The IRS recently proposed new regulations under Section 409A to clarify certain aspects of the current regulations. Here is a quick summary of the most significant clarifications that apply to stock compensation.
Pre-Hire Stock Options
As my readers know, NQSOs are exempt from Section 409A if they meet certain conditions. Under the existing regs, however, it is unclear that NQSOs granted in advance of when an individual starts employment (or starts performing services, in the case of outside directors, consultants, and other nonemployees) can be exempt. The proposed regulations clarify that these options can also be exempt provided they meet the same conditions that apply to other NQSOs. (This issue doesn’t apply to ISOs because ISOs can’t be granted in advance of employment).
Delay of Payment Due to Legal Compliance
The proposed regs would permit a delay of a payment under the short-term deferral exemption, if the payment would violate the federal securities laws or other applicable laws. This could be helpful in the right set of circumstances (e.g., a restatement that causes a company to no longer be current in its public filings, causing the Form S-8 filed for the plan to no longer be effective). But, in my experience, the situations in which issuing stock under an equity plan would violate a law are few and far between. For instance, this would not allow a company to delay issuing shares until the end of a black-out if the short-term deferral period expired before the trading window is scheduled to open. While employees wouldn’t be able to sell the shares until the trading window opens, the issuance is not a violation of securities law. Even in a situation where the S-8 is no longer effective, there might be other exemptions the company could rely on to issue the shares.
Repurchase Rights
The amendments would clarify that stock options are exempt even if stock acquired under the option is subject to repurchase at less than FMV in the event the optionee is terminated for cause or breach of a restrictive covenant. Who knew? I had no idea there was even a concern about this.
Payments Upon Death
The proposed regulations would clarify that a payment will be treated as being made upon death, in satisfaction of Section 409A, if the payment is made no later than December 31 of the year following the calendar year of death. The proposed regs would also provide flexibility around making payments in the event of the death of a beneficiary who has become entitled to payments as a result of an employee’s death (i.e., a situation where an employee dies, the company begins making payments to the employee’s beneficiary, and then the beneficiary dies).
Quick Survey on Global ESPPs
Take our quick survey on global ESPPs, co-sponsored by Solium. The survey is less than 25 questions; you can complete it in under 15 minutes! Do it today before you forget!
Brush up on the basics of full value awards with our newest online program, Restricted Stock Essentials. The full course has been archived for you to complete at your convenience.
Our popular “Meet the Speaker” series, featuring interviews with speakers at the 24th Annual NASPP Conference is great way to get to know our many distinguished speakers and find out a little more about their sessions in advance of the Conference.
NASPP: Why is Section 16 compliance particularly timely right now?
Alan: Section 16 compliance is a particularly timely topic right now for two reasons. First, the SEC has stepped up its Section 16(a) enforcement program, targeting more late filers of Forms 4 and increasing it monitoring of noncompliance through electronic surveillance techniques. Second, the Section 16(b) plaintiffs bar is growing in size and becoming increasingly aggressive in pursuit of potential recoveries of short-swing profits. These developments make it even more important than before that every public company have a qualified, knowledgeable person responsible for Section 16 compliance.
NASPP:What is one action should companies be taking now with respect to Section 16?
Alan: Companies should review their existing compliance program, including how they determine each insider’s beneficial ownership, how and from whom they receive information about insiders’ holdings and transactions, and how they keep insiders’ informed of the importance of restricting and monitoring the actions of their financial advisors, to be sure that the compliance program is designed and implemented to maximize filing compliance and minimize exposure to liability under Section 16(b) as well as the SEC’s antifraud rules.
NASPP:What is the worst Section 16 horror story you know?
Alan: A Section 16 insider paid more than $30 million in short-swing profits, as calculated under the punitive “Smolowe rule” of matching the highest priced sale with the lowest priced purchase within six months, because the compliance staff didn’t fully understand the application of Section 16 to transactions in derivative securities.
NASPP:What is your favorite memory from a past NASPP Conference?
Alan: My favorite memory is of the first few NASPP Conferences, which seemed to be held in San Francisco in those days, and finding time to explore the city and even Napa Valley with other speakers. Running into Conference speakers and attendees around town made the city and the Conference very personal.
The 24th Annual NASPP Conference will be held from October 24-27 in Houston. This year’s program features close to 100 sessions on today’s most timely topics in stock and executive compensation; check out the full agenda and register today!
Here’s what’s happening at your local NASPP chapter this week:
Denver: Bruce Brumberg of myStockOptions.com presents “10 Mistakes Your Participants Are Making With Their Stock Plans You Really Need to Know About.” (Tuesday, July 26, 12:00 PM)
Los Angeles: John Hammond of Bendystraw and Elizabeth Dodge of Equity Plan Solutions present, “But Will There Be Cats?” on the future of video and employee learning. (Wednesday, July 27, 11:00 AM)
Seattle: Tim Oakes of Moss Adams and Megan Hunt of Nordstrom present, “Mobility Taxation: A Continuum of Solutions.” (Wednesday, July 27, 11:30 AM)
The IASB recently finalized amendments to IFRS 2 relating to the accounting treatment of share withholding and cash-settled awards.
FASB in the Lead
The IASB issued the exposure draft of the amendments in November 2014—so long ago that I was beginning to think that maybe they had forgotten about the project and would never get around to it. By way of reference, the FASB issued the exposure draft of their amendments to ASC 718 seven months later and still managed to issue their final amendments three months ahead of the IASB.
Share Withholding
The most exciting amendment permits shares to be used to cover tax withholding without triggering liability treatment. Under the original IFRS 2, share withholding triggered liability treatment for the shares that were applied to the tax payment—no exceptions. This resulted in a bifurcated accounting treatment for the award: the portion that would be settled in cash to cover the tax payment was subject to liability treatment while the rest of the award was subject to equity treatment. It was also an area where IFRS 2 diverged from ASC 718, which has always included an exception to liability treatment for share withholding.
Unfortunately, the two standards still don’t converge. The IASB’s amendment only permits share withholding up to the statutorily required payment, and, as my readers know, the FASB recently expanded the exception in ASC 718 to apply to share withholding up to the maximum individual tax rate in the applicable jurisdiction. It’s ironic: the primary reason the FASB expanded the exception in ASC 718 was to facilitate share withholding for non-US employees but, unfortunately, for companies that have to report under IFRS, the international standard will still pose an obstacle to doing this.
Cash-Settled Awards
The IASB also amended IFRS 2 to clarify the vesting conditions that apply to cash-settled awards should be accounted for in the same manner as for stock-settled awards. The upshot is that for non-market conditions, the company records expense based on an estimated forfeiture rate and trues up to outcome. Market conditions (and non-vesting conditions) are incorporated into the fair value of the award. I’m surprised that anyone thought anything different. I guess that’s the problem with a “principles-based standard.” If you don’t spell everything out with a nice clear set of rules, someone is bound to interpret the principle in a way you don’t want them to.
The amendments also clarify how to account for modifications that change the classification of awards from cash-settled to stock-settled. I’m not going to bother to explain this because 1) it’s a total snore (as compared to the rest of the action-packed amendments) and 2) it happens so rarely that hardly anyone cares about it. And, as with any modification of stock awards, it’s crazy complicated—if this is something your company is doing, you should really be talking to your accounting advisors and not relying on an English major to tell you how to account for the modification.
Thanks to Ken Stoler of PwC for bringing the amendments to my attention and for providing a handy summary of them.
Quick Survey on Global ESPPs
Take our quick survey on global ESPPs, co-sponsored by Solium. The survey is less than 25 questions; you can complete it in under 15 minutes! Do it today before you forget!
Don’t Miss the Restricted Stock Essentials!
This course covers the core knowledge necessary for successful management of restricted stock plans, including key design, regulatory and administrative considerations. Get the nuts-and-bolts guidance you need in just two webcasts. The course began yesterday but it’s not too late—yesterday’s webcast has been recorded for you to listen to at your convenience. Register today.
Recent Accounting and Regulatory Changes
The FASB, IASB, IRS, and Treasury were busy in June. Check out our most recent alerts:
We are pleased to bring back our popular “Meet the Speaker” series, featuring interviews with speakers at the 24th Annual NASPP Conference. These interviews are a great way to get to know our many distinguished speakers and find out a little more about their sessions in advance of the Conference.
For our first “Meet the Speaker” interview, we feature Deborah Walker of Cherry Bekaert, who will lead the session “The IRS and Treasury Speak.” Here is what Deborah had to say:
NASPP: Why is your topic particularly timely right now?
Deborah: Our presentation features IRS and Treasury speakers involved in regulatory and legislative initiatives involving equity compensation. This is a chance to hear the government’s enforcement focus and new guidance that could affect your equity plans and programs. In prior years, the session has been interactive, giving you a chance to question the government officials about an issue that concerns you and discuss their response, often giving the government ideas for ways to approach various issues that are less obtrusive than what the government may think about. We look forward to another interactive session this year in Houston.
NASPP:What is one best practice companies should implement?
Deborah: The IRS is implementing new computer audit procedures, enabling them to determine that withholding taxes are unpaid in a matter of days rather than in a matter of months. To avoid unnecessary intrusions in the form of “soft letters” from the IRS, you should review your payroll tax withholding and deposits for equity compensation, focusing particularly on the timeliness of deposits for the vesting of restricted stock and the exercise of non-qualified stock options. This should be done on a regular basis. Correction of failure to deposit amounts should be done as soon as possible.
NASPP:What is something companies should know about penalty assessments from the IRS?
Deborah: As the IRS computer systems are becoming more modern, there is an increase in penalty assessments. If you are assessed an IRS penalty, the IRS has a program allowing for the waiver of penalties when a penalty notice is a first time assessment. The program is only available to those who have had no penalties in the prior three years. There is no limit on the amount that can be waived. If this program is not available to someone when a penalty has been assessed, the taxpayer or their representative should always ask for waiver of the penalty for reasonable cause.
NASPP:What is something people don’t know about you?
Deborah: I had a speaking part as a terrified nun in the Three Stooges movie produced in 2012 by 20th Century Fox and directed by the Farrelly brothers.
The 24th Annual NASPP Conference will be held from October 24-27 in Houston. This year’s program features close to 100 sessions on today’s most timely topics in stock and executive compensation; check out the full agenda and register today!
Here’s what’s happening at your local NASPP chapter this week:
Michigan: Best practices and beer at the Latitude 42 Brewing Company! UBS will facilitate a discussion of mobility, stock ownership guidelines and more. The discussion will be followed by a beer tasting, appetizers, and a fun trivia game—there will be a prize! (Tuesday, July 19, 2:00 PM)
Austin: Kelly Geerts of E*TRADE presents “Equity Administration Benchmarking: Taking a Deep Dive into ESPP Trends.” (Thursday, July 21, 11:30 AM)
Sacramento: Chapter members can participate in the Austin meeting by webcast.
Wisconsin: Bryan Ortwein and Brian Myers of Willis Towers Watson present “Executive Pay: Navigating the Impact of Proxy Advisors and Long-Term Incentive Plan Current Trends.”
I’m fascinated by how the field of stock compensation has changed over the years, so I love that the NASPP has been conducting surveys on stock compensation since 1996. For today’s blog entry, I have created an infographic comparing the data in our most recent survey on ESPPs to surveys the NASPP has conducted since before FAS 123(R) was adopted.
The 2016 ESPP survey is a joint project of the NASPP, the NCEO, and the CEP Institute. It was conducted in January and received over 200 responses. I compare the results to editions of the Domestic Stock Plan Administration Survey that were conducted in 2014, 2011, 2007, and 2004. All editions of this survey were co-sponsored by the NASPP and Deloitte Consulting, except the 2004 edition, which was co-sponsored by KPMG.
My infographic is interactive! Select a year to see how the data changes from one survey to another. Hover over the charts with your mouse to view the data points. (If you have trouble seeing the infographic, click here to view it on a separate page.)
Restricted Stock Essentials Starts Next Week!
This course covers the core knowledge necessary for successful management of restricted stock plans, including key design, regulatory and administrative considerations. Get the nuts-and-bolts guidance you need in just two webcasts. The course begins on July 19—register today.
Check Out the Latest Equity Expert Podcasts
We’ve recently posted to new podcasts in our Equity Expert series: