Every once in a while we visit the topic of timely tax deposits in this blog. It’s been a while, and judging by recent comments made by the IRS’s Stephen Tackney (in the session The IRS and Treasury Speak at the recent 22nd Annual NASPP Conference), there are a significant number of companies still not in compliance with the IRS’s requirements for tax deposits, the most egregious likely being those companies who should be making accelerated tax deposits but aren’t doing so. This time instead of the standard recap on the tax deposit rules (see NASPP Blog from May 26, 2011 for that detail), I’m going to challenge our readers to a quiz! How knowledgeable are you about the IRS deposit requirements?

The answers are below, but all fun aside – this is an area where companies should pay attention. It’s clear that late deposits may be subject to penalties and interest. Given the public opinion shared by at least one IRS staffer regarding the agency’s awareness that many companies are not making timely deposits, companies should be concerned that this may become an area of focus or even audit for the IRS.

Most of us are aware that common triggers for accelerated deposits that come from the equity plan side are restricted stock/unit vesting events (performance and time based) and large volume or sized stock option exercises. We are probably well attuned to the fact that the $100,000 or more figure is cumulative – not just reflective of equity transactions, but rather all federal employment tax withholding/liability for an entity. However, without careful coordination between payroll and stock administration, it’s hard to know when this amount is exceeded. For example, a stock option exercise with taxes at the $50,000 mark may seem well below the $100,000 threshold to the stock administration group – until the company payroll department realizes that bonuses were taxed on the same day (or even two days ago, yesterday or tomorrow or the next day if those days fall within the same deposit period). Additionally, some personnel may incorrectly assume that the period of time over which the $100,000 or more in cumulative tax withholding figure is measured is the payroll cycle. That is actually not the case. The calculation is based on the company’s deposit schedule with the IRS (there are two types of deposits – either monthly or semi-weekly – most NASPP members fall into the semi-weekly category).

The cumulative calculation resets each deposit period. For example, if the company is on a semi-weekly deposit plan (making two deposits to the IRS each week), and the end of one deposit period was Tuesday, then taxes withheld on Wednesday would not be combined with Tuesday’s since Wednesday is in a different deposit period.

IRS’s Tackney suggested that many companies are ignoring the next day deposit requirements when their cumulative tax withholding in the deposit period meets or exceeds $100,000, choosing instead to deposit the taxes as part of their normal schedule of deposits. For companies still taking that approach and hoping that they don’t get caught, be aware that the IRS is aware this practice.

For additional details, see:

IRS Publication 15

IRS’s Notice 931 (rev October 2014),

NASPP’s Tax Withholding and Reporting Portal

NASPP blog entry (May 26, 2011)

-Jennifer

Answers: C, C, C, B

In late September, the SEC announced enforcement actions against dozens of companies and their insiders for failures and violations of Section 16 and Item 405 of Regulation S-K (see the blog entry: SEC Enforcement Actions for Section 16 Reporting Violations). At that time, I recapped “what” had happened, but didn’t have all the details about the “why” (what triggered the SEC actions). Now, as more is known about the practices that brought the scrutiny, it’s time to look at processes in this area to minimize your company’s risk. Alan Dye and Peter Romeo addressed this topic in their session “Section 16 & Insider Considerations in Today’s Market” at this year’s NASPP Annual Conference (definitely worth a listen to the audio if you want to hear more of their opinions and insights). In today’s blog I’ll catch you up on some of the key things to know about the SEC’s renewed interest in these disclosures.

Low Hanging Fruit

Prior to the recent actions, the SEC was basically dormant for the past 12 years in pursuing stand alone enforcement actions for Section 16(a) and Item 405 violations. We can speculate as to why scrutiny in this area was in hibernation for so long, but at the end of the day it doesn’t really matter. What matters is that technology has advanced – a lot – in recent years. Tracking trading activity, comparing multiple types of data from different sources, and overall monitoring has become more sophisticated and easier for the SEC. With these advancements, it’s become simple to track Section 16(a) filings and analyze that data. So if you’ve been thinking that the enforcement actions in this area may have been a one shot deal, think again. Untimely or missing filings are now easily exposed, and have become low hanging fruit for the SEC. The message: take compliance seriously.

No Excuses!

Many of us come from a practical mindset. That mindset may have us thinking that sometimes oversights occur, and there was no mal intent involved. After all, we are human, and humans aren’t perfect. Makes sense, right? It does make sense, but don’t count on that thought process buying freedom from SEC penalties. One insider subject to the recent actions was never notified by his company that he was subject to Section 16 reporting (case of Alan Schnaid, corporate controller for Starwood Hotels), and filings were not made on his behalf for several years. The company and the insider both were in agreement on the facts pertaining to this oversight. One may think that the SEC may have forgiven the insider for not filing Section 16 Forms, since he was not informed. They did not. He was personally fined $25,000 for failing to file timely Forms 3 and 4 and also was subject to a cease and desist order.

If you have occasional Section 16 reporting violations, you are not alone. It’s said that approximately 48% of Russell 3000 companies have had at least one late filing each year. Clearly oversights happen. However, the SEC reiterated that “the failure to timely file a required report, even if inadvertent, constitutes a violation.” The message here is to drop the complacency and step up compliance practices. If your insiders have occasional or repeated violations, review the processes involved and make changes. Even an inadvertent or occasional violation can bring SEC sanctions.

Gray Area

There is at least one gray area when it comes to Item 405 disclosures. Alan Dye and Peter Romeo suggested that this is an area where practice and advice differ more than any other area of Section 16, and more guidance from the SEC is needed. People often ask things like whether a correction to a previously timely filed Form 4 needs to be disclosed under Item 405.  There is no uniform answer to that question. Some counsel may guide companies to disclose the corrected Form 4 as late, since the initial filing did not have the complete picture. Others may arrive at the conclusion that disclosure is not required, since the original Form 4 was filed timely. When in doubt, talk to your counsel. Whatever practice is adopted, you’ll want to be consistent.

Think Outside the Box

Often late filings can be triggered by out of the box scenarios. Some of them include situations where the Section 16 reporting insider’s beneficial ownership changes. For example, the insider marries an employee (and now the new spouses’ company stock holdings are also counted as part of the insider’s beneficial ownership). Or, the insider was trustee of the family trust, but is no longer the trustee (thus the beneficial ownership in the trust may no longer be associated to the insider). There are many scenarios where simple life changes can trigger reportable Section 16 transactions. It would be best to brainstorm some of these possibilities internally and with counsel to determine proactive monitoring processes for these situations in order to avoid late or missed Section 16 filings.

I’d love to hope that we’ve seen the last of enforcement actions in this area, but it’s more likely that’s not the case. It’s time to take a look at Section 16 reporting practices to ensure the maximum effort is expended to avoid incorrect or late filings.

-Jennifer

Last week the IRS and the Social Security Administration (SSA) announced the cost of living adjustments (“COLAs”) for 2015.

No News is Good News?

Earlier this year, there was a lot of talk about potential far reaching tax reform proposed by the House Ways and Means Committee (see the NASPP podcast interview with Bill Dunn of PwC for a recap). Nothing new seems to be happening in that area, so it looks as if 2014 might go down as a very quiet year on the tax front. As a result, the only news is routine – the annual cost of living adjustments.

FICA 

The wage cap for Social Security tax purposes will increase to $118,500 for 2015 up from $117,000 in 2014.  The tax rate remains the same at 6.2%, so this increases the maximum Social Security withholding to $7,347 per employee.

Highly-Compensated Employees

The threshold at which an employee is considered highly compensated for purposes of Section 423 will increase to $120,000 for 2014 (an increase of $5,000 from the threshold of $115,000 for 2014).  (Section 423 allows, but does not require, highly compensated employees to be excluded from participation.)

More Information

SSA Press Release

IRS Press Release

-Jennifer