April 15th is looming and many of your employees will be scrambling to get their taxes filed. Since crunch time exaggerates confusion, this last push will really highlight the top issues your employees face when it comes to reporting their equity compensation.
Keep a Tally
It’s a busy time of year. I know you have a lot going on, and fielding tax questions from employees only makes it busier. But, give this a try, anyway. Keep a tally of the types of questions that you get from employees who are trying to file their tax returns. Better yet, see if you can bring your HR teams in on the count (or at least get feedback from them). This is the best feedback on your communications efforts that you can get from your employees. They may love your seminars, you may have high participation rates, you may even have 100% grant acceptance. But, when it comes down to actually getting the right numbers onto the right tax forms, employees absolutely must have absorbed what you’ve been telling them. If you see a particular type of question come up more often than any other, then you know what information to tackle in the coming year. If you get too many questions to even begin to keep track, then tax time is telling you to step up your game and get communicating.
More Choices Mean More Issues
If you have multiple equity compensation vehicles (say, an ESPP, NQ options, and RSUs), employees have a lot to sort through when tackling their tax returns. If they sold shares during the year, they need to understand how to find the cost basis of those shares and whether they are reporting income or capital gains. If you find that a significant number of questions center around employees’ inability to distinguish between their different pieces of equity compensation, then maybe tax time is telling you to reconsider the mix as well as the choices. Even just limiting tax payment methods can reduce the confusion.
Walk the Line
A difficult issue that stock plan management teams deal with is exactly how to help an employee understand their equity compensation well enough to file a correct tax return without actually offering tax advice. I think the best way to avoid the two extremes of either giving out too much information or frustrating employees by just sending them away unassisted is to have standard communications and samples ready. You can get buy-off from your legal department on the communications, desiminate them to HR locations, and make them available on your intranet. This helps to control the message that’s going out to employees and will save you time when you can direct an employee to a resource instead of walk them through the information personally.
If you find that you are getting a significant number of employees begging for tax help beyond what is in your standard communications, tax time may be telling you that employees need tax advice resources. Check with your legal team and your current service providers to see if you can direct employees to a list of financial advisors that understand equity compensation.
NASPP Resources – Be a Part of the Solution!
We now have an Employee Communications portal on the NASPP site. Included in the content are samples of how other companies are helping employees understand their equity compensation. This is a great place to share and learn, so don’t be shy about submitting your own communications. You can submit via the Employee Communications portal, or by contacting me directly. You can find my contact information in the NASPP On-line Member Directory.
If you signed up to participate in the 2010 Domestic Stock Plan Design Survey, but haven’t completed it, yet, don’t forget that the deadline for completion is Friday, April 9th! Remember, anyone who completes the survey will get an additional 10% discount on 2010 Conference registration fee.
Tax season in the U.S. is fast approaching, and now is the time to consider how you are helping your employees understand the tax implications of their equity compensation. Like most stock plan administration processes, educating and communicating with your employees about stock plan participation and taxes should be an ongoing, year-round process and should be customized for different employee populations.
The impact of equity compensation can be confusing and intimidating for employees, but it doesn’t need to be. I’m sure that many of you have experienced the frantic barrage of calls that come in as the individual tax filing deadline approaches. If you reach out to your international HR folks, you will find that they experience a similar frenzy as they attempt to help employees who are trying to file their tax returns. Even though I can certainly sympathize with employees, this can be a burden on the time resource for not only stock plan services, but also the HR and payroll departments. Once you have the employee (or their tax preparer!) on the phone, it is difficult to offer information without stepping over the line and offering actual advice. It’s much easier to tackle this problem in advance, on paper, and with the blessing of your legal department!
If you find that you are getting a large number of employees asking the same question, this is an indication that you are missing some opportunity to educate your employees. There will always be those who do not read their notices, listen to your explanations, or take advantage of any education you make available. There will also always be some employees who have done their part, but still are not able to understand or have a complicated situation that does not appear to be covered in any of your examples. However, a large percentage of the questions that stock plan administrators and HR receive at tax time can be reduced by better employee education. You should be collecting and sharing questions and “standard” answers in preparation for tax season. If at all possible, it is very helpful to have a database of sorts that is accessible to those at your company who will be answering questions with example questions and answers so that there is consistency in the information employees are receiving. Even if the best answer is “I’m sorry, this really is something you will need to ask your tax preparer”, everyone who answers that question should know to respond in this way.
The first step in creating a solid employee education program for tax implications is to identify your different employee populations both in the U.S. and internationally. Then, you will want to identify what information you can provide to these employees that will help them file their individual tax returns. You should employ advice and help from tax advisors with local expertise, and coordinate with your local HR and payroll resources. Once you feel comfortable that you know what information each employee population may need, you will want to determine the best strategy for getting the information to them. Some populations will be comfortable with obtaining information online (and have access), others may need hard-copy handouts and face-to-face interactions. There may be situations where translation is needed.
Don’t be shy about taking every opportunity to remind employees about basic tax information. The first opportunity that you have to communicate the income and tax impact for you stock plans is during the on-boarding process. As part of the hiring or on-boarding process, employees who are eligible for equity compensation should receive or have access to information on income and tax withholding along with any other information you distribute about your stock plans. The company intranet is a great place to keep information posted as well, especially if you have a way to distinguish between participants employed in different countries. As part of the new hire process, make sure that employees know what resources are available.
Seminars or smaller meetings throughout the year–especially if you can make them mandatory–are a great way to increase visibility for your stock plans, solicit feedback from your employees, and provide information about tax time. It is especially helpful if you can make arrangements to have 3rd party financial advisors available to take questions or meet with employees individually. Examples can be very helpful for employees. If you have a few examples for situations, then employees can determine which one (if any) they fall under. For instance, if you have a 423 qualified ESPP program in the U.S., then an example of the purchase and then both a qualified and disqualified sale of shares will help employees understand the implications of either choice.
Finally, there is tax time. When you send out W-2s (or the equivalent in other countries) to employees, you have either their full attention, or their tax preparer’s. If possible, a short FAQ on income and tax withholding enclosed with the W-2 can be a great way to provide some information to employees. At the very least, you will be able to alert the employee to the fact that their taxes may be impacted by their equity compensation.
So – take a moment to review your employee education program and see if you are taking advantage of these opportunities to get employees comfortable with the basic impact of their equity compensation on their personal income taxes.
All this talk of tax withholding got me thinking about the reconciliation challenges that surround your employee tax withholding on equity compensation. As your Payroll team prepares to send out Form W-2s or 1099s, and their equivalents internationally, the stock plan management team should be involved in efforts to confirm the income and withholding amounts for stock plan transactions. This can be a pretty daunting task if you’ve saved it all up for the end of the year, so hopefully you have been reconciling periodically throughout the year. You may be able to find some relief with employees in countries where the tax year does not end in December (such as the UK); these employees may be set aside until after you have reconciled for the deadlines coming up immediately in the new year. Here are some areas that you should focus on:
Income Reported
You will want to make sure that the income amounts reported in each payroll system match the income amounts reflected in your stock plan administration database. If your company is tracking different sources of income separately (restricted stock vs. options or ESPP), then the separate sources will need to be balanced separately. However, the total income amounts should also be reconciled as a confirmation. Pay special attention to employees who may have transferred between payroll groups during the year. This would include not only your globally mobile employees, but also local transfers or administrative transfers (for example, if you have a subsidiary locally or if employees from an acquisition stayed under their own payroll for a period of time). You will want to confirm that no employee income has fallen through the cracks or been double-reported. However, in the case of income from globally mobile employees, you may have situations in which the double-reporting of income is correct and intended, which you will need to also track and confirm.
Tax Withholding
Reconciling the tax withholding amounts can be trickier than reconciling income. This is because there are more situations in which the amount of withholding reported should not equal the amount actually withheld at the transaction because of an administrative policy. For example, there are U.S. states where withholding amounts are difficult to determine in advance (like Kentucky) where your company has chosen to true-up through payroll. This is also true internationally; your company may be withholding at a higher rate on the transaction and then refunding excess through the local payroll either because you have implemented a foreign disbursement process that requires a 100% sell or because you have difficulty obtaining individual tax rates. Hopefully, your company has thoroughly researched these decisions and is not creating unnecessary exposure by withholding shares in excess of statutory minimums or other issues on excess withholding (see Barbara’s past two blog posts here and here). You should know in advance what these standard exceptions are and account for them in the reconciliation process.
There are also the unusual exceptions (typically, these are mistakes that have been made). These may include over or under withholding from timing issues on communicating capped social taxes between payroll and stock plan services or situations where an incorrect tax withholding was made and later corrected through either payroll or stock plan services, but not both. You should be identifying and resolving these throughout the year, but also keeping a list for your reconciliation. Sometimes, the reconciliation itself brings these issues to light!
Special Circumstances
There are circumstances like death, divorce, change in status between employee and non-employee participant, and cross-border income and taxation that may require special attention during your reconciliation. In the case of the death of a U.S. employee, you should not be withholding federal income tax on any transactions executed by the estate or beneficiary. You should only be withholding FICA on transactions that take place in the same tax year as the death, and the FICA amount should be reported on the employee’s final Form W-2. Divorce is a little more complicated depending on the divorce settlement arrangements. Be sure that you are carefully tracking any options in which the company’s withholding obligations have been impacted from the divorce–have them flagged in some way and have a notification policy in place for both parties should they transact on those grants. When an employee becomes a contractor or non-employee director (or vice versa), you will need to pay close attention to how the income and tax withholding is handled. This reconciliation process is a good time for you to confirm that you have not withheld on non-employee income for these individuals. You will also need to divide the W-2 income from the 1099 income when reconciling. Cross-border income reporting and tax withholding can be complex. Whatever your policy has been on reporting and withholding for cross-border situations, you will need to set these aside and reconcile them separately at year-end.
Whatever your process is, start early and engage your payroll team(s) as early in the year as you can. For more information on tax withholding, check out our Tax Withholding and Reporting portal. Also, if you missed Barbara Baksa and Robyn Shutak’s 2nd Annual Webcast on Tax Reporting this week, keep an eye out for the transcript and materials to be posted on our Audio/Video Webcasts Archive. All NASPP members should be taking advantage of these free webinars–it’s a fantastic perk to your membership! Our next webinar is on December 18th and will be presented by Frederic W. Cook: Moral Hazard and Executive Compensation – Balancing Risk and Reward.
You can find more information about good practices for year-end in the NASPP’s Year-End Procedures portal. Also, Robyn Shutak and I will be presenting a FreeSMARTs webcast on year-end reporting next Wednesday, December 17th at 1:30 pm EST. Register with Computershare here.
This Tuesday, I had the privilege of attending the CEPI’s 5th Annual CEP Symposium at the Santa Clara University. NASPP’s own Robyn Shutak and Barbara Baksa both received 2008 Volunteer Excellence Awards, and Barbara had the exceptional honor of being a “Super-SME”(subject matter expert)! If you are a CEP already, don’t forget that the volunteer efforts by outstanding CEPs like Robyn and Barbara are an essential part of the CEP program. For more information on volunteering, visit the CEPI site for CEP designees at http://www.scu.edu/business/cepi/current_ceps.cfm. If you are still in the process of earning the CEP designation, there are some fantastic opportunities through the NASPP to gain the knowledge expertise you will need like the Stock Plan Fundamentals and the Restricted Stock Essentials.
The keynote address and general session of the CEP Symposium centered on an issue that most companies should be grappling with today: the idea vs. the reality of equity compensation programs. The keynote address delivered by author and professor Hersh Sefrin really highlighted for me not only how psychology dominates our markets, but also the success (or lack thereof) of our equity compensation programs. It ties closely with companies moving to performance-based compensation in an effort to tie principal (shareholder) interests with agent (executive) interests. One thing that stood out for me is the realization that people are more risk averse when they have the potential to lose a “sure gain”. In other words, once an executive has reached a point at which their equity compensation has significant value, they may be less likely to take productive risks with the direction of the company than they would be while they still want to see an increase in the value of their equity compensation. A real way to counter this is to balance out the carrot with the stick; to incorporate a potential for loss or penalty that will create incentive to continue to be innovative and engage in productive risk. For more information on performance-based equity compensation, check out the Performance Plans portal on our site.
The general session, delivered by Sheila Lyons and Miriam Solomon of BNY Mellon, was on communicating the value of your equity compensation program. An essential part of communicating your program is to have a solid idea of what goal (or goals) your company is pursuing with equity compensation. It is important to make sure that the goal of the company is being met by the program. One common example of misalignment that I see is when the company would like to promote an ownership culture across the board as the main goal, but is not able to give grants that are sizable enough to be of any significance to the participant. Another issue to watch out for is conflicting goals within the program. If a company wants to use stock as a part of compensation and as a way to promote an ownership culture, then these two goals may conflict with each other and create difficulty when trying to communicate the value of the program to employees (will you compare it to salary/compensation or promote share retention?). I thought the best idea to come out of this session is that companies should probably be looking at stock plan communications from a marketing viewpoint to promote the value of the program to employees. This means identifying employee needs and promoting education around those needs. Some great ways to do this are to interview or survey employees to understand their experiences with the program, to work with managers so that they can talk with employees in a smaller setting, and to bring financial planning education into the mix through a 3rd party that does not represent the company. Don’t be afraid to get outside your comfort zone and employ some clever marketing when it comes to your equity compensation!