As announced yesterday, we’ve extended the deadline to participate in the Domestic Stock Plan Administration Survey that the NASPP co-sponsors with Deloitte Consulting. For today’s blog entry, I have six things I am excited about learning from this year’s survey.
Domestic Mobility Compliance: New this year, we’ve added questions on tax compliance for domestically mobile employees. This is an area of increasing risk and I’m curious to learn how far companies have come in their compliance procedures.
ESPP Trends: This survey takes an in-depth look at the design and administration of ESPP plans. I hear rumors of increased interest in ESPPs—both in terms of companies implementing new plans and enhancing the benefits in their existing plans; I’m excited to see if this plays out in the survey results.
Stock Plan Administration Staffing: This is the only survey I’m aware of that collects data on how stock plan administration teams are staffed, the department that stock plan administration reports up through, and how companies administer their plans. It is always intriguing to see the trends in this area.
Ownership Guidelines: The prevalence of ownership guidelines has increased dramatically in the last decade, with 80% of respondents to the 2014 survey reporting that they have these guidelines in place. Has this trend topped out or will we be reaching near universal adoption of ownership guidelines in this survey?
Rule 10b5-1 Plans: These trading plans have become de rigueur for public company executives, with 84% of respondents to the 2014 survey allowing or requiring them. We’ve expanded this area of the survey to capture more data on policies and practices with respect to these plans.
Director Pay: The survey reports the latest trends in the use of equity in compensating outside directors. I’m particularly interested in seeing what percentage of respondents indicate that they have imposed a limit on the number of shares that can be granted to directors. This is a best practice to avoid shareholder litigation but adoption of it was low in the 2014 survey—have we made progress on this in the past three years?
If you are interested in these trends, too, you’re going to want to participate in the survey so that you’ll have access to the results. It’s not too late to participate, but you have to do so by the end of this week. We’ve already extended the deadline once; we can’t extend it again. Register to participate today!
– Barbara
* Only issuers can participate in the survey. Service providers who are NASPP members and who aren’t eligible to participate will receive full access to the published results.
For today’s blog, we have a special guest entry from Emily Cervino of Fidelity Stock Plan Services on a subject near and dear to my heart: defining FMV as the prior day close for purposes of determining taxable gain on award vesting events and the price of shares purchased under your ESPP.
What a Difference a Day Makes! Considering Prior Day Close
By Emily Cervino of Fidelity Stock Plan Services
At the recent NASPP Annual Conference in Houston, I had the opportunity to present “This Ain’t My First Rodeo: Lessons Learned about Equity Compensation.” I took advantage of the new format introduced at the conference: laser-focused, 20-minute sessions during breaks—as an alternative to the traditional, more in-depth breakout panels. I love this format. Short sessions appeal to conference-goers who are looking to cram in as much learning as possible, as well as those whose shorter attention spans make an hour-long, detailed session a hard sell.
I broke this micro-session into even smaller bits and used it as an opportunity to talk about four concepts that can make equity professionals’ lives easier. One concept, which I’d like to review here, is reconsidering the fair market value (FMV) definitions used for equity awards. FMV is an important concept used to set the price on stock options, calculate the taxable income on cash exercise and restricted releases, and determine the purchase price for ESPP.
Back when I started out, things were simpler. FMV was used for grant pricing, and, when it came to calculating taxable income on stock option exercises, where the vast majority of transactions were same-day sales, the actual sale price was utilized. Today, the equity landscape has changed dramatically. The majority of grants now come in the form of restricted stock, which doesn’t include an exercise. Rather, as a time-based vehicle, restricted stock releases (creating a taxable event) are based on a preset schedule.
According to the NASPP Stock Plan Design Survey, 87% of companies use close or average as the FMV to calculate taxable income on restricted stock.(1) Among clients of Fidelity Stock Plan Services, we see very similar results, with 85% of companies using close or average.(2) Which means, for most companies, taxable income can’t be calculated until the market closes on vest date. The exceptions (12% of NASPP responses, 13% of Fidelity clients) are using prior day close (or average), a better option that provides them with a full additional day for calculations! That means on the day before vest date, the FMV is determined as of market close, and the restricted release process can begin, allowing shares to be delivered to participants sooner.
And the benefits don’t end there. This is also a great strategy for ESPP. NASPP doesn’t specifically ask about FMV for ESPP, but in the Fidelity client base, while close and average still rule, we see 5% using prior day close, and a full 20% using current day open price as FMV, providing the benefit of extra hours to one-in-four companies processing their ESPP.
So why do most companies stick with close or average? This may be one of those things that falls into the “we’ve always done it this way” category. While many companies have changed the award types they grant, their FMV definition hasn’t yet evolved.
Plan Sponsors should check out their plan documents. It may be that FMV is only defined for grant pricing, where close or average is a great strategy. The plan document may provide flexibility with respect to the FMV used for tax purposes and/or ESPP. Even if the plan prescribes close or average FMV for tax and/or ESPP, a switch to prior day close (or current day open price) could be effected at the board or committee level and would not require shareholder approval.
Check it out! The gift of time is priceless.
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[1] 2016 NASPP Domestic Stock Plan Design Survey (co-sponsored by Deloitte Consulting LLP)
2 Fidelity client base, as of 9/30/2016
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.
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Here we are again at the start of another season of Section 6039 filings. Nothing much has changed with respect to Section 6039 filings in recent years, so imagine my surprise when I learned that the IRS had updated Form 3922.
Form 3922 Grows Up
As it turns out, the only update to the form is that it has been turned into a fill-in form. If you are planning on submitting paper filings, this allows the form to be filled in using Adobe Acrobat, so you don’t have to scare up a typewriter or practice your handwriting. I haven’t owned a typewriter since college and even I can’t read my handwriting, so I am a big fan of fill-in forms.
Unfortunately, this is just about the least helpful improvement to the forms that the IRS could make. Form 3922 is for ESPP transactions. ESPPs tend to be offered by publicly held companies with well over 250 employees. Chance are, if a company has to file Form 3922, the company has more than 250 returns to file (less than 250 ESPP participants is probably a pretty dismal participation rate for most ESPP sponsors) and the returns have to be filed electronically. The fill-in feature doesn’t impact the electronic filing procedures; it is only helpful for paper filings.
It would have been more helpful if the IRS had made Form 3921 a fill-in form. Given the declining interest in ISOs (only around 10% of respondents to the NASPP/Deloitte Consulting 2016 Domestic Stock Plan Design Survey grant ISOs), companies are more likely to be filing this form on paper. The IRS notes, however, that it selected Form 3922 to be made into a fill-in form because they receive so few filings of it on paper. I guess the IRS’s goal was to appear helpful but not actually be helpful. Your tax dollars at work.
A Fill-In Form Isn’t As Helpful As You Think, Anyway
As it turns out, having a fill-in form may not be that helpful, anyway. I was thinking you could fill in the form, save it, and then email it to the IRS but it doesn’t seem like this is the case. No, even if you fill it in using Adobe Acrobat, you still have to print it out and mail it to the IRS. And the requirements for printing the form out still include phrases like “optical character recognition A font,” “non-reflective carbon-based ink,” and “principally bleached chemical wood pulp.” I think this means that you have to print the form on white paper, using black ink that isn’t too shiny, and using the standard fonts in the fill-in form. But I’m not entirely sure.
What About Form 3921?
When I first saw that Form 3922 is now fill-in-able, I assumed, perhaps naively, that a fill-in Form 3921, which would truly be useful, would be available any day. But that was back in September and still no update to Form 3921. Upon reflection, especially given the IRS’s statement about why this honor was bestowed upon Form 3922, I think I may have been overly optimistic.
Leap year can make things complicated. For example, if you use a daily accrual rate for some purpose related to stock compensation, such as calculating a pro-rata payout, a tax allocation for a mobile employee, or expense accruals, you have to remember to add a day to your calculation once every four years. Personally, I think it would be easier if we handled leap year the same way we handle the transition from Daylight Saving Time to Standard Time: everyone just set their calendar back 24 hours. Rather than doing this on the last day of February, I think it would be best to do it on the last Sunday in February, so that the “fall back” always occurs on a weekend.
In a slightly belated celebration of Leap Day, I have a few tidbits related to leap years and tax holding periods.
If a holding period for tax purposes spans February 29, this adds an extra day to the holding period. For example, if a taxpayer buys stock on January 15, 2015, the stock must be held for 365 days, through January 15, 2016 for the sale to qualify for long-term capital gains treatment. But if stock is purchased a year later, on January 15, 2016, the stock has to be held for 366 days, until January 15, 2017, to qualify for long-term capital gains treatment. The same concept applies in the case of the statutory ISO and ESPP holding periods–see my blog entry “Leap Year and ISOs,” (June 23, 2009).
Even trickier, if stock is purchased on February 28 of the year prior to a leap year, it still has to be held until March 1 of the following year for the sale to qualify for capital gains treatment. This is because the IRS treats the holding period as starting on the day after the purchase. Stock purchased on February 28 in a non-leap year has a holding period that starts on March 1, which means that even with the extra day in February in the year after the purchase, the stock still has to be held until March 1. See the Fairmark Press article, “Capital Gains and Leap Year,” February 26, 2008.
Ditto if stock is purchased on either February 28 or February 29 of a leap year. In the case of stock purchased on February 28, the holding period will start on February 29. But there won’t be a February 29 in the following year, so the taxpayer will have to hold the stock until March 1. And if stock is purchased on February 29, the holding period starts on March 1. Interesting how none of these rules seem to work in the taxpayer’s favor.
The moral of the story: if long-term capital gains treatment is important to you, it’s not a bad idea to give yourself an extra day just to be safe–especially if there’s a leap year involved.
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.
The NASPP’s 2014 Domestic Stock Plan Administration Survey (co-sponsored by Deloitte Consulting LLP) is now open for participation. This is the industry’s most comprehensive survey on stock plan administration, easily worth the cost of NASPP membership. Seriously–consulting firms charge upwards of $1,000 to participate in surveys that offer less data with fewer respondents. We let you participate for free–but issuers have to participate to receive the full survey results. Don’t put it off; you’re going to want this data and you only have until April 25 to complete the survey.
For today’s blog, I highlight just a few of the many data points in the survey that I am eagerly anticipating an update on. These are hot topics today and I’m looking forward to finding out where current practices stand with respect to them:
The Latest Trends in ESPPs: Rumor has it that companies have been implementing new ESPPs and have been enhancing the benefits (discount, lookback, etc.) in their existing ESPPs. We saw a decline in both the number of ESPPs and the benefits offered under ESPPs in the last survey, so I’m very excited to see if this trend really has turned around.
Automatic Exercise on Expiration: For the first time ever, the survey collects data on this emerging practice. I think it makes a lot of sense so I’m very interested to see what percentage of respondents have implemented this program.
Rule 10b51 Plans: Has the recent negative attention that Rule 10b5-1 plans have received from academics and the media impacted the use of these plans? My money says no; if anything, I expect usage to have increased a bit; we’ll see if I’m right when the survey results are published.
Stock Ownership Guidelines: The 2011 Stock Plan Administration survey saw a 35% increase in the percentage of companies that have stock ownership guidelines, a remarkable increase–far higher than we expected based on responses to the 2007 survey. If everyone that said they were considering implementing stock ownership guidelines in 2011 survey did actually implement them, close to 80% of all respondents will now have these guidelines in place.
Social Media: The topic du jour when it comes to educating employees these days is the use of social media (Facebook, Twitter, LinkedIn, etc.) I think these tools have significant potential for reaching younger employees. I look forward to finding out what percentage of respondents use them now and setting a baseline that we can use for comparison purposes in future years.
April 25 will be here before you know it and you are definitely going to want to have access to the full survey results. If you are an issuer, register to participate today. (Service providers that are not eligible to complete the survey can access the full survey results at no cost, provided they are members of the NASPP. This access is available to service providers only; issuer companies must complete the survey to access the full survey results.)
The topic du jour for my Google alerts for the past several days has been that companies are going to be enhancing their ESPPs in the next few years. A recent survey by Fidelity found that 51% of companies that offer an ESPP are planning on modifying their plan in the next two to three years, and 31% of those companies are planning on increasing the discount.
ESPPs: Better than Sliced Bread
For those of us that are strong proponents of ESPPs, this is welcome news. I think ESPPs are the best thing since sliced bread (and I say this as true carb lover) for a number of reasons:
Financial: ESPP expense is usually insignificant compared to stock option and full value award plans; on a per-share basis, even the most generous ESPP is usually cheaper than both an option or full value award; and ESPPs are never underwater, ensuring that a benefit is delivered to employees in exchange for the expense recognized by the company.
Shareholder Optics: The plans are minimally dilutive and rarely encounter shareholder opposition. And employees tend to hold shares acquired under the ESPP.
Employees: Right now, with interest rates at laughably low levels, ESPP make a great investment vehicle for employees. There is no other vehicle with the same low risk where you can earn a 17.6% return in, say, six months.
This is a win-win-win for everyone: employees, shareholders, and the company. The preferential tax treatment is nice too.
Decline in Benefits
But, despite these benefits, we have seen an erosion in ESPPs since ASC 718 went into effect. In the NASPP’s 2011 Stock Plan Administration Survey (co-sponsored by Deloitte):
The percentage of respondents offering ESPPs was 52%, down from 64% in 2004 (the last survey before ASC 718 went into effect).
Of those respondents with an ESPP, the percentage offering a 15% discount was 71%, down from 87% in 2004.
Lookbacks fared even worse: only 62% of respondents in 2011 offer a lookback, down from 82% in 2004.
And offering periods got shorter: in 2004, 43% of respondents offered a 12 or 24 month offering period. In 2011, that percentage dropped to 20%.
Where Do You Stand?
So I’m very excited to see Fidelity’s press release stating that companies are reinvigorating their ESPPs. I look forward to a day when all NASPP members proudly offer the most generous ESPP. For now, I’m curious–where does your company stand:
In today’s entry I highlight a few articles that are available on the NASPP website that I think are particularly valuable. Many of these articles are updated on an annual basis; together they comprise the core foundational knowledge necessary to be proficient in stock compensation.
Restricted Stock and Units: The article “Restricted Stock Plans” covers just about anything you could want to know about restricted stock and unit awards and is updated annually.
ESPPs: “Designing and Implementing an Employee Stock Purchase Plan” takes an in-depth look at the regulatory and design considerations that apply to ESPPs, particularly Section 423 plans. This is a reprint of my chapter in the NCEO’s book “Selected Issues in Equity Compensation” so it is updated annually.
Securities Law: Alan Dye and Peter Romeo’s outlines of Rule 144 and Section 16 provide great overviews of these areas of law and are also updated annually.
I’m sure that all of you are completely on top of this, but just in case you’ve gotten a little distracted by all the excitement over the new tax withholding rates and the American Taxpayer Relief Act, don’t forget that it’s time to file the returns and distribute the information statements required under Section 6039 for ISOs and ESPPs.
Section 6039 Deadlines Coming Up
The information statements need to be distributed to employees by January 31 and the returns need to be filed with the IRS by February 28 (if filing on paper) or April 1 (if filing electronically).
The returns are filed on Form 3921 for ISOs and Form 3922 for ESPPs. You can simply provide employees with a copy of the returns that will be filed with the IRS or you can provide them with a substitute statement, provided the statement complies with the IRS’s requirements (which aren’t terribly onerous despite what one law firm memo I’ve seen suggests).
What If You Did Forget?
Well, you’ve still got plenty of time on the returns that are filed with the IRS, especially if you file electronically, which is actually probably easier than trying to file on paper anyway. There are several providers than can take your data, whip it into shape, and file it electronically for you–see the NASPP’s webcast “Comparing Solutions for Section 6039 Compliance. Not only is the deadline (April 1–we get an extra day this year because March 31 is a Sunday) still several months off, but you can file for an automatic, no-questions-asked 30-day extension using Form 8809.
But you’d better get cracking on the employee statements. There’s no automatic extension available here–if you need an extension you need to write a letter to the Extension of Time Coordinator in the Information Returns Branch at the IRS, include a good excuse (the dog ate my information statements?), and hope the IRS is feeling generous. [A couple of thoughts come to mind: 1) How cool is that job title? I think it would be awesome to tell people that you are the “Extension of Time Coordinator.” I bet a lot of people want to be your friend. I wonder if this person also has the authority to suspend birthdays? And, 2) if you are in need of an extension, it’s nice to know that there are so many other people in the same boat that the IRS has actually created a position to handle all the requests.]
If any of my readers have requested (or have clients that requested) an extension on the employee statements I’d love to hear from you–how quickly did the IRS respond, was the extension granted, did they give you are hard time about it, etc.?
More Information
The NASPP has loads of resources on Section 6039–Section 6039 is practically our middle name! Our Section 6039 Portal brings together all of our great resources on this topic, including numerous blog entries we’ve written on the topic as well as many other articles we’ve collected and various IRS publications that relate to this reporting obligation.
New this year, we’ve posted the article “6039 Gotchas!” by My Equity Comp to the portal. And the article “Figuring Out Section 6039 Filings” answers every question you could possibly have on either the returns or the statements. If it doesn’t, let me know so I can update it.
In addition to the webcast on providers that I mentioned above, we have a “lessons learned” webcast on 6039 filings.
Last year was the first year companies filed Section 6039 returns with the IRS for ISO and ESPP transactions. Those of us who lived through those filings are a little older and wiser now. So, as we head into our sophomore year of 6039 returns, I have a few tips for you.
Update Your FAQ
Participant statements have to be sent out by January 31, so updating your FAQ on Forms 3921 and 3922, as well as any other communications you include with the statements, should be first up on your list of things to do. The materials you created last year probably refer to the forms as “new,” state that this is the first year employees are receiving them, and fail to mention Form 8949 (and instead just tell employees to complete Schedule D). I’ve updated the sample memos and FAQ available in the NASPP’s Section 6039 Portal:
If you are interested in seeing what I changed in the FAQ, I’ve posted a redline version of it in the NASPP Document Library. And, of course, I posted the updated Section 6039 Flow Charts last week.
Deja Vu
Forms 3921 and 3922 are currently not available through the IRS’s online order form (if you recall, last year the forms weren’t available until mid-March, well after the deadline for filing on paper). Yesterday was a federal holiday, so I couldn’t verify whether or not the forms were available through 1-800-Tax Forms, but I suspect not. If the forms aren’t available right quick, companies will have to use substitute statements for participants again this year. Hopefully the forms will be available this year before the deadline to submit paper filings. If they aren’t, anyone filing on paper will need to file for an extension on Form 8809. It’s best to file for the extension online, using the IRS FIRE system, even if you are submitting the returns on paper.
Lessons Learned
Here are a few tips and other things that I learned from last year’s filings:
You can email the IRS many, many times with the same question and they won’t take out a restraining order against you. But they also still won’t answer your question. This probably isn’t the kind of tip you were looking for.
You have to include employees’ full social security numbers on the participant statements. Yes, I know that employees already know their social security numbers and that this presents a security risk. It’s not my rule–email the IRS about it (see my first tip).
If you are having trouble figuring out your grant date and grant date FMV for Form 3922, you are probably thinking too much. If you have a look-back, it’s the same date and FMV you use to determine the purchase price. If you don’t have a look-back, I take it back; you aren’t thinking too much.
The corporation on Form 3922 has to be the corporation whose stock is purchased under the plan, even if this isn’t the company that operates the plan. I’ve asked this question of IRS staffers multiple times and I get the same answer every time; I don’t think they are going to change their minds. But I think you could include the address of the company operating the plan rather than the address of the corporation whose stock is purchased, so that any IRS communications about the filings at least go to the right place.
If you are filing electronically, you probably went through some angst last year relating to rounding shares and/or monetary amounts. Publication 1220 was updated this year to specify that a true round should be used on share amounts. There’s still no instruction on how monetary values should be rounded, but it would seem reasonable to do the same thing. Then again, this seems like such an immaterial issue that I think you could probably use any reasonable rounding method (up, down, true) you want, so long as you are consistent about it.
Account number is really a transaction number. And it’s important, because if you have to file a corrected return, the account number could be critical to matching the corrected form to the original filing. You can come up with your own system for assigning account numbers, just so long as each transaction you report has a unique number and the numbers aren’t longer than 20 digits. They can include numbers, letters, and symbols.
You have to file Form 3921 for all ISO exercises, even same-day sales, even though an AMT adjustment is necessary for same-day sales. This is the way the law was passed by Congress, so the IRS can’t really do anything about it. Blame your Congressman.
Dead men don’t wear plaid but they do still get Section 6039 statements. The death of an employee does not relieve you of the obligation to file Forms 3921 and 3922.
NASPP “To Do” List We have so much going on here at the NASPP that it can be hard to keep track of it all, so I keep an ongoing “to do” list for you here in my blog.
