The NASPP Blog

More on the Proposed ESPP Regs

At last week’s NASPP Conference, I presented (along with Michelle Lara of Cooley Godward, Alison Wright of Howard Rice, and Susan Garvin) on how to correct errors that occur during administration of a Section 423 ESPP.  It just so happens that this is also a topic covered in the proposed ESPP regs; I thought I’d highlight some of the provisions relating to error corrections this week:

The potentially most damaging error discussed in the proposed regs is a situation where an employee that is eligible to participate in the ESPP is inadvertently excluded.  Since Section 423 requires that substantially all employees of the company be allowed to participate on an equal basis, excluding someone that should have been permitted to participate causes the plan to no longer meet the requirements of Section 423. Under the proposed regs, this disqualifies the entire plan from preferential treatment–a serious problem.  We discussed this error in our workshop and our conclusion was that the best course of action would be to make the employee whole by allowing her to write a check for the contributions she would have contributed and then issuing to her the number of shares she would have been able to purchase under the plan.  The IRS has requested comments as to whether they should implement a formal corrections program for this situation.

The regs don’t directly address a situation where an eligible employee is allowed to participate but is unfairly limited (e.g., his payroll deductions are less than he requested and was eligible to contribute), but it seems to me that this would be analogous to the prior situation (where an employee is inadvertently excluded), and thus would also have the potential to disqualify the entire plan if the employee isn’t made whole. 

Of less concern is the situation where an individual that wasn’t eligible to participate is permitted to purchase stock under the plan.  Here, the individual’s purchase would be disqualified but the qualification of the rest of the plan would not be impacted.

Another common error addressed in the regs is a situation where an employee is granted the right to purchase stock under terms that are consistent with the plan and then, subsequent to enrollment, is inadvertently allowed to purchase stock on terms that are inconsistent with the plan.  The regs give an example in which an employee’s purchase price is computed incorrectly; I think a more common scenario is one where an employee is allowed to purchase stock in excess of the $25,000 limitation or a plan limitation.  The key consideration here is that, because the purchase is inconsistent with the terms of the plan, it is now considered to be outside of the plan for tax purposes, which means that it can no longer qualify for preferential tax treatment.  So, in the case of a purchase that exceeds the $25,000 limitation, the entire purchase, not just the shares purchased in excess of the limitation, would be disqualified.  On the bright side, however, the qualification of the rest of the plan would not be impacted.   

Seen and Heard at the NASPP Conference

It wasn’t all work and no play at the NASPP Conference–here are a few scenes to prove that, despite our penchant for accounting, even stock plan professionals have a lighter side.

Over 1,800 Watch John Olson and Crew: The audience for the Conference keynote session was daunting in size (speaking as the person that had to bring the room to attention so we could start–I’ve never said the words “Welcome to the NASPP Conference” with more trepidation), with several thousand more members watching online:

The “We Want Heat” Chant: It got a little nippy during the “3rd Annual Proxy Disclosure Conference,” so Broc Romanek led the audience in a chant:

Baker & McKenzie’s Voodoo Dolls: Our Conference swag is always among the best; this year’s breakout hit was Baker & McKenzie’s voodoo dolls. Attendees were trading them like crazy:

Other notable give-aways included mice (the computer kind, not the live kind) from Sungard and Charles Schwab, stuffed bears (vested and unvested) from Easi, wind-up car/pencils from E*TRADE Financial, and flashing medallions from Smith Barney.  

Time for a Little Fun: Many service providers hosted special events for their clients in the evenings. Fidelity booked Howie Mandel for a private show; Merrill Lynch booked the singer Jewel, E*TRADE hosted an event on a riverboat, UBS hosted clients at the Audubon Tea Room (where my co-panelist, Alison Wright, won an aligator–I’m not sure how she got it past airport security on the way home). On Wednesday night, three different parades complete with floats and marching bands left the hotel heading to private events. The hotel said that was two more parades than any other conference has ever had. Merrill Lynch provided keepsakes for their clients:

“Lounge Lizard” Exhibit Space: Stock & Options Solution wins for the coolest exhibit booth: