubled.  Also, note that the maximum penalties for Form W-2 are slight lower (I’m not sure why, but that’s what it says in the General Instructions for Forms W-2 and W-3). For small businesses with annual gross receipts of $5 million or less, the maximum penalties are about one third of the amounts stated above.

- Barbara

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