The NASPP Blog

May 11, 2009

Seven-Figure Tax Penalties; New Twist on Option Exchanges

Timely Tax Deposits Still an Issue for the IRS
Kaye Thomas of Fairmark Press tells me that he recently spoke with an IRS Appeals officer who told him that the IRS is still finding that many companies aren’t making timely deposits of tax withholding collected in connection with stock compensation. 

As many of you know, taxes withheld on stock compensation are generally deposited according to the company’s regular payroll deposit schedule, but if a company’s cumulative deposit liability (for all compensation, not just stock compensation) exceeds $100,000, the tax withholding must be deposited by the following business day. Stock plan transactions can frequently cause companies to exceed this threshold, triggering the accelerated deposit.  For same-day sale exercises of stock options, the deposit liability accrues on T+3 (per an IRS Field Directive issued in 2005). For other types of option exercises, SARs, and restricted stock/unit transactions, the deposit liability accrues on the transaction date (there is some question of whether the field directive could be relied on for SAR and restricted stock/unit transactions involving an open market sale).

Kaye tells me that even though non-compliance is rarely intentional and is usually due to a failure to understand the deposit requirements, this kind of minor operational failure can still result in severe penalties. The IRS appeals officer indicated that he’s seen penalties into seven figures. 

For more information on the tax withholding requirements, see the NASPP’s portal on Tax Withholding and Reporting.  Better yet, take our online Fundamentals of Stock Plan Administration program to learn about the full gamut of tax regulations that apply to your stock plans. 

Option Exchange Program with a Twist: Employee Choice
Intellon recently filed a Schedule TO for an option exchange program in which employees can choose to receive their replacement awards in the form of options or RSUs. The exchange ratio for options to options is 1.01-to-1; the ratio for options to RSUs is 2.03-to-1. It will be interesting to find out which vehicle employees choose.

Intellon includes a thorough set of examples (small increase in stock price, moderate increase, significant increase, decrease in stock price, significant increase and termination of employment, significant increase and then a decrease in stock price–count ’em, that’s six different possible future outcomes) to help employees decide whether or not to participate in the program and whether to elect to receive options or RSUs. It’s worth taking a look at.

Reason #24 to Renew Your NASPP Membership:  The Global Stock Plans Portal
The extensive country guides in the NASPP’s Global Stock Plans Portal are easily worth more than the cost of NASPP membership.  We’ve recently posted new or updated guides for Australia, China, Ireland, Mexico, and the United Kingdom–bringing the total number of guides we offer in the portal up to 27.  In addition to the guides, we’ve posted a hot-off-the-press updated edition of Baker & McKenzie’s 40-country matrix of Selected International Tax & Legal Consequences.

NASPP Conference 2-for-1 Rate Ends Next Week
If you haven’t yet registered for the Conference, make sure you do so by May 22.  NASPP members from the same company and location can receive 2-for-1 registrations and members that register on an individual basis also qualify for a substantial discount. But don’t wait to register any longer–we won’t be able to offer these discounts after May 22.

NASPP “To Do” List
We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog. 

– Barbara