The NASPP Blog

Many companies are very excited about the expanded exception to liability treatment that is available under ASU 2019-06 (see my blog entry, “Update to ASC 718: The FASB’s Decisions,” December 1).  In the NASPP’s quick survey on the ASU, about 30% of respondents so far have said that this is the amendment they are most excited about (to the extent that anyone can be excited about accounting).

But, hold your horses there, buckaroo.  As Mike Melbinger of Winston & Strawn noted in his blog on CompensationStandards.com this week (“Can You Amend Your Stock Plan to Allow Tax Withholding Up to the Maximum Statutory Rate?,” May 2), changing your share withholding procedures may be more complicated than you think.

Plan Amendment May Be Required

Many plans (possibly even most plans, by a wide margin), include language prohibiting employees from tendering award shares to cover tax payments in excess of the minimum statutory required withholding. This language is included in the plan to make it abundantly clear that the company doesn’t allow share withholding in excess of the minimum required tax payment; liability treatment could be required if it appears that the company would allow this, even if it isn’t ever actually done. I’m sure the language is also included to protect companies from themselves—if anyone had ever gotten the bright idea to allow share withholding for a tax payment in excess of the minimum required, hopefully someone would have realized the plan prohibited this.

If this language exists in your plan, the plan has to be amended to change the limitation from the minimum required payment to the maximum payment before you can change your share withholding procedures.

Shareholder Approval May Be Required

At a minimum, the Board of Directors would need to approve the amendment to the plan.  But for some companies, shareholder approval may be required as well. The NYSE and NASDAQ require shareholder approval of any material amendments to stock plans.  As Mike notes:

From the perspective of the NYSE and NASDAQ, if the Stock Plan allows the recycling of shares surrendered or withheld to pay tax withholding (that is, puts those shares back in the authorized share pool and allows those shares to be re-used for future awards), then an amendment of that Plan that allows for tax withholding at the maximum rate, instead of the minimum rate, would be material because it will increase the number of shares available for issuance under the Plan!

According to the NASPP’s 2013 Domestic Stock Plan Design Survey (co-sponsored by Deloitte Consulting), close to 60% of respondents allow shares withheld for taxes to be recycled. These companies would need to obtain shareholder approval of this amendment.

Companies May Need to Wait Until After Adopting the ASU

Once you amend your plan, your auditors make take this as an indication that you plan to allow share withholding in excess of the minimum required tax payment. If so, and the amendment is approved before you adopt ASU 2016-09, that’s going to trigger liability treatment for all of the awards under the plan. This liability treatment will go away once you adopt the ASU, but until then, it could be a problem.

Thus, once this plan amendment is adopted, you may need to immediately adopt ASU 2016-09.  As Mike notes in a follow-up blog, (“Follow-Up: Can You Amend Your Stock Plan to Allow Tax Withholding Up to the Maximum Statutory Rate?,” May 3), once you adopt ASU 2016-09 for share withholding purposes, you’d better be ready to adopt it for all other purposes as well.

It might be possible to structure the amendment so that it is effective only after your company adopts ASU 2016-09, but it’s a good idea to consult with your legal and accounting advisors before rushing headlong into amending your plan.

– Barbara