Employee Stock Purchase Plans (ESPPs) have had a long history in equity compensation. Over the years we’ve seen many changes in plan design trends – some driven by economic factors, some driven by changes to accounting regulations, and others “just because.” Through it all, it seems like some of the beliefs around ESPPs have taken on the status of an urban legend (you know, those stories that float around where nobody quite knows if they are true or not). Even now we hear a lot of buzz about ESPP, and not all of it rings true. In today’s blog, I’m going to take on three of the ESPP myths that have achieved urban legend status.

I recently caught up with Emily Cervino of Fidelity (many of you may know Emily as a passionate supporter of ESPPs) to talk about some of these myths. My full interview with her (including 2 additional myths not discussed in today’s blog) was captured in the most recent episode of our Equity Expert podcast series—be sure to check it out!

Myth #1—An ESPP is Like an ATM Machine

I often hear people describe ESPPs just like the caption above—they are an ATM machine. As soon as employees purchase the shares, they will cash them out (via sale). It’s not an investment tool—it’s a short term savings plan, and it’s too much administrative headache and accounting expense to take that on. And so on, and so on. So what’s the truth? The NASPP’s 2014 Stock Plan Administration Survey (“2014 Survey”), co-sponsored by Deloitte, shows dramatically different behaviors when it comes to the length of time ESPP participants hold their shares. Only 11% of responding companies report that the majority of participants sell shares immediately, and only 8% of respondents report that participants sell, on average, within the first 6 months after purchase. That means 81% of respondents find that, on average, participants hold their ESPP shares at least 6 months, and 67% of respondents find that, on average, participants are actually holding a year or more. This is similar to data from the NASPP/Deloitte 2011 Stock Plan Administration Survey, so this is not a new trend.

Myth #2 – Offering An ESPP is Too Expensive From an Accounting Perspective

Accounting standard FAS 123R (now referred to as ASC 718) brought an end to an era of widespread non-compensatory ESPP plans. Today, most ESPP plans are considered compensatory for accounting purposes (meaning the company must now record an expense for them) unless they meet specific criteria (a safe harbor plan with a maximum 5% discount and no look back). According to the 2014 Survey, 66% of respondents with a Section 423 plan offer some type of look back for purposes of determining the purchase price. And, the majority of companies offer more than a 5% discount, so the majority of ESPPs are considered compensatory. Although most ESPP plans are now compensatory, they are still less expensive than other forms of equity compensation, and when the value to the participant for that expense is considered, many experts agree that they are still a good or great bang for the buck.

With expense related to ESPPs commonplace, companies have found ways to curb the expense. Some companies have implemented share limits as a plan feature, meaning that the participant can only purchase up to a maximum number of shares over a given period (offering, year, or some other period). This seems to be more favorable than a limit on contributions—because if your stock is volatile and the price goes up, the number of shares that a participant can purchase could be greatly limited. Additionally, since expense is tied to the shares and not the contributions, it seems more predictable to establish a limit on shares purchased. Lastly, the IRS already has a statutory dollar limit in place – it’s not on contributions per se, but rather on the value of shares purchased—Section 423 plan participants can’t purchase more than $25,000 worth of stock in a calendar year.  According to the 2014 Survey (here I am citing Section 423 plan data only; see the survey for non-qualified plan data), 56% of companies have a limit on shares purchased (19% have no limit other than statutory limits; only 16% limit contributions based on a percentage of compensation and 26% have a set dollar amount limit).

Myth #3 – Communication Does Not Impact Participation in the ESPP

I’ve heard many variations of this myth: “No matter what we do, the participation rate is what it is—and it’s not much.” Or, “ESPP is such a simple concept, we don’t really need to communicate—it’s a plan that runs on autopilot.” Both of these statements are proving incorrect, and we are starting to see data to support a different notion—there is a correlation between communication and ESPP participation. At the NASPP’s recent 22nd Annual Conference in Las Vegas, two companies detailed recent efforts to makeover their communication programs in the session Extreme Makeover:ESPP Edition. One of those companies, Baker Hughes, made no plan design changes and focused solely on improving ESPP communications. The results of those efforts increased participation in the ESPP by 18% in the US and 35% internationally. The other company, Hologic, made a series of plan design changes (moved from a safe harbor plan to a 15% discount and 6 months lookback) and significantly expanded their educational program. Participation in the plan increased from 14% to 31% in just six weeks. Additional educational efforts (no further design changes) raised participation to 51%. While these are only two companies, they are two success stories, and communication played a big role. There are many ways to educate employees these days, and companies are getting more creative—incorporating white board videos, mobile friendly content and language translation into their communication strategy. There were some great sessions on communication strategies and approaches at the Annual Conference that addressed everything from the latest tools to communicating to the short attention span. You may want to check out the audio or materials if you missed these sessions.

I’ve only scratched the surface of addressing some of the ESPP myths. If your company is considering an ESPP, looking to increase participation in the ESPP, contemplating a plan design change or simply curious, check out some of the following resources to get started:

• 5 ESPP Myths with Emily Cervino (audio podcast – can also be downloaded from iTunes for free to your mobile device using a podcast app)
• NASPP/Deloitte 2014 Stock Plan Administration Survey (data on current ESPP plan design, features, practices and trends)
• NASPP’s Employee Stock Purchase Plan portal
• ESPP Essentials (NASPP’s online course for those new to ESPP)
• Audio of various ESPP and communication oriented sessions from 22nd Annual Conference (available for purchase)

-Jenn

It’s Thanksgiving week and the holiday season is already in full swing (I actually consider the start of the holiday season to be November 1st, the day Starbucks switches over to their festive red holiday cups.) In fact, we’ve been very busy at the NASPP preparing for 2015 and we’ve decided to have some fun in documenting some of our goals for next year (hint: the “fun” will be revealed at a future date). We’re inviting members to join us in doing the same.

Which of our members has a goal to play tennis twice a week in 2015? Which one wants to step up their participation in our Question of the Week contest? Can you guess which member runs a farm when they aren’t contributing to our Global Stock Plans portal? You’ll find out soon enough, we’ve got some of our members on the record (via short audio clips)…sharing what they want most in 2015 — both professionally and personally. The folks I’ve talked to so far have been full of great goals and fun ideas.

It gets better! You can do the same! If you’re interested in recording your 2015 resolutions (or a portion of them) in a one-minute or less clip, send an email to: jnamazi@naspp.com. It takes just 5-10 minutes on the phone to get it done. And, your audio clip and photo will be featured on our web site during the holiday season.

Did you know that an estimated 40% of Americans make New Year’s resolutions? That’s more than watch the Superbowl (that event attracts an audience of about one-third of Americans). There are many estimates out there as to the actual percentage of resolutions that are achieved each year; one reported that only 8% of resolutions are actually achieved. I know we brilliant NASPP members can do better than that – we are a motivated bunch. Just in case you’re a doubter, I’m going to offer some reasons why resolutions aren’t achieved, and how to overcome them.

It’s Too Hard

Does your list for 2015 look something like a long bucket list of many amazing things that you want to accomplish? Perhaps you’ve got too much on the list. Many experts agree that the simpler you keep your resolutions, the more likely you are to achieve them. You don’t have to do everything at once!

It’s Not Defined

Some of the most popular year-to-year resolutions include losing weight, becoming healthier and spending more time with family. Those are all GREAT objectives. But, in their present form they are also vague, which makes it harder to know if you’ve actually succeeded in reaching a goal. When thinking about what you’d like to accomplish, put a measurement factor to it, and think about how you are going to achieve it! Do you want to spend more time with family? Maybe that translates to spending at least 2 hours a week engaged in an outdoor activity. You get the picture.

What Did I Resolve Again?

Many people write down their resolutions and then put them away somewhere, only to be forgotten. If you take a little time to create some reminders – visuals, sticky notes on your computer, or something that will be in front of you daily, you’ll be more likely to stay engaged with your goal. You’re also more likely to follow through on something if you declare it publicly, in front of others (hence the option to put some of your goals out to the NASPP population).

I’m sure this Thanksgiving week we can all find many things to be grateful for in 2014. I’d really love to hear from you about what you’re excited about for 2015. We still have a few spots open for brave members to record their 2015 goals, so if you want to participate please send me a note!

Happy Thanksgiving and wishing everyone a wonderful holiday season.

-Jennifer

Last week I did a pop quiz on some of the nuances of making timely tax deposits to the IRS. I’ll admit, some of the questions were a bit detailed – covering points that may not be well known to a lot of us. More than 250 of you responded! The results of the quiz suggest a bit of room to provide some additional education in this area, so today I’ll tackle some of the explanations behind last week’s questions.

Question 1: The IRS requires accelerated deposit of federal employment taxes when the cumulative liability exceeds $100,000 during what period of time?

79% of poll respondents answered “any single day”, which is a common misconception and incorrect. The correct answer to that question was “during the IRS defined deposit period”, which was chosen by 12% of respondents. The short story on this is that the IRS has two deposit schedules – monthly and semi-weekly. Most NASPP members fall into the semi-weekly category, making twice weekly deposits of federal payroll taxes to the IRS. When the cumulative federal tax withholdings reach or exceed $100,000 during the payroll deposit period, then accelerated deposit is required (within one business day of reaching $100,000 or more).

Question 2: Which types of taxes count towards calculating cumulative withholdings for purposes of determining if accelerated (next day) deposit is necessary?

This question seemed to raise confusion – the responses were all across the 4 possible choices. Only 11% of respondents chose the correct answer, which is *all* federal taxes, which are: federal, and both employee and employer portions of Medicare and social security taxes. Essentially, anything owed to the IRS for tax deposits (including employer portion) counts towards determining if the company has accumulated $100,000 or more in taxes due to the IRS.

Question 3: Accelerated deposits are due to the IRS by the next business day. What happens when the “next business day” falls on a day when the IRS is closed (e.g. legal holiday recognized by IRS but not your company)?

The majority of respondents (70%) came up with the correct answer, which is “The deposit needs to be made by the next business day that the IRS is open – so that would be the next business day after the holiday.” However, 24% of respondents thought that they still may need to make the deposit to the IRS if their company wasn’t closed on the holiday, answering “The IRS expects the deposit anyway, and the IRS systems will accept the payment even if the agency is closed.” To clarify – the IRS defines business day as a day that is not a Saturday, Sunday or legal holiday. If the IRS is closed, then payroll deposits can be made timely the next business day that the IRS is open.

Question 4: How does the IRS define a “legal holiday” for purposes determining whether it is considered a business day or not?

Many respondents seemed stumped by this question, because the answers were all over the place. 40% felt that if it were a legal holiday somewhere, then it was a legal holiday for IRS tax deposits. 35% of participants felt that a “legal holiday” was any holiday observed by the banking industry. Both of these answers (representing 75% of responses) are incorrect. The right answer is that a “legal holiday” is any legal holiday observed in the District of Columbia, where the IRS resides (26% came up with this answer). The District of Columbia does have at least one “legal” holiday not observed in other jurisdictions – Emancipation Day in April. It’s wise to check the IRS’s annual calendar of legal holidays each year and share those with the payroll department.

While stock plan administrators may not be the primary person responsible for making tax deposits to the IRS, we are in a unique position in that we may often know of situations where the $100,000 threshold will be reached in a deposit period, triggering the accelerated tax deposit deadline. However, there are also situations where the stock plan administrator may not know with certainty that the cumulative amount has been reached, since it is indeed cumulative – covering all of the organization’s federal taxes on hand. With the IRS recently expressing more interest in monitoring late tax deposits, stock plan administrators should work closely with their Payroll departments to ensure all the nuances of accelerated and timely tax deposits are understood and covered.

-Jennifer