Today’s blog features guest author Emily Cervino of Fidelity Stock Plan Services, who gave us a heads-up on the SEC’s big “Tick Size” pilot that just kicked off.
Tick Tock: Time for the SEC’s Tick Size Pilot
By Emily Cervino, Fidelity Stock Plan Services
Are you ready? On October 3, 2016, the evaluation of whether or not to widen the tick size from $.01 to $.05 began.
News to you?
At Fidelity, we’ve been ticking off our Tick Size Pilot to-dos, but, if this is news to you, don’t worry… I’ve got you covered with a handy synopsis.
In May 2015, the SEC approved the two-year Tick Size Pilot, sponsored by the Financial Industry Regulatory Authority (FINRA), as a mandatory program for a select group of publicly traded equity securities. The pilot will evaluate whether or not widening the tick size, from $0.01 to $0.05, for securities of smaller capitalization companies would impact trading, liquidity, and market quality of those securities and consists of one control group and three test groups, each consisting of approximately 400 securities.
If your company is one of the 1200 that have been identified to participate in the test groups, your stock price will only move in nickel increments, rather than penny increments. To find out if your company is included in the pilot, check the pilot program test group assignment sections on the NYSE or Nasdaq websites. Note that Control Group = C, Test Group = G1, G2 or G3 and the Rollout Date is the date that security joins the pilot.
From a stock plan perspective, this will directly impact option exercises, long share sales, and Rule 10b5-1 contracts and sales, and indirectly impact pretty much anything else that relies on your FMV, such as grant pricing and ESPP purchases. Most immediately, it will have an impact on outstanding limit orders.
If your company’s security is involved in the pilot, i.e. is assigned to a test group, you’ll want to be sure your participants know what’s in store. They may see a change in quoted spreads when buying or selling a security and they’ll need to submit limit orders in five-cent increments.
What to do now?
Check with your service provider to find out:
What tools and resources exist to help you understand the pilot and communicate to your participants
How customer services associates are trained on the pilot
What messaging participants will see regarding nickel increments
How outstanding orders (both buy and sell orders) will be adjusted prior to the pilot effective date to conform to the pilot rules
With that, you should be able to tick this off your list.
Emily Cervino is a Vice President at Fidelity Stock Plan Services. She has been an active participant in the equity compensation industry since 1998, and now focuses on strategic marketing initiatives, thought leadership, and building Fidelity’s strong industry presence.
Emily is a frequent speaker at equity compensation events, past president of the Silicon Valley Chapter of the NASPP, a member of NASPP, GEO, and NCEO, and a 2015 recipient of the NASPP’s Individual Achievement Award. Emily is a Certified Equity Professional (CEP) and she holds Series 7 and 63 securities registrations.
Views expressed are as of the date indicated and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the author, and not necessarily those of Fidelity Investments.
Links to third-party websites may be shared on this page. Those sites are unaffiliated with Fidelity. Fidelity has not been involved in the preparation of the content supplied at the unaffiliated site and does not guarantee or assume any responsibility for its content.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917. 775451.1.0
It’s a slow news day here at the NASPP. I don’t have anything pressing to blog about so I thought it would be a good time for a poll. Below are a few questions that were recently posted to the NASPP Q&A Discussion Forum that are largely unanswered at the moment. If they apply to you, please take a moment to indicate your answers so we can help these folks out. Thanks for indulging me!
If you can’t see the poll below, click here to participate in it. As always, if you are a contractor that works with multiple clients, please answer for just one of your clients (preferably one that won’t otherwise complete this poll).
I feel like I’ve been blogging about proposed and final cost-basis reporting regs for Form 1099-B for three years now. Wait, I have been blogging about this topic for that long–my first entry was on June 2, 2010 (“Cost-Basis Reporting: Complicating an Already Confusing Topic“). Over that period, we’ve seen several iterations of regulations–this was, after all, a three-phase project for the IRS. But we’re now at the end of phase three and the final set of final regulations have been issued.
Not the News You Were Hoping For
As my readers know (because you’re all so smart and also I’ve blogged on this to the point where you probably wish I’d just shut up about it), the cost basis of shares acquired under stock compensation arrangements includes two components: 1) the amount paid for the stock and 2) any compensation income recognized in connection with the arrangement.
Under the first set of regs that were released in 2010, brokers were temporarily relieved (until 2013) of the obligation to include #2 (the compensation income component) in the cost-basis reported on Form 1099-B. Brokers could, however, voluntary report the correct basis if they were able to (and, to my knowledge, several brokers did this). Then, in 2012, the IRS issued proposed regs that indefinitely extended this relief beyond 2013. In the final regs, not only is this relief made permanent but brokers are prohibited from even voluntarily including the compensation income in the basis.
Thus, for sales of any shares acquired under stock compensation arrangements after January 1, 2014, brokers are required to report only the amount paid for the stock as the cost basis on Form 1099-B. This basis will almost always be wrong (twenty points if you know the two circumstances for which it is the correct basis). Employees will then have to adjust the gain on Form 8949 when they file their tax return to avoid overpaying tax on their sales.
By prohibiting brokers from voluntarily reporting the correct basis, the IRS was hoping to achieve consistency on Form 1099-B. And, having written all the various iterations of flow charts for reporting sales that we have available in our Cost-Basis Reporting Portal, I have to say that I think consistency will be helpful. But I kinda wish the IRS had gone for consistency in the other direction–i.e., requiring brokers to report the correct basis, rather than an incorrect basis.
A Silver Lining
One bit of good news in the regs is that, beginning in 2014, brokers will be required to report sale proceeds net of fees on Form 1099-B. This small change will eliminate about two-thirds of the flow charts in the Cost-Basis Reporting Portal so I expect it also make your educational materials a little simpler as well.
Managing a global equity compensation program entails helping your non-U.S. employees overcome the significant barriers to understanding and accessing their stock compensation. Non-U.S. employees may have to absorb information in a language they aren’t comfortable with and embark on a business relationship with a U.S. broker in addition to the more universal challenge of conceptualizing compensation that does not come in the form of a simple paycheck.
One of the issues that only your non-U.S. participants will face is keeping their W-8BEN current with their broker. I say keeping it current because most, if not all, brokers have incorporated the submission of an initial W-8BEN into the account activation process.
Backup Withholding
Brokers are required to ask for a SSN–or taxpayer ID–when individuals open a new account. If the SSN is missing or incomplete, brokers must process backup withholding, which is 28% through 2012, on any transaction. However, a W-8BEN is a form that establishes an individual (or organization, really) is both not a U.S. resident or citizen and not subject to tax on income that would otherwise be taxable in the United States. Most importantly for your non-U.S. employees, the W-8BEN confirms that shares sold through their U.S. brokerage account are exempt from backup withholding.
Once and Again
Once a person has a U.S. taxpayer ID or SSN, it’s permanent. Being exempt from backup withholding, on the other hand, is not a static status. Therefore, a W-8BEN expires at the end of the third calendar year after it was completed and a new one must be signed in order to continue to be exempt from backup withholding. No matter how the W-8BEN is completed, this can be confusing. A broker can remind employees of an impending expiration, but not to force them to complete it.
Backup Plan
If you have non-U.S. employees, it’s important to coordinate with your broker on how to handle expiring W-8BENs. Your broker can help you identify and target employees with communications. You can even set up a post-transaction verification process to try and catch employees with expired W-8BENs before backup withholding is actually remitted to the IRS. However, you should still have a backup plan for how your company will handle situations where backup withholding has passed the point of no return. Once tax withholding has been remitted to the IRS, the only person who can get the funds back is the individual. Having a protocol in place for how much hand-holding the company will do.
Back Again
In order for your employee to recover backup withholding, she or he must file a tax return, which means a SSN or tax ID is required. Your employee may complete a Form W-7 and submit it along with the tax return, which would most likely be the Form 1040NR-EZ if the backup withholding is the only reason your employee is filing.
If you have more questions about managing a global stock plan, find the answers you need in the NASPP’s Global Stock Plans portal.
The upcoming tax season is shaping up to be a confusing one for your plan participants. They will be receiving new bits of information regarding their equity transactions, all intended to be helpful. The problem with information is that it’s only helpful if you can understand it. As your company gears up for your Section 6039 reporting, don’t push cost basis reporting off as an issue that can wait until 2011 year end.
As Barbara pointed out in her June 2nd blog entry, requirements for cost basis reporting come in phases and 2011 marks the first phase. For regular stock sales, this will be very helpful. For equity compensation, however, this first phase actually provides misleading information. The cost basis that is required to be in Box 3 of the new Form 1099-B is only the purchase price of the shares, not the actual cost basis. While it is permissible for brokers to go above and beyond the requirement ahead of schedule, I doubt that it will be feasible for, especially for sales of ESPP shares, to put processes in place to capture and incorporate the necessary information to report the true cost basis for all sales in 2011.
Tower of Babel
What the communication quagmire boils down to is that employees are receiving an increasing number of communications with numbers that represent some piece of their tax puzzle, but not all the numbers will match or even be relevant. The message to your seasoned employees can be simple and clear: There is absolutely no change in the way you need to report your income or capital gains. This is true for both the Section 6039 information statements that employees may receive for this upcoming tax season as well as the changes to 2011 Forms 1099-B. Your new employees or those who still haven’t fully grasped the concepts behind tax reporting, on the other hand, will need to be given the resources to avoid making costly mistakes.
Double Trouble
Just to review, let’s talk about an NQSO exercise. At exercise, the employee realizes income on the difference between the exercise price and the FMV on the exercise date. For example, if 100 shares of an option were exercised for $10 per share when the FMV is $15 per share, the employee would pay an exercise price of $1,000 and realize ordinary income of $500. The new cost basis for these 100 shares is the exercise price plus the income, which is $1500 or $15 per share.
If the exercise in this example takes place in 2011 and the employee sells 11 shares to cover the taxes due, she or he will receive a Form 1099-B from the broker for the 11 shares showing a cost basis of $10 per share. Leaving the fees and commission on the sale out of the conversation, this means that the employee could easily misunderstand and pay capital gains taxes on that same $5 per share that is reported as income on his or her W-2–effectively paying taxes twice.
The Broker Connection
Brokers are making changes to their back-end systems and the user interfaces to accommodate lot ID for sales of shares. Some brokers already have electronic lot selection for some or all brokerage accounts, but the functionality may not yet apply to shares from employer equity plans. You will want to work closely with your broker(s) to understand what any changes will look like for employees, especially if there will be enhanced modeling features. Get educated on how the broker will determine which lot of shares is being sold through employee accounts and if or how employees can designate specific lot sales when selling online.
Now is also a perfect time to provide information to employees on the acceptable methods for determining cost basis of shares and how to plan for tax filing before they engage in a sale. Many brokers have information and FAQs already available that you can leverage to educate your employees.
Because cost basis reporting is only required for sales of shares that were acquired on or after January 1, 2011, you’ll also want to know what your broker is planning to do about reporting for shares purchased prior to 2011.
Break it Down
If possible, provide your employees with an FAQ that illustrates the cost basis of shares sold from each type of equity award that you offer this year so that next year’s conversation won’t mean starting from scratch. If you need a refresher in any of these, the Conference session, “IRS Cost-Basis Reporting: Are Your Stock Plans Ready?” includes a great list. By working to get employees familiar with the term “cost basis” right now, you help them with their tax reporting for this year, making next year’s conversation easier. If you issue ISOs or have an ESPP, any discussion of cost basis must include a refresher on qualifying vs. disqualifying dispositions, which works perfectly into any plans you have in place for educating employees on the Section 6039 information statements they’ll be receiving.
