The end of December is the end of a purchase period for many companies. If December 31 is a purchase date for you, then you are in the last stages of preparation for the big day. Here’s hoping you have a smooth and stress-free purchase day; and to help you with that, these are my top five last-minute ESPP audit items. Don’t let these be the “gotcha” that gets ya! If it’s already too late, and you find yourself on the correction end of an ESPP blooper, you may want to check your 2008 Conference materials for the “Oops! Fixing ESPP Problems” session.

Plan Parameters

Before running your purchase, confirm that the plan parameters are set correctly in your stock plan administration software. This is especially important if either your software or your plan parameters have changed. If your company has added, or will be adding, an individual purchase limit to the plan in response to the final ESPP Regulations, pay special attention to this setting. One of the most important points to verify is that the purchase price is being calculated correctly. A great way to confirm that the plan parameters are correct is to run a “practice” purchase prior to the actual purchase date, giving you the opportunity to confirm that the purchase price is being calculated correctly as well as the chance to verify all the important data points in your purchase like contribution amounts and limits. Treat the practice purchase as if it is the actual final purchase by performing all the same audits and verifications.

Residual Contribution Amounts

At the end of each purchase, there will be excess contributions associated with each participant. These could be just the ‘fractional share’ amount (an amount too small to purchase one whole share), or an excess resulting from a plan limit. Although most companies carry forward the fractional share amount to the next purchase, if you refund this excess amount back to the participant, then confirm that there are no residual contribution amounts in your stock plan administration software. If you carry the excess forward and apply it to the next purchase, then verify that the residual contribution amount associated with each participant is equal to the excess contribution amount recorded after the previous purchase. Additionally, check that anyone who has withdrawn from the plan after the previous purchase has had their excess contribution amount refunded to them (and that it no longer reflects in the stock plan administration software). This audit helps to prevent you from purchasing an extra share for participants or, if the purchase price for the current purchase is less than the prior period purchase price, one share for an employee who is no longer participating in the purchase at all.

Actual Contributions

As you collect the contribution amounts recorded by each of your payroll groups, you will be confirming that the contribution amounts are correct. One reconciling item you should included, but may have overlooked, is reconciling the total contribution amounts recorded by payroll against the contribution amounts deposited into the clearing account where actual contributions are held. If you have a plan in a country that requires contributions to be held in a separate account, this may mean that you need to reconcile against more than one account. This verification will help insure that the contributions used to calculate purchased shares are correct. If there is a discrepancy between the payroll record and the clearing account, it may indicate that there is an error in a contribution amount, which you can address prior to the purchase.

Eligibility

Qualified ESPPs must provide equal rights and privileges to all eligible employees. One particularly obvious violation of this requirement is when an employee enrolls in the plan, but is prevented from participating in the purchase due to an administrative error. This could be because the enrollment record did not get communicated correctly to payroll, because contributions were not withheld, because the contribution amounts were not communicated to the stock plan management team, or any number of other administrative issues. There are two really great ways to proactively minimize the likelihood of excluding an eligible participant from your purchase. First, send out a communication to all eligible employees confirming whether or not each is currently enrolled (and the contribution level for those enrolled in the purchase). By including employees who are not contributing in this communications, you give them the opportunity to notify you if their enrollment is not reflecting in your system. Second, check your enrollment records against your payroll contribution records prior to the purchase to confirm that each individual who enrolled in the purchase period also has contributions. Uncovering any participants that may have been incorrectly excluded prior to the purchase will give you the opportunity to take corrective action.

Terminations and Withdrawals

As part of your final purchase audit, take a close look at participants who enrolled at the beginning of the period, but who have withdrawn from the plan either as an active withdrawal or because of a termination. You will want to pay special attention to problem situations like mobility, when contribution records may not be transferred over to the new payroll location, or changes in status, when contributions may be inadvertently discontinued or the employee record may be incorrectly treated as a termination. In this audit, your objective will be to match either a termination record or withdrawal record to any employee who has an enrollment record, but is not on the final contribution list that you recieve from payroll. Be sure that you understand exactly how employees transferring from one location to another will reflect in your HRIS database so that you can confirm all termination records are legitimate. This will help you to identify any employees that were marked as withdrawn from the plan when they moved from one payroll location to another. If you allow employees to reduce their contribution amount to zero without withdrawing, then add this to the possible scenarios as you confirm the termination and withdrawal records for your purchase.

Bonus for International Plans: Exchange Rates

Whether you receive contribution amounts from your international payroll teams already converted to U.S. dollars, or you must apply an exchange rate to the contribution amounts directly, take a moment to verify that the correct exchange rate is used. Don’t forget to check for silly, but costly, mistakes like an inaccurate decimal point or a formula that is pointing to the wrong field in your spreadsheet.

As you know, the final regulations for Section 423 ESPPs are out. Although the actual tax code can be a pretty dry read, the regulations are pretty straightforward and the examples provided are really good. Don’t be intimidated by them; take the time to review them yourself and then join us on January 20th for our webcast, Final Regulations on Sections 6039 and 423: Implications and Action Items.

Happy New Year to you all! We wish you the very best and look forward to a spectacular year in 2010!

-Rachel