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No. The 20% should have been withheld from your compensation in the first place, so there isn't really a reason that they should pay the 20%. Their mistake was in not withholding the 20% from your compensation, or from the exercise of the options itself by forcibly selling some of the stock, and in not providing you with a correct W-2. They are offering to correct their mistakes by paying the interest (and hopefully any penalties) and paying to re-do your taxes. Seems reasonable to me.

That would be great, but I don't that is the case. I understand the 20% to be in addition to the regular state and federal taxes.

Here is one of the examples from the FAQ they sent:

Employee C was granted a stock option on February 1, 2003 with an exercise price of $4.00 per share. The fair market value of Sun's common stock on the date of grant was $5.00 per share. The option vests at a rate of 20% per year over five years. The option is a discounted stock

Example 1:
Employee C exercised a portion of the discounted stock option presenting 2,000 shares on December 1, 2005.

Result: Employee C does not have Section 409A liability with respect to this portion of the discounted stock option because she exercised it prior to January 1, 2006. Employee C owes the regular federal and state income taxes, due upon the exercise of a non-qualified stock option.

Example 2:
Employee C exercised a portion of the discounted stock option representing 1,000 shares on December 29, 2006.

Employee C is liable for the Section 409A taxes and interest described above, as well as the regular federal and state taxes due upon the exercise of a non-qualified stock option, because this portion of her discounted stock option vested after January 1, 2005 and she exercised it after January 1, 2006.

At the time of exercise, they withheld around 39% (state, federal, fica, etc). As I understand it, I am now liable for an additional 20% (total ~59%), meaning I only get 41%. right?

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