I thought I was going to be blogging about the government shutdown today but since it’s business as usual in DC as of last night, I’m off the hook on that topic, at least for a few weeks. Instead, I have a few Section 6039 reminders for you, seeing that the participant statement deadline is fast approaching.
Let’s Review
As you know, under Section 6039, companies are required to file returns with the IRS and issue participant statements for transactions under ISOs and ESPPs. For ISOs, the reporting obligation is triggered upon exercise and is fulfilled using Form 3921. For ESPPs, the reporting obligation is triggered by the first transfer of legal title of the shares and is fulfilled using Form 3922. If the shares acquired under an ESPP are deposited into an account at the company’s designated broker, the purchase is considered to be the first transfer of legal title.
Deadlines
Here are the deadlines for this year:
Information statements must be distributed to employees by January 31
Returns filed on paper must be filed by February 28
Returns filed electronically must be filed by April 2 (because March 31 is a Saturday)
Paper or Electronic?
You must file electronically if you have more than 250 returns to file and anyone can file electronically voluntarily to take advantage of the extended deadline available to electronic filers. If you have more than five returns to file, I recommend going electronic; there are solutions that are priced reasonably for companies with only a handful of returns to file (email me if you need a list).
Check Your TINs
Make sure employees’ tax identification numbers are correct. The IRS is for sure going to check them but they won’t get around to it until well after the filing deadline, when the correction will be subject to the maximum late filing fee. Consider using an TIN matching service before filing your returns. (Thanks to My Equity Comp for this tip!)
What’s Up with Form 3921?
Kim Diemer of Take Stock brought to my attention that, although the IRS updated Form 3921 this year, the new paper version of the form is not yet available from the IRS. If you file electronically, this doesn’t effect you, as the information in the form and the specifications for the electronic file haven’t changed. The only change was to make copies B, C, and D fill-in forms in the PDF.
If you file on paper, the delay in availability of the forms could be a problem. The thing about filing on paper is that you can’t just print the forms from the IRS website, fill them in, and then drop them in the mail. You have to order the official paper forms from the IRS. Failure to receive the forms from the IRS does not relieve you of the obligation to file the returns by February 28.
At the moment, you’ve still got some time on this. You don’t need the official paper forms for the participant statements that are due by January 31; you can just download the form from the IRS website, fill out the appropriate copies, and distribute them to the appropriate parties. Or you can create a substitute statements (see the NASPP article “Figuring out Section 6039 Filings” for more information on this).
If February 28 nears and you still haven’t received the forms from the IRS, you can use Form 8809 to request a 30-day extension. If Form 8809 is submitted electronically (via the IRS FIRE system), the extension is automatic (handy if the government is shut down when you submit your request). You can request the extension electronically even if you are filing the forms on paper.
Alternatively, you could file the forms electronically (see note above about affordable solutions). Note that if the government does shut down after February 8 (the date the government is currently funded through), this may affect the IRS’s ability to provide the new forms. The IRS isn’t expected to extend the filing deadline in the event of a shutdown, so keep an eye on this and if a shutdown happens, be prepared with a backup plan.
More Information
Check out the following articles for more info on Section 6039 filings:
Tax reform has been a hot topic of late, with new changes effective January 1 of this year (and still being phased in). With the changes now officially the “law,” corporate america seems to be celebrating – in the form of bonuses back to employees.
Hiding Under a Rock?
If you’re asking yourself “what tax reform?” see Barbara’s blogs on the topic:
Since the beginning of the year, several companies (Wal-Mart, JetBlue, AT&T, Bank of America and others) have announced that they would be giving cash bonuses to employees in celebration of the new tax landscape. This week Apple joined those ranks – but with a different twist. The company confirmed that most employees would be receiving an award of $2,500 worth of RSUs in the coming months. A memo to employees, described by Bloomberg, indicated that the awards would be given to both full-time and part-time employees across all departments (up through senior manager level).
Is this the beginning of a stock boom trend? Will other companies use their projected tax savings to fund employee stock awards? It will be interesting to see if Apple is just a stand-alone on this, or whether there will be a mini-boom of stock awards conceived by the new tax reality.
As I noted back in May (“An Expensive Tax Cut“), companies will have to adjust the deferred tax assets recorded for stock compensation as a result of the new corporate tax rate. Because the tax reform bill was enacted in late December, companies don’t have as much time to record these adjustments as we might have originally expected, so the SEC has issued Staff Accounting Bulletin No. 118 to provide some relief.
What Adjustments?
The DTAs you’ve recorded for stock awards represent a future tax savings that the company expects to realize when the awards are eventually settled. When you recorded the expected savings, you based it on a 35% corporate tax rate. Now that the corporate tax rate has been reduced to 21%, the expected savings is a lot less (40% less, to be exact).
For example, say you recorded a DTA of $3,500 for an award worth $10,000 (the DTA was 35% of the $10,000 fair value of the award). Assuming that no portion of the award has been settled, you now need to adjust that DTA down to $2,100 ($10,000 multiplied by the new 21% corporate tax rate). You make the adjustment by recording tax expense for the difference between the new DTA and the original DTA. In my example, you would record tax expense of $1,400 ($3,500 less $2,100).
When Do Companies Record the Adjustments?
The adjustments have to be recorded in the period that the change in the corporate tax rates is enacted, not when it goes into effect. Once you know the tax rate is going to change, there’s no point in continuing to report based on the old rate; you immediately adjust your expectations. Since the bill was signed into law on December 22 and most companies have a fiscal period that ended on December 31, most companies will record the adjustments in that period. That doesn’t give companies much time to calculate the adjustments.
SAB 118
My example was very simple; things are a lot more complex in the real world, so it might not be quite that easy for companies to figure out the total adjustment they need to record for their DTAs. In addition, in some cases, it may not be clear what the adjustment should be. For example, the tax reform bill also makes changes to Section 162(m) (see “Tax Reform Targets 162(m)” and grandfathers some compensation arrangements from those changes (see “Tax Reform: The Final Scorecard“). There are currently some questions about which arrangements qualify for the grandfather; for arrangements that don’t qualify, the DTA may have to be reduced to $0. Companies may not be able to determine the adjustments they need to make to their DTAs until the IRS provides guidance.
Which brings us to SAB 118. The SEC issued SAB 118 to provide guidance to companies who are unable to determine all of the tax expense adjustments necessary in time to issue their financials. The SAB allows companies to make adjustments based on reasonable estimates if they cannot determine the exact amount of the adjustment. Where companies cannot even make a reasonable estimate, they can continue to report based on the laws that were in effect in 2017.
The SAB also provides guidance on the disclosures companies must make with respect to the above choices and provides guidance on how companies should report the correct amounts, once they are known.
– Barbara
P.S.—For more information about how the tax reform bill impacts DTAs and SAB 118, don’t miss today’s webcast “Tax Reform: What’s the Final Word?“
The presence of employee stock purchase plans (ESPPs) in the equity mix has been long and fairly consistent. Mostly drama free, for the past several years ESPPs seem to often live under the radar. If you have an ESPP, you may be wondering how it stacks up compared to those of your peers. If you don’t have an ESPP, your company might be entertaining the idea of implementing one. In today’s blog, we’ll look at some ESPP trends from the NASPP/Deloitte’s 2017 Domestic Stock Plan Administration Survey in an attempt to answer the question: Should you keep or implement an ESPP?
ESPP Prevalence
52% of survey respondents reported having an ESPP, which is basically consistent with our survey data from 2011 until now. This suggests somewhat of a leveling off of ESPP implementations (but not a decline since that time). Back in 2004, 64% of respondents said they had an ESPP – and that number declined until 2011 (likely due to changes in accounting rules).
The silver lining is that in the 2017 survey, 1 in 5 respondents who don’t have an ESPP report that they are considering implementing one. So perhaps this figure is primed to finally begin an upward trend.
Participation Rates
When it comes to employee participation in the plan, a key metric in determining whether a plan is competitive, 62 percent of respondents with a qualified plan cite an employee participation rate of less than 40 percent. For non-qualified plans, participation is even lower, with almost 90 percent of respondents reporting participation of less than 40 percent. Exactly half report participation of less than 20 percent.
With a known positive correlation between the discount offered in the plan and participation rate (= the greater the discount, the greater the participation rate), the lower participation rates in non-qualified plans could suggest that non-qualified plans can be less generous. On the flip side, we’ve seen companies implement very generous terms and find themselves with 80% or more in participation. Obviously, this achievement includes more than just lucrative plan terms – communication and education matter in upping participation rates as well.
Plan Terms
The following are a few highlights among trends in plan terms and practices:
15% is the most prevalent discount offered in ESPPs across the board (both qualified and non-qualified).
The lower of the offering date or purchase date price is the most common way to set the purchase price for both qualified (63% of respondents) and non qualified (54% of respondents) plans.
Two-thirds of companies say their participants hold shares purchased under a Section 423 plan for at least one year.
94% of companies offer no quick sale for purchased shares.
6 months is the length of the offering period used by the majority companies, followed by 3 months and 1 month. Longer duration offering periods are on the decline.
To learn more about the data from the Survey, including 6 factors that correlate to higher ESPP participation rates (shared by Joseph Rapanotti of Deloitte), NASPP members can view our webcast “Survey Says: Dos and Don’ts of Stock Plan Administration” (November 8, 2017).
Additionally, I’ll be presenting on “Considerations in Offering an ESPP” (with co-presenters Shyam Raghavan of Pearson plc, and Landy Tam of Computershare) at the Computershare/NJ/NY Center for Employee Ownership’s ESPP Day on February 8, 2018 in New York and hope to continue the conversation about ESPP trends.
It used to be that ISS would make only a few changes per year to its voting policies that affected stock compensation. Some years the changes didn’t even warrant a blog entry. But now ISS has the Equity Plan Scorecard and a scorecard requires constant tweaking. As a result, we now have a lengthy list of changes to review every year. Today’s blog entry is a summary of the ones I think are most significant.
It’s Harder for S&P 500 Companies to Earn a Passing Score
Big news for S&P 500 companies: your stock plans now have to earn an extra two points (a total of 55 pts) to receive a favorable recommendation. Everyone else’s plans still pass with only 53 pts.
The Burn Rate Test Gets a Little Easier for Acquirers
More big news: all companies can now request that ISS exclude restricted shares granted in consideration for an acquisition from their burn rate. Companies that want to request this must include a tabular disclosure reporting the number of restricted shares granted in this context for their most recent three fiscal years.
Partial Credit Eliminated for Some Factors
No more partial credit for CIC provisions, holding requirements, and CEO vesting requirements, and in some cases, the requirements to receive full credit have been relaxed.
To earn full credit for CIC provisions, the provisions must meet both of the following conditions (unless the company doesn’t grant time-based awards, in which case only the condition related to performance awards matters):
Performance awards can allow the following: (i) pay out based on actual performance, (ii) pro rata pay out of the target level (or a combination of i and ii), or (iii) forfeiture of awards.
Time based awards cannot provide for automatic single-trigger or discretionary acceleration of vesting.
To receive full points for the holding period requirement, shares must be required to be held for 12 months (down from 36 months in past years) or until the end of employment. No points for requiring shares to be held until ownership guidelines are satisfied.
To receive full points for the CEO vesting requirements, awards granted to the CEO in the past three years cannot vest in under three years (down from four years in the past). Still no points if no performance awards have been granted to the CEO in the past three years, but grants of time-based awards are no longer required to earn full credit.
Happy New Year! It’s that time of the (new) year again where we offer up congrats for our annual Question of the Week contest.
Question of the Week Winner!
The winner is of our 2017 Question of the Week contest is (drum roll!): Sunny Days (who, by the way, tied for 2nd in our 2016 contest). For those of you who are asking “What’s the Question of the Week Contest?“, it’s a weekly quiz challenge designed for stock plan professionals to test their know-how in a variety of areas, while competing against their peers. Hone your equity compensation knowledge while having fun at the same time! There’s a new question each week, and a correct answer earns points.
And the Winners Are…
The screen names of the top 5 scorers for the 2017 contest are:
1st – Sunny Days 390 ( points)
2nd – DMekwunye (380 points – tie with IheartESPP; this contestant was also the winner of the prior year’s contest)
2nd – IheartESPP (380 points – tie with DMekwunye)
4th – edodge (370 points – tie with Will Give It A Go)
4th – Will Give It A Go (370 points – tie with edodge)
Congratulations to our top scorers!
What’s in a Name?
In our current game, your play is tracked by your screen name – so you can be as anonymous or transparent in your game playing as you like. It’s become an annual tradition for me to highlight some of the fun, intriguing and perplexing screen names each year. In 2017, once again the contestants expressed great variety in selecting their game names – with “equity” oriented and technical names (Equity Guy, Stock Plan Warrior, Bifurcation) to the mythical (War Eagle (is that considered mythical?)) to the humble (Humble Pie, Lucky13) to the optimistic (Its_a_new_year!) and those who are new to the game or industry (new at equity, giveitatry, Equity Newbie). Finally there were a few that would probably require a happy hour and some time to explain (coco13bongo, The Shadow Knows, RU Crazy, BlackSwan, Building Chops).
Work Hard, Play Hard
We’ve just reset scores and this week’s challenge starts a whole new contest, so this is the perfect time for NASPP members to sign up, create your screen alias and jump into the Question of the Week Contest. We leave all of January’s questions active for the entire month, so you have plenty of time to complete the first quizzes of the new game.
What would you do if you got an email from your CEO, asking you to provide a report of taxable income, including employee IDs—stat? A) Respond with the requested information as quickly as possible or B) be very suspicious?
As it turns out, you should be very suspicious.
Phishing Scheme Targets Payroll and HR
Most phishing schemes have little to do with stock compensation, but a scheme that the IRS has issued an alert on in the past hits a little close to home. This scheme targets payroll and HR personnel. The scammer sends an email that purports to be from the company’s CEO or other executives and requests that the recipient provide employee data, including personal and W-2 information.
If successful in acquiring this information, the scammer then submits false tax returns (possibly with both state and federal tax authorities) and collects on any refunds due to employees.
According to the IRS, the email may include the following (or similar) requests:
Kindly send me the individual 2017 W-2 (PDF) and earnings summary of all W-2 of our company staff for a quick review
Can you send me the updated list of employees with full details (Name, Social Security Number, Date of Birth, Home Address, Salary) as at 2/2/2017.
I want you to send me the list of W-2 copy of employees wage and tax statement for 2017, I need them in PDF file type, you can send it as an attachment. Kindly prepare the lists and email them to me asap.
Kindly?
It seems to me that the big giveaway here is the use of the word “kindly” in the above requests. What executive ever used that word when asking for a report ASAP?
Let’s Be Careful Out There
Payroll and HR aren’t that far removed from stock plan administration. Some of you probably wear both hats. It’s always a good idea to verify any unusual requests from executives and to make sure that any personal data for employees, including compensation data, is transmitted in a secure manner, especially if that data includes employee identifiers, such as names and ID numbers.
You also might want to make sure your colleagues in payroll and HR are on alert for this scam. It’s more widespread than you think and it’s a mess to resolve; you don’t want it to happen to you or your fellow employees.
– Barbara
Update: Since I posted the blog, the IRS has announced that this phishing scheme has emerged as “one of the most dangerous phishing emails in the tax community.” Make sure your payroll team is aware of it. If your company has been victimized by this scheme, the IRS urges you to report it to them as soon as you become aware of it; see their press release for information on how to report it.
It’s the last week of the year; a time when I usually post a lighter blog entry. For this year, in celebration of the NASPP’s 25th anniversary, I have a smattering of headlines from early issues of the NASPP Advisor (10 pts if you remember what the Advisor was called back then; 20 pts if you actually have a copy of one of the early issues.)
Best Practices for Filing Paper Grant Agreements
There were two camps, one for ordering by grant date and the other in favor of alphabetical by optionee. I remember suggesting during seminars that separate copies should be maintained by HR and by stock plan administration—all that paper! Another hot topic was whether stock options could be exercised by fax.
IRS Asserts that FICA/FUTA Applies to ESPPs
Ten points if you remember when this question was finally put to rest. (Hint: It was in the same bill that brought us 409A.)
New FASB Bill Introduced into Congress
In 1994, the Coalition for American Equity Expansion (CAEE) had just been formed to fight the FASB’s plans to require option expensing and was successful in getting a number of bills aimed at preventing the FASB from adopting its standard introduced into Congress. The Accounting Standards Reform Act would have required the SEC to approve all accounting standards, effectively stripping the FASB of its authority. An earlier bill created a new type of “performance stock option” that would have been eligible for fixed accounting and qualified tax treatment. A subsequent bill eventually passed and was instrumental in FAS 123 being relegated to a footnote in the financial statements.
T+3 Becomes Effective
Remember when settlement in three days seemed like an impossible task? Me neither. Seems like the move to T+2 this year was barely a blip.
How to Set Up a Cashless Exercise Program
Early issues of the Advisor had numerous articles on option exercise procedures that are now old hat and practices that have fallen by the wayside. In addition to tips on setting up cashless exercise programs, there were articles about using attestation for stock-for-stock exercises and case studies on how to manage tax withholding. Did you know that, in instances of withholding failures, the IRS use to assess penalties against individuals who were responsible for administering tax withholding for their employers? I’m glad they’ve dropped that program (technically, they can still assess these penalties but they generally only apply them in extreme cases and usually only against employers and business owners).
Here’s to the Next 25!
Thanks for indulging me in a little stock plan nostalgia. The NASPP has come a long way and it’s been a great first 25 years! Here’s to the next 25 years!
On Wednesday, the final version of the tax reform bill was passed in both the House and Senate. There were a few small changes to the bill at the last minute, but none of them impact what I wrote about on Tuesday. Since the bill changes individual tax rates, some of you may be wondering if you need to update your withholding rates on January 1.
It’s Still Just a Bill, Sitting There on Capital Hill
Hold your horses, there, buckaroo. If you are old enough to remember Schoolhouse Rock’s I’m Just a Bill, you know that the passage of a bill by Congress doesn’t make legislation a law (unless the bill has already been vetoed by the president and two-thirds of Congress votes for it). The legislation still has to be signed by the president. Although Trump’s signature seems like a formality with the tax bill, it still has to happen (rules are rules); moreover, there is speculation that the bill won’t be signed until January (“It’s Unclear When Trump Will Actually Sign the Tax Bill,” Bloomberg.com).
Tax Withholding Rates for 2018
Most of the provisions in the bill, including the new individual tax rates, are effective as of January 1, 2018. This does not mean that you have to rush to update tax withholding rates, however (especially if the bill hasn’t been signed into law as of January 1). The IRS has to issue guidance updating the tax rate tables and withholding procedures before you can withhold at the new rates. Of course, the IRS can’t issue any guidance until the bill becomes law (and if the looming government shutdown happens, this could impact how quickly the IRS can issue its guidance). The following announcement is posted to the IRS website:
The IRS is continuing to closely monitor the pending legislation in Congress, and we are taking the initial steps to prepare guidance on withholding for 2018. We anticipate issuing the initial withholding guidance (Notice 1036) in January reflecting the new legislation, which would allow taxpayers to begin seeing the benefits of the change as early as February. The IRS will be working closely with the nation’s payroll and tax professional community during this process.
Your payroll provider should be a great resource when tax withholding rates change, since this will impact all compensation subject to withholding, not just stock compensation. An announcement on the ADP website notes that companies should continue to apply 2017 withholding rates until the IRS issues new guidance (“Federal Tax Reform Legislation May Be Imminent: Impact to 2018 Payroll Calculations May Be Delayed“)
Thanks to Marlene Zobayan for bring this concern to our attention.
Transactions on December 31, 2017
As a reminder, transactions that occur on December 31, 2017 are still occurring in the 2017 tax year, even if the FMV for these transactions isn’t known until market close on December 31 (market close does not mark the end of the tax year) and even if the transactions aren’t settled until 2018 or the shares acquired under the transactions aren’t issued until 2018. Most companies have to complete a special payroll run in the first week of 2018 to add late December transactions to Forms W-2.
With tax rates changing for 2018, it is especially important to include transactions in the correct tax year. Failure to do so could cause employees to underpay or overpay taxes due on the transaction and underpayments could be subject to penalties. (Remember that even though the withholding rate may not change until February, withholding is only an estimate of employees’ tax liability. Their actual liability will be based on the rate in effect at the time of their transaction; any excess withholding will be refunded to them when they file their tax return.)
This is a good reason to avoid scheduling vesting dates for December 31; see the November-December 2016 NASPP Advisor for nine more reasons to avoid December 31.
The conference committee charged with aligning the Senate and House versions of the Tax Cuts and Jobs Act announced late last week that they have come to an agreement. The final bill is expected to be approved in both the House and Senate this week and then signed into law by the president.
Here’s where the bill ended up with respect to the provisions that impact stock compensation.
Individual Tax Rates: The final version of the bill released by the conference committee largely matches what was in the Senate version, except that the maximum individual tax rate is reduced to 37%. So we end up with seven individual tax rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The highest rate kicks in at $500,000 of income for single taxpayers but at only $600,000 for joint filers (instead of the $1 million threshold that was originally proposed). The individual tax rates sunset after 2025 and will revert back to the current rates at that time.
Supplemental Withholding Rate: For employees who have received supplemental payments of $1 million or less during the year, the supplemental rate is tied to the third lowest individual tax rate, which will be 22% under the aligned bill. For employees who have received supplemental payments of more than $1 million during the year, the rate is tied to the maximum individual tax rate, which will be 37%.
AMT (for Individuals): This is probably the closest we’ve come to a repeal of the AMT (at least in my memory) but still no cigar. The bill does increase the exemption amounts and phaseout thresholds, so fewer taxpayers will be subject to the AMT. These changes sunset after 2025.
Corporate Tax Rate: Reduced to 21% with no sunset.
Estate Tax: Increases the estate tax threshold to about $11 million; no repeal and no sunset.
Section 162(m):
The CFO is once again subject to 162(m).
Anyone serving as CEO or CFO during the year is also subject to 162(m) (instead of just the individuals serving in those roles at the end of the year).
Once a covered employee for a company, always a covered employee for that company.
Stock options and performance awards will no longer be exempt from the deduction limitation.
Includes an exemption for compensation paid pursuant to a written, binding contract (such as a stock option or award agreement) in effect as of November 2, 2017, if not modified after that date.
Qualified Equity Grants: The final bill includes a provision that would allow employees in privately held companies to elect to defer tax on stock options and RSUs until five years after the arrangements vest, provided certain conditions are met.
Stock Options and RSUs: No change to the current tax treatment of stock options, SARs, or RSUs. The provision that would have taxed these arrangements at vest was removed from both versions of the bill before it was passed by House and Senate.
Determination of Cost Basis: No change from current law. The Senate version of the bill would have required identification of securities sold to be on a FIFO basis but this is not included in the final bill.
