The NASPP Blog

Wow – it’s a light-hearted week here at the NASPP! As a follow-up to my post on tax withholding and reporting, today I’d like to address some steps stock plan administrators can take to prepare for the unfortunate event of an employee death.

Availability of Shares

The first step in preparing for efficient handling of an employee death is to know you plans and grant agreements. You need to know how the death will impact different equity vehicles.

Typically, the post-termination period for exercises is at least 12 months for death. This is because of the time and effort it takes to provide the correct documentation. In addition to knowing the period of time an employee’s estate or beneficiary has to exercise vested options, check to see if your plan or grant policy addresses the situation of a participant who dies within the standard post-termination exercise period.

For restricted stock, confirm whether or not unvested shares will accelerate or continue vesting. If there are any required post-vesting holding requirements associated with your restricted stock grants, check to see if these requirements apply to the estate or beneficiary.

If you have an ESPP, confirm that either your plan document or official policy addresses the issue of how contributions will be handled in the event of a death part-way through an offering period. Most companies do not allow the contributions to stay in the plan, but some do, and it is permitted under Section 423. For purchased shares that transfer to the estate or beneficiary, the statutory holding periods no longer apply.

Required Documentation

Unfortunately, it’s difficult to have a blanket policy on documentation required across all jurisdictions. Some companies use beneficiary designation forms to pass equity compensation on to an employee’s beneficiary. I would submit a word of caution against generic beneficiary forms for equity compensation–see Robyn’s blog entry on this topic for more information. Here are a few types of documentation that your company may determine is necessary in order to permit the estate or beneficiary to exercise:

Death Certificate: This is a pretty standard requirement, which will be needed for all types of inheritance issues.

Will: Also known as the “Last Will and Testament”, a will establishes how all of the assets of the decedent will be distributed and should include equity compensation. Generally, an executor will be named in a will and will be tasked with the process of overseeing the distribution of assets in the will. It is generally too risky for the company to attempt to prove that a will is, in fact, the most recent version and how to interpret its contents.

Court Documentation: All jurisdictions have some official body that establishes the official distribution of assets. These official documents will most likely be required by the broker, life insurance company, and other entities that hold assets which need to be distributed. It would be a massive investment in time and resources to identify which official documentation is applicable to each jurisdiction and asset level, so I don’t recommend attempting to identify this in advance. However, it is a good idea to identify your resources in each country for assistance in this matter, should it come up.

Held Shares

Brokerage firms have their own policies and procedures about transferring held shares to the estate or beneficiary. Although this process is essentially completely separate from your company’s process, it can be confusing and stressful for your employee’s heirs to understand that. Similar to educating employees about taxes on equity compensation, there is a fine line between making the process easier and providing legal advice. It’s good to consider how to handle this situation in advance, particularly for international beneficiaries. An important preparation you can make is to meet with your preferred brokers and identify the steps beneficiaries must take and who at the brokerage to contact in the event of an employee death.

Less than One Week Left!

You have through next Tuesday to take advantage of the NASPP’s New Member Referral Program. You can earn $150 off your NASPP Conference registration and an entry into a raffle for an iPad for each new member you refer to the NASPP–and the new members you refer can save 50% on their NASPP membership for 2010. Don’t let this deadline slip by!

-Rachel