Last Chance for the NASPP Conference Early-Bird Rate The early-bird rate for the 22nd Annual NASPP Conference is only available through this Friday, March 14. After that, we will begin our new phased-in pricing–the longer you wait to register, the more you’ll pay. The Conference will be held in Las Vegas from September 29 to October 2.
NASPP To Do List Here is your NASPP to do list for this week:
Read Andrea Best’s newest blog, “Time to Let Go,” in the NASPP Career Center.
Tune in next Tuesday, March 18. the NASPP’s Ask the Experts Webcast on retirement provisions.
Register for the 22nd Annual NASPP Conference. The Conference will be held from September 29-October 2, 2014 at the Mandalay Bay in Las Vegas. Don’t wait–the early-bird rate is only available through this Friday, March 14.
Sign up for the NASPP’s acclaimed online Stock Plan Fundamentals course; the first webcast is April 16.
The Chairman of the House Ways and Means Committee has released a discussion draft of proposed legislation that could dramatically change the tax treatment of stock compensation as we know it. Here is a summary of the proposals.
No More Deferrals of Compensation
The good news is that Section 409A would be eliminated; I still don’t fully understand that section of the tax code and maybe if I just wait things out a bit, I won’t have to. But the bad news is that it would no longer be permissible to defer taxation of stock compensation beyond vesting. Instead, all awards would be taxed when transferable or no longer subject to a substantial risk of forfeiture.
This would eliminate all elective deferral programs for RSUs and PSUs. The NASPP has data showing that those programs aren’t very common, so you probably don’t care so much about that. On the other hand, according to our data, about 50% of you are going to be very concerned about what this will do to your awards that provide for accelerated or continued vesting upon retirement. In addition to FICA, these awards would be subject to federal income tax when the award holder is eligible to retire. Say goodbye to your good friends the rule of administrative convenience and the lag method (and the FICA short-term deferral rule)–those rules are only available when the award hasn’t yet been subject to income tax. This could make acceleration/continuation of vesting for retirees something we all just fondly remember.
As drafted, this proposal would also apply to stock options, so that they too would be subject to tax upon vest (the draft doesn’t say anything about repealing Section 422, so I assume that ISOs would escape unscathed). But one practitioner who knows about these things expressed confidence that there would be some sort of exception carved out for stock options. I have to agree–I don’t have data to support this, but I strongly suspect that the US government gets a lot more tax revenue by taxing options when they are exercised, rather than at vest (and that someone is going to figure this out before the whole thing becomes law).
Section 162(m) Also Targeted
The proposal also calls for the elimination of the exception for performance-based compensation under Section 162(m). This means that both stock options and performance awards would no longer be exempt from the deduction limitation. At first you might think this is a relief because now you won’t have to understand Section 162(m) either. I hate to rain on your parade, but this is going to make the tax accounting and diluted EPS calculations significantly more complex for options and performance awards granted to the execs subject to this limitation.
And that’s a bummer, because the proposal says that once someone becomes subject to the 162(m) limitation, they will remain subject to it for the duration of their employment. Eventually, you could have significantly more than five execs that are subject to 162(m). That’s right–five execs. The proposal would make the CFO once again subject to 162(m), a change that’s probably long overdue.
And There’s More
The proposal would also change ordinary income tax rates, change how capital gains and dividends are taxed, and eliminate the dreaded AMT (making the CEP exam just a little bit easier). And those are just the changes that would impact stock compensation directly. There is a long list of other changes that will impact how you, your employees, and your employer are taxed. This memo by PwC has a great summary of the entire discussion draft. In addition, we are in the process of recording a podcast with Bill Dunn of PwC on the draft–look for it soon in the NASPP podcasts available on iTunes.
When Does This All Happen?
That’s a very good question. This proposal has a long ways to go on a road that is likely to be riddled with compromise. As far as I can tell, it hasn’t even been introduced yet as a bill in the House. It has to be passed by both the House and the Senate and then signed into law by the President. So I wouldn’t throw out those articles you’ve saved on Sections 409A and 162(m) and the AMT just yet. It’s hard to say what, if anything, will come of this.
On Tuesday, March 11, the LA and San Fernando Valley NASPP chapters will host a joint webcast on “Tax Season Communications: Challenges for Employees and Common Questions,” presented by Bruce Brumberg, Editor-in-Chief and co-founder of myStockOptions.com. More information.
Buck Consultants’ 2013 Global Long-Term Incentives survey returned insight into some of the trends that capture the pulse of the global happenings in stock plans. In today’s blog, I’ll highlight some of the key observations.
It’s a Small World, After All
Oops, as soon as I wrote the above caption, the song from Disney’s “It’s a Small World” ride has been looping in my head. Sorry if it’s happening to you now, too (although misery does love company).
What I was reaching for is that some of the global trends point to a fairly consistent and uniform approach across the global board. Among them:
Full value awards (time and performance based) are squarely the dominant form of equity compensation, with RSUs presently delivering the most value, globally.
Stock options are out; their use globally continues to decline.
The use of broad based equity globally is on the decline, and usage rates are projected to stay fairly flat in 2014. Senior management levels and above are most targeted to receive grants from the equity plan.
There weren’t any big surprises there – these trends have existed in the U.S. for a while now, but it is nice to have some confirmation that this truly is a global trend.
I was reminded when reviewing the summary of the survey of the key factors that drive global equity plan decisions:
Overall objective: the company’s high level objectives filter down to many decisions, including how and when to use equity compensation.
Local talent market: Sometimes it’s easy to forget that there are many other job markets and economies outside of the U.S. The dynamics of the local market can be a huge factor in determining a compensation approach. The survey summary cited the examples of China, India and the Philippines – all of whom have hot labor markets right now.
Red tape: This has long been a consideration for U.S. parent companies looking to extend their compensation programs abroad. Just how many legal, securities, and employment considerations exist are largely specific to each country and therefore need to be considered in advance of adopting an equity approach in those regions.
Taxes: The tax implications of certain award types are a big driver in determining what will maximize the value to the participant. Employer taxes are also a consideration.
Administration: Last, but not least, the cost and burden to administer these programs abroad is considered. There are only so many resources available, and in some cases it may not make sense to issue equity once the administrative analysis comes into play.
One of my favorite NASPP resources is the bundle of Country Guides in our Global Stock Plans portal. The Guides provide a lay of the land on a myriad of considerations (including commentary from the practitioners who work on these guides) for 34 countries. If you are looking to expand into new regions, or offer additional equity types in existing countries, the Country Guides should be your first stop. There are a myriad of other resources available in the portal as well, all contributed by the folks and firms who specialize in global stock plans – a true gold mine of information.
Attend the 10th Annual CEP Symposium on March 25 The 10th Annual CEP Symposium on March 25 in Santa Clara, CA is a great way to catch up on what’s going on in the industry and earn continuing education credit while you are doing it. Don’t wait any longer to register–I have it on good authority that the event is likely to sell out. Check out the program and register today. You’re going to want to stay until the end so you don’t miss my panel, “Living on Easy Street: Innovative Ideas to Make Your Life Easier,” and the fabulous closing reception (I understand that there will be some pretty terrific prizes–but you have to be present to win).
NASPP To Do List Here is your NASPP to do list for this week:
Submit a question for the NASPP’s Ask the Experts Webcast on retirement provisions. Don’t wait–all questions must be submitted by March 7.
Register for the 22nd Annual NASPP Conference. The Conference will be held from September 29-October 2, 2014 at the Mandalay Bay in Las Vegas. Don’t wait–the early-bird rate is only available until March 14.
Sign up for the NASPP’s acclaimed online Stock Plan Fundamentals course; the first webcast is April 16.
Last week, the IRS issued the final version of the new Section 1.83-3 regs that were proposed back in 2012.
Background: The Proposed Regs
Section 83 provides that property transferred in exchange for services is taxable when it is transferable or no longer subject to a substantial risk of forfeiture (whichever occurs first). As explained in the preamble to the proposed regs, the purpose of this revision was to clarify that, for a substantial risk of forfeiture to exist, there has to be 1) some reasonable possibility of forfeiture (e.g., a performance goal which is certain to be met would not give rise to a substantial risk of forfeiture) and 2) there has to be some likelihood that the forfeiture provision would be enforced.
Most of us always thought this was the case, so we were surprised to see the proposed regs. Some speculated that companies would now have to estimate the likelihood of forfeiture due to failure to meet the vesting requirements to determine if taxation is delayed under Section 83. During his session at the 2012 NASPP Conference, Stephen Tackney, of the Office of Chief Counsel, at the IRS explained that this wasn’t the IRS’s intention and that they were really only concerned about situations where the likelihood of forfeiture was so infinitesimally small as to be almost nonexistent. Apparently the IRS lost a couple of enforcement actions in court due to a misunderstanding about this concept, so they decided to make the rules a little clearer.
The proposed regs also clarified that lock-up restrictions and trading black-out periods don’t delay taxation under Section 83 and codified a prior Rev. Rul. clarifying when taxation is deferred as a result of the operation of Section 16(b) (for practical purposes, virtually never).
What’s New in the Final Regs
Well, not much, really. In response to the concerns that the regulations were perhaps raising the threshold for a substantial risk of forfeiture, the IRS explains in the preamble that the new regulations are not intended to depart from the historic position that the IRS has taken with respect to Section 83. The IRS also edited the language of the regs, I think with the intention of making this clearer.
The IRS added a sentence to the regs to further clarify that it must be likely that the forfeiture restrictions would be enforced for there to be a substantial risk of forfeiture. Here again, I don’t think this represents a change in position for the IRS.
Finally, the IRS added an example to clarify that, where a Section 16 insider engages in a non-exempt purchase in the six months before an otherwise taxable acquisition under a stock option or award, the non-exempt purchase doesn’t delay taxation of the option or award (even though it does delay when the insider can sell the shares acquired under the option/award). We had noticed there were some differences in opinion among practitioners as to whether this was the case and had asked for clarification. Although the situation probably doesn’t come up that often, when it does come up, we thought it important to know what the correct tax treatment is. And now we know (and I think it’s the answer most of us had been assuming all along).
Read more about the final regs, including our redline comparing the proposed and final regs, in the NASPP Alert “IRS Issues Final Regs Under Section 83.”