The NASPP Needs Your Help
The NASPP is looking for a few people to help with our social media strategy at the Conference. It’s easy! You just do the stuff you normally do at the Conference (go to sessions, network with people, etc.) and post about it on your social medium of choice (LinkedIn, Facebook, or Twitter) with the Conference hashtag #NASPP23. If you are interested, email me.
San Diego Preview
Here’s a pic from the balcony off the show floor for this year’s NASPP Conference.
NASPP To Do List
I just have one thing for you to do this week:
We’re into fall already, and before we know it the end of the year will be upon us. This upcoming period of time is a busy one for stock administration professionals. In the mix of activity that tends to spike in the month of December is that of charitable giving and gifts. In today’s blog I’ll cover some reminders about ensuring proper tax reporting and securities law compliance for stock related donations.
My inspiration for this blog actually came from a Fortune magazine article about John Mackey, co-CEO and co-founder of Whole Foods. Only a single sentence in the entire article mentioned stock options. In talking about Mackey’s $1 per year salary, the article also mentioned that “The company donates stock options Mackey would have received to one of its foundations.” As I started thinking about how that transaction would be handled on the company side, I realized that it’s been a while since we talked about gifts and donations.
This is honestly a topic that could command a lot of written coverage. The intricacies of gifting stock can be complex from several angles. In the interest of space, I’ll focus on a few areas that touch stock administration.
Timing of Donation to Charity: For tax purposes, the IRS considers the charitable donation to be complete on the date it is received by the charity – not the date it was requested, not the date the company approved the transfer. This is something to be mindful of the closer the request is made to December 31st. If the donor personally delivers a stock certificate with all necessary endorsements to the charitable recipient, the gift is complete for federal income tax purposes on the day of delivery. If the shares are being transferred electronically to the charity, then the transfer is complete when the shares are received into the charity’s account. It’s not enough to have made a transfer request to a broker. This timing can be important to companies who are tracking dispositions of ESPP shares and ISOs. For dispositions due to charitable donations occurring near December 31st, it’s best to verify the date the shares were actually received by the charity in order to apply the disposition to the proper tax year.
Donations of shares acquired through an ESPP or Incentive Stock Option (ISO) exercise: There are some tricky nuances around taxation on the participant side that hopefully will have been discussed with their tax advisor. What stock administrators need to know is that in tracking dispositions of ESPP and ISO shares, a disposition is a disposition – even a charitable one. That means for purposes of tracking qualified vs. disqualified dispositions, the same rules apply to charitable donations of the shares. See the above section on “Timing of Donation to Charity” to ensure tax reporting in the proper year.
Rule 144 Considerations: Rule 144 is concerned with the sale of control securities, not their gratuitous transfer, so the subsequent sale of the stock by a charity, not the actual gift of the shares to the charity, would be subject to the restrictions of Rule 144, if it is applicable. The charity must follow Rule 144 if it has a control relationship with the issuing company. Those wanting more detail on Rule 144 and gift requirements can read the March-April 2013 issue of The Corporate Counsel.
In summary, if an affiliate gifts stock to a non-affiliate that was originally acquired by the affiliate in the open market (i.e., not restricted in the affiliate’s hands), since the securities were not subject to a holding period requirement in the affiliate donor’s hand, SEC staff has stated that the donee need not comply with the Rule 144(d) holding period requirement for its sales of the securities. Moreover, the Staff notes that if the donee is not an affiliate and has not been an affiliate during the preceding three months, then the donee is free to resell the securities under Rule 144(b)(1) “subject only to the current public information requirement in Rule 144(c)(1), as applicable.”
“The one-year cut off for the application of the current public information requirement to donees does run from the donor’s original acquisition. Good news—but don’t forget that the six-month “tail,” adopted in 2007 (which requires donors to aggregate with their donees’ sales) runs from the date of the gift.” The “tail” mentioned in the article applies to the donor, who must aggregate his/her sales of stock with those of the donee for purposes of complying with the Rule 144 volume limitation. This requirement applies for six months after the gift (12 months where the issuer is not a reporting company or is not current in its Exchange Act reporting).
If you are not a subscriber to The Corporate Counsel (or have not yet renewed) you can gain immediate access online to sample gift compliance letters by taking advantage of the no-risk trial. (Almost all of our member companies and law firms are long-term subscribers to The Corporate Counsel.)
Pinball and ASC 718
I recently had an opportunity to visit the Pacific Pinball Museum in Alameda, CA. (BTW, way fun, if you ever happen to be in Alameda with some kids you need to amuse.) And what should I be surprised to discover there? That’s right, a Monte Carlo simulation in action (video below)! Just add some stock prices to those bumpers, pull the ball pin a couple of hundred thousand times (as many plays as you can manage for just $15 a day, $7.50 if you make your kid do it), and you’ve got yourself a Monte Carlo simulation on the cheap.
I often encounter confusion over the difference between 401(k) plans and ESPPs, as well as the misperception that these two plans don’t mix: employees should participate in one but not both. The truth is that participating in both plans can be great for employees. Moreover, recent research from Fidelity shows that offering an ESPP can enhance your 401(k)
Two Great Plans that Go Great Together
A 401(k) is a great tool to save for retirement: employees invest their own money on a tax-exempt basis (except for FICA), the company may offer a match as an incentive to participate, and, in many cases, employees are able to hold their plan assets in a variety of diversified investments.
With an ESPP, employees also invest their own money in the plan, but on a post-tax basis. Instead of a match, most plans offer a discount. The ESPP is not a diversified investment (employees must sell their stock and pay tax on it to diversify) and, although employees can certainly hold their stock as along as they want, they are not incented to hold until they retire, as is the case with a 401(k).
Another difference between these two plans: the maximum contribution to a 401(k) is increased periodically for inflation, whereas, as far as I can tell, the $25,000 limit under Section 423 has not been increased since the section of the tax code was enacted.
A 401(k) is a great tool to save for retirement; an ESPP is a great way to provide employees with additional earnings that are more liquid than their 401(k) holdings and can be used for to meet employees’ other financial needs. In addition, an ESPP allows employees to participate in the company’s success; in a 401(k), employees’ assets are often invested in mutual funds or other alternatives that aren’t related to the company.
401(k) loan rates were lower across the board when companies offer an ESPP, regardless of company size.
Employees with access to both an ESPP and a 401(k) tend to borrow a smaller amount from their 401(k), and had a lower outstanding loan amount.
Employees at large companies (more than 10,000 employees) with both an ESPP and 401(k) borrowed an average of $2,000 less than employees with only a 401(k), and had an average outstanding loan balance of $3,000 less than employees without access to an ESPP.
The difference was especially notable among small companies (fewer than 500 employees), where 9% of workers took out new 401(k) loans when an ESPP was also available, versus 14% at companies that don’t offer an ESPP.
The outstanding loan rate at small companies was also significantly lower, with only 14% of ESPP/401(k) workers having an outstanding 401(k) loan balance, compared with 23% of employees at 401(k)-only companies.
In case you were wondering (in your spare time), the IRS now has a techniques guide for auditing equity compensation. The “guide” is actually an instruction to internal IRS auditors on how to evaluate equity compensation during an “examination” (fancy word for “audit”). The guide, published in August 2015, is available on the IRS web site. I’ll try to summarize some of the more interesting points in today’s blog.
The Angles of Audit
Before I dive into what the guide says, I want to cover a thought that came to me as I was reading the guide. Stock Plan Administrators and their vendors are focused on tax compliance relative to the company’s corporate tax obligations (reporting, withholding, etc.). However, it’s important to remember that as compliant as we may be from a issuer standpoint, there is still audit exposure potential from the individual angle of tax compliance. An employee may get audited, even if the company is not being audited. The company’s documentation may be requested from the IRS as part of that audit. It’s important that issuers are aware that there are a variety of audit angles that could attract attention to their equity compensation record-keeping and disclosures at any given time, and the IRS guide seems to support that thought – providing detailed information on the types of transactions and potential tax issues that could arise. With that detail comes guidance on how to source documents attached to equity compensation. According to a blog dedicated to explaining the guide by Porter Wright Morris & Arthur LLP,
“Interestingly, the Guide devotes a fair amount of detail to explaining where auditors may find these documents, encouraging them to review Securities and Exchange Commission (“SEC”) filings as well as internal documents. As such, the Guide serves as an important reminder to employers to be mindful that the IRS (or other third parties) someday could seek to review their corporate documents. ”
Documents Galore
Let’s cut to the chase. Where are auditors instructed to look?
SEC documents – This is an obvious one, but it’s where the IRS recommends their auditors start. Disclosures such as the 10K (Form 10-K), proxy statement (DEF 14A) and Section 16 reports of changes in beneficial ownership (Form 4) are places to identify types of plans and awards, as well as detailed compensation data for named executive officers and directors. The IRS recommends comparing data from these disclosures to individual Form W-2s and 1099-MISCs to verify proper tax withholding and reporting. If discrepancies surface, the IRS recommends expanding the audit (yikes).
Internal Documents – Types of internal documents subject to scrutiny include employment contracts, and meeting minutes from Board of Director and Compensation Committee meetings.
The Porter et al blog summarized this into some key awareness factors for employers:
“Employers should be aware of these instructions. Often times, it is easy for someone to prepare internal documents using jargon or short-hand that is familiar among people at the company but that may be difficult to explain to a third party or worse could be misleading. The Guide demonstrates that internal documents may not be restricted to internal personnel. Instead, the IRS very well could review these internal documents. As such, employees and advisers who prepare these documents should be mindful of both the information contained in the documents and how they present that information.”
Takeaways
When preparing documentation or disclosures (including supporting documents for those disclosures), it’s good to look at the process as if a third party will eventually come in and evaluate the information. The Porter blog made a great point – often times records are maintained in manner that internal parties may easily understand, or there’s someone on hand who can “interpret” that scrawl made by a board member. However, once that information is subject to review by an auditor, questions can arise. Companies should be aware of the IRS audit instructions relatives to equity compensation and maintain their records in a way that will make it easy to explain if audited.
Carolinas: Emily Cervino of Fidelity presents “A ‘Data Dictionary’ for Stock Plan Decision Makers.” (Tuesday, September 22, 11:00 AM)
Austin: Denise Glagau of Baker & McKenzie presents “Equity Awards on the Move: Creating Effective Strategies for Equity Awards Granted to Globally Mobile Employees.” (Wednesday, September 23, 11:30 AM)
Houston: Equity Methods presents “2015: A Year to Remember in Stock Compensation – New SEC Regulations and the FASB’s Updates to ASC 718.” (Wednesday, September 23, 11:30 AM)
Nashville: Emily Cervino from Fidelity and Jennifer Baehr from Certent present “Making Your Broker Relationship an Epic Partnership.” (Wednesday, September 23, 7:30 AM)
Salt Lake City: Ken Stoler from PwC presents “FASB Update – What’s Changing and When!” (Wednesday, September 23, Noon)
Silicon Valley: Kelly Geerts of E*TRADE and Rose Hoffman of Paypal present “Mission Impossible: Overcoming the Challenges of Payroll” (Wednesday, September 23, 11:30 AM)
Ohio & Michigan: The chapters host a joint regional event featuring two presentations. Steve Dickstein of E*TRADE presents “Automate Me! Automating Data Exchanges Between your Equity Compensation Platform and Internal Systems” and Emily Cervino of Fidelity and Jen Baehr of Certent present “A ‘Data Dictionary’ for Stock Plan Decision Makers.” (Thursday, September 24, 10:15 AM)
San Francisco: Michael Esposito of Solium and Elizabeth Dodge of SOS present “The Heat is On: Accounting Foibles, Missteps and Process Improvement” and Jason Flaherty and Jeremy Erickson of Orrick present “CEO Pay Ratio Update.” (Thursday, September 24, 11:30 AM)
Twin Cities: Mark Spittell and Leann Balbona of KPMG present “Compensation and Equity Trends Update.” (Thursday, September 24, 3:30 PM)
A riddle: what do the Trade Adjustment Assistance Program, the African Growth and Opportunity Act, and HOPE for Haiti have to do with Forms 3921 and 3922? You might think “not much” but then you aren’t a member of Congress. The Trade Preferences Extension Act, which includes provisions relating to those three things and a couple of other global trade-related items, also increases the penalties for failure to file Forms W-2 and forms in the 1099 series, which includes Forms 3921 and 3922 (why forms 3921 and 3922 are considered part of the “1099” series is another riddle for another day).
The New Penalties
Timing of Correct Filing
New Penalty (Per Failure)
New Annual Cap
Old Penalty (Per Failure)
Old Annual Cap
Within 30 days
$50
$500,000
$30
$250,000
By Aug 1
$100
$1,500,000
$60
$500,000
After Aug 1 or never
$250
$3,000,000
$100
$1,500,000
With intentional disregard,
regardless of timing
Min. of $500
uncapped
Min. of $250
uncapped
Make That a Double
The penalties apply separately for returns filed with the IRS and the statements furnished to employees. If a company fails to do both, both the per-failure penalty and the cap is doubled. Thus, if both the return and the employee statement are corrected/filed/furnished after Aug 1, that’s a total penalty of $500, up to a maximum of $6,000,000. If intentional disregard is involved, that’s a minimum total penalty of $1,000 (and this amount could be higher) with no annual maximum.
Effective Date
The new penalties will be effective for returns and statements required after December 31, 2015, so these penalties will be in effect for 2015 forms that are filed/furnished early next year.
Penalties At Least As Interesting As the Trade Provisions?
Interestingly, when I Googled “Trade Preferences Extension Act,” so I could figure out what the rest of the act was about, the first page of search results included as many articles about the new penalties as about the trade-related provisions of the act.
If you want to know what the rest of the act is about, here is a summary from the White House Blog. There’s not a lot more to say about the penalties but if you want to spend some time reading about them anyway, here are summaries from Groom Law Group and PwC.
I have to start off today’s blog saying that I never imagined a context where I’d see the words “unicorn” and “restricted stock unit” in the same sentence. I guess that was my first mistake – never say never, right? Turns out, thanks to a tweet from myStockOptions.com that led me to a recent NY Times article, I’ve learned that you can use unicorn and RSU in the same sentence. How, you ask? To get the full answer, you’ll have to follow me as I explain a phenomenon taking place in Silicon Valley – involving both.
Isn’t a Unicorn a Mythical White Horse with a Horn?
If you are conjuring up images of a white mythical horse-like creature with a pointy horn, yes, that’s the unicorn I was thinking of also. However, the term is also being used to describe a new generation of tech start up companies. The New York Times describes these unicorns as “a class of hot start-ups valued at $1 billion or more. There are now more than 124 unicorn companies, according to CB Insights, a research firm that tracks start-up.” The largest and possibly best known unicorn is Uber.
Unicorns and RSUs
So where do the RSUs come into play? It appears that the tech variation of unicorns are stealthily and steadily poaching top talent from many other more established tech darlings – impacted companies include Google and Amazon. The carrot used to entice the talent? You got it – none other than RSUs. Lots of them. At this point, I’m reminiscing back to the dot com days of mega sized stock option grants offered to lure talent to start ups. Silicon Valley and the tech world in general have been no stranger to these talent wars. What appears to be different this time around is that the poachers are unicorns – heavily funded and backed by deep resources. Perhaps with that comes a stronger potential for success – at least in the eyes of some. These aren’t tech companies who are simply promising hope – in many cases the hope is already a reality. Uber is valued at more than $50 billion. That could feel pretty attractive to prospect employees who are eyeing the healthy sized RSU awards offered by the unicorn. According to the NY Times article, “To snag employees from large rivals, unicorns have a simple recruiting pitch: They are on a path to success, as illustrated by their rising valuations. Many offer generous equity packages of restricted stock units that can later translate to big paydays for employees if the unicorn goes public or is sold — a lure that neither Google nor any other public tech company can dangle. Also, the unicorns say they are far more fleet-footed and cutting-edge than large organizations.”
The issue of pursuing top talent and the impact on the organization left behind is not a new one. It’s the rapid rise of the unicorns and their arsenal of both compensation and arguments of an apparent path to future success that appears to be a significant issue for other tech companies. Top executives at Yelp and Amazon have both publicly acknowledged that their talent is being recruited by other organizations. Yelp’s CEO acknowledged that the unicorn bubble is having an impact on their organization.
What’s the Impact on Stock Plans?
I’d like to know if stock plan administrators are feeling impacted by the unicorn situation. In my mind I see a rapid sequence of offers and counter offers, along more volatility in hiring/terminating employees, and I’m wondering if that affects the timing of how organizations have typically handled their grant approval process. Has there been an increase in “one off” or off cycle awards due to the reactionary nature of responding to an employee who has received an offer from a unicorn? Or are Silicon Valley stock plan administrators just as surprised as I am to head the word “unicorn” in the same sentence as “RSU”? If you’re a stock plan administrator in the tech industry or Silicon Valley, share your insights with us by taking the quick poll below:
NASPP Chapter Meetings
Here’s what’s happening at your local NASPP chapter this week:
Los Angeles: Emily Cervino of Fidelity presents “Data Analytics for Stock Plan Decision Makers.” (Wednesday, September 9, 11:30 AM)
San Diego: Emily Cervino of Fidelity presents “Building a ‘Data Depository’ for Stock Plan Decision Makers” (Thursday, September 10, 11:30 AM).
Read All About It: Global Equity Incentives Survey
The NASPP and PwC have just published the executive summary for our 2015 Global Equity Incentives Survey. Check it out today and don’t miss our webcast highlighting the results on September 22.
NASPP To Do List
Here’s your NASPP To Do List for the week:
