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.
This week, we feature another installment in our series of guest blog entries by NASPP Conference speakers. Today’s entry is written by Jon Doyle of International Law Solutions, who will lead the session “The Amazing Race–Revisiting Global ESPPs.”
Companies are increasingly revisiting global ESPPs. Whether your company has offered its ESPP globally for years, is considering starting or re-starting an ESPP, or expanding your existing ESPP into new countries, this session is for you. The panel will take an in-depth look at global ESPPs.
Increasingly, with complex and expensive regulatory obstacles, as well as low participation in some cases, companies are more selective in offering their ESPPs around the world. In addition, companies that may have suspended their ESPPs internationally due to compliance, participation and budgetary concerns, are increasingly exploring offering their ESPPs in new markets. The panel will discuss the importance of setting expectations on participation and educating executives and local management about global ESPPs.
We will examine the regulatory challenges of a global ESPP, including the unique issues presented by Section 423 plans and how a non-423 component may be of use to you. We will discuss balancing the goal of offering an ESPP broadly while staying compliant. We will explore how to navigate through compliance and administrative roadblocks, as well as the impact of a company’s corporate structure on these plans. The panelists will share their experiences and best practices for successfully offering ESPPs globally.
Don’t miss this session, “The Amazing Race–Revisiting Global ESPPs,” presented by Jon Doyle of International Law Solutions, Bob Hartley of BMC Software, Wendy Jennings of Riverbed Technology, and Kate Lloyd of Accenture at the 20th Annual NASPP Conference in New Orleans, October 8-11.
Let’s face it: we live in an era of information abundance. Yes, I can remember the days when I had to go to the library to research something on a microfilm. If you mention the word “microfilm” to kids today, all you’ll get is a blank, puzzled stare in return (really, try it!). In recent years I’ve started to realize that we have access to so much information, that at times it seems like too much information (“TMI”). I think it hit me when my children’s pediatrician told me to stop googling (yes, googling is officially a verb) every little symptom. Why? Because there is so much information out there it’s hard to validate and assign credibility to what you read online. The term “TMI” isn’t in the Merriam-Webster Dictionary, but I did find it in the Online Slang Dictionary, so it appears that acronym may be here to stay.
What does my rambling have to do with stock compensation? This blog was prompted by an article across my Google alerts last week that referenced ESPPs. The piece in question was published by a reputable news agency, and yet I found misleading and inaccurate information about the mechanics of how ESPPs work. This prompted me to think about what our employee populations must be googling about their benefit plans, and even more concerning, what they are relying on as “truth”. For example, in the article titled “5 Ways to Increase Your Net Worth” and published by U.S. News & World Report, the author says: “ESPPs allow employees to withhold a portion of their paycheck to purchase company stock at a discount. Once purchased, you can usually sell your shares for a guaranteed return.” Last time I checked, there is no “guaranteed” return for an ESPP plan. Now, I think the author probably meant to say that there is a guaranteed formula for the purchase price (in terms of discount applied and/or look back), but that doesn’t solidify a certain dollar return upon sale. We’ve all seen the scenario where an ESPP purchase occurs one day and the stock price drops immediately, before the employee can even sell. It’s misleading to suggest that there is a guaranteed return, even though the publicity for ESPPs is great and the author is trying to highlight the benefits of such a plan. I’m concerned about an employee who reads a statement like this, signs up for the ESPP, and then expects a certain sale price down the road. Yes, the employee should verify the plan mechanics before joining, but we all know that employees often need assistance in getting the facts straight.
What Else is Out There?
A quick web search led me to several other inaccurate statements, and I’m sure there must be more out there. Here are a couple of samples:
– “Most startup employees don’t realize that it’s possible to ask to “forward exercise” their unvested options immediately after receiving their options grant.” This article makes no mention of needing to consult plan/grant documents and company policy to determine if early exercise is, in fact, permitted.
–“…the IRS considers this exercise a taxable event under the Alternative Minimum Tax because they just got something that’s worth more than what they spent on it.” This article does not identify the type of stock options that are being exercised, or explain that only ISOs are considered for AMT purposes (not non-qualified stock options). Imagine if an employee holding NQSOs read this article and assumes their exercise will trigger AMT.
I’m sure the list could go on and on as we explore the web and the information about there about stock plans. This further highlights that our need to communicate directly with stock plan participants is greater than ever before. It’s not only about informing them about the mechanics of their stock grants/awards. It’s also about being a direct resource to the employee and mitigating against the mis-truths they may find if they go hunting themselves. Make no mistake: if you fail to communicate with employees they will fill in the blanks on their own, and that’s a scary reality when it comes to stock plans and their complex layers. I list a few things you can do to ensure employees are receiving quality information:
Do communicate thoroughly about the terms and conditions of their grants/awards.
Do inform employees about the pitfalls of relying on online information; encourage them to validate information with you or your service provider before taking action based on something they read online. Even if you can’t give them official guidance, you can point them to other resources.
Do highlight reputable resources to obtain further information, such as myStockOptions.com, and/or a knowledgeable tax or financial adviser (emphasis on knowledgeable).
Don’t let random web articles be the sole source of information that your employees use to make sense of their stock plans. Some online content can certainly be a great supplement, especially from a credible source, but it’s in that context you want participants educating themselves online. The first and primary source of information should be the company. If you’re not communicating regularly, hopefully I’ve highlighted a few reasons to start. A great first step would be to visit our Employee Communications portal for sample documents and other valuable information.
April 9th was a picture perfect day at Lincoln Financial Field in Philadelphia. Not only is it the home field for an NFL football team, but it was the location for the Philadelphia chapter’s half day event as well.
I was fortunate to be one of the 75 people in attendance that day. The agenda included two great stock compensation educational sessions, lunch overlooking Lincoln Financial Field, and a behind-the-scenes tour of the stadium. For today’s blog, I share some photos that captured the essence of the day. (Click on thumbnail to see larger image.) Kudos to the chapter board and meeting sponsors who came together to create something unforgettable.
Picture Perfect
The setting for the chapter meeting was Lincoln Financial Field, home to the Philadelphia Eagles.
Chapter board member Scott McCloskey of Lincoln National Corporation and Chapter President Terry Adamson of Aon Hewitt take in the view while preparing to kick off the day’s events.
Emily Cervino of the Certified Equity Professional Institute, Liz Stoudt of Aon Hewitt, and Mike Palermo of E*TRADE lead attendees through an informative session on the current landscape of offering an Employee Stock Purchase Plan.
Bill Dunn of PwC talks about election year tax volatility.
The newest addition to the Philadelphia chapter board, Andrea Kagan of QlikTech, takes time to network.
Session attendees listen intently.
Lunch, sponsored by E*TRADE, is held in the press box. Attendees network while enjoying the amazing view.
Did I mention that there was an incredible view from the press box?
After lunch, attendees were treated to a behind the scenes tour of the stadium, which included a tour of the locker room. I’ve never seen so many cell phone cameras fly out at once!
This is where many players meet the press after their games.
It was a day filled with education, great networking, and fun for all who participated.
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.
Do you know how much return participants in your company’s ESPP have realized on their investment? Recently, I ran across a blog about how Apple’s ESPP has produced millionaires and it got me thinking about how that sort of information might be used to promote an ESPP.
Apple ESPP = Millionaires In the blog (“$1.1 Million for Apple Employees,” Forbes, 10/19/11), author Troy Onink estimates how much money Apple employees that have participated in the ESPP for the past seven years have made, coming up with just over $1 million per employee.
Onink does make a mistake in his assumption: he assumes that each employee is contributing $25,000 per year to the plan. He bases this on the $25,000 limit, but he is apparently a little fuzzy on how the limit works–as my readers know, in a plan with a 15% discount (which Apple’s plan offers), the most an employee could contribute per year is $21,250 (and this assumes an appreciating stock price, contributions would be limited more severely in a declining market). Moreover, according to Apple’s Form 10-K, contributions are capped at 10% of compensation, so employees earning less than $212,500 per year can’t contribute the maximum under the statutory limit anyway. An employee earning, say, $150,000 per year can only contribute $15,000.
Which means that Apple’s employees probably haven’t made quite as much through the ESPP as Onink thinks. Nevertheless, regardless of how much Apple employees contributed to the ESPP, the 635% return that Onink calculates is still applicable. Even with contributions capped at 10% of compensation, that’s nothing to sneeze at.
What About Your ESPP?
If you were writing a similar article about your own company’s ESPP, do you know how much money your employees have realized on their ESPP? For example, if an employee enrolled in your ESPP seven years ago, bought stock on the first purchase date, and still held that stock today, how much would it be worth?
More important, is the amount an impressive return? Because if it is, I think I’d mention that in the materials promoting the ESPP. Frankly, if I were the stock plan administrator at Apple, I think I’d be passing out copies of this article to everyone not currently enrolled in the plan.
Take a Lesson from Your 401(k)
The educational materials for your 401(k) plan most likely talk about return on investment and give examples of how much money employees will have when they retire for specified investment levels. Why not do something similar for your ESPP?
You have to be a little careful here–you don’t want to be promoting the ESPP as a retirement plan–estimate a return over a shorter period. (Onink has a blurb about using ESPP proceeds to pay for kids’ college educations. I don’t recommend counting on the ESPP to pay for college, retirement, or anything important.) But you could have an example of how much return employees might have realized if they had enrolled in the plan five to ten years ago (this time frame helps to emphasize that this is a long-term investment). You could also run some numbers using disposition data and calculate the average return employees are actually realizing on their sales of shares acquired under the plan.
Of course, when discussing potential returns, always remember to include a disclaimer about past stock price performance not necessarily being indicative of future performance. I’m betting this disclaimer is included in your 401(k) materials–another lesson we can learn from this plan.
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.
It was great to see everyone at the NASPP Conference last week. One session I look forward to every year at the Conference is “The IRS Speaks“–which I consider to be my chance to get the inside scoop on various IRS projects that impact stock compensation. For today’s blog, I have a few updates from this year’s panel, as well as some other recent tax news.
For highlights of the NASPP Conference, check out my blog entries on November 2 and November 4.
COLAs for 2012 The maximum amount of earnings subject to Social Security tax will increase to $110,100 in 2012 (up from $106,800 this year) (those of you that follow the NASPP on Facebook and Twitter already know this). The tax rate is also scheduled to return to 6.2% (up from 4.2% this year), making the maximum withholding $6,826.20 for 2012 (see the NASPP alert). But stay tuned on this one; President Obama has proposed reducing Social Security tax for 2012.
Also, if any of you exclude highly compensated employees from your ESPP, note that the threshold for who is considered highly compensated increases to $115,000 in 2012.
BTW–COLAs stands for “cost of living adjustments.”
Updates from “The IRS Speaks“ Here are areas where the IRS hopes to issue guidance in the next year or so:
409A income inclusion rules. Note however, that this doesn’t include Code Y reporting. That isn’t likely to happen until some time after the 409A income inclusion rules are finalized.
Finalizing the proposed regs that were issued earlier this year under Section 162(m).
The treatment of dividends and dividend equivalents under Section 162(m).
A model election under Section 83(b) that includes examples illustrating the tax consequences of making (or not making) the election. (Fascinating–I had no idea the IRS even thought there was a need for this.)
Guidance on Section 162(m)(6), which relates to the deduction limit that applies to health insurance providers.
Something about foreign pension plans under Section 402(b) (I have no idea what this is–sorry, when I hear the words “foreign pension plans,” I tune out).
The panel also covered a number of issues relating to Section 6039 returns for ISOs and ESPPs. I don’t have time to cover them all today, but maybe in a future blog.
In terms of cost-basis reporting, the panel did say that the IRS is considering adding a checkbox to Form 1099-B that would indicate whether the reported cost basis includes W-2 income recognized in connection with the shares. We think this brilliant suggestion from Andrew Schwartz of BNY Mellon Shareowner Services would be a big help in explaining the form to employees, but if the IRS makes this change, it won’t be until the 2012 form comes out.
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.
In a flurry of acronyms, the DOL (Department of Labor) and the IRS (I’m sure you all know what this acronym stands for) signed an MOU (Memorandum of Understanding) to improve agency coordination to address worker misclassification. A number of states are also participating in the agreement.
DOL and IRS Sign MOU The agreement provides that the DOL will share information with the IRS and the participating states to address workers classified as contractors that should really be treated as employees. Worker misclassification is a target of the IRS’s current employment tax research study, which I’ve blogged about before (“IRS Auditing Stock Compensation,” June 7, 2011). This MOU will give the IRS additional information to use in its audits.
At the same time, the IRS also announced a voluntary worker classification settlement program, further demonstrating their focus on this issue.
Misclassifying a worker that should be an employee as a consultant can result in a host of legal issues, from benefits that the individual should have been accorded (such as the right to medical benefits and vacation time), tax withholding considerations, overtime pay, and unemployment benefits, to name just a few.
This probably seems like a topic that doesn’t impact stock plan administration that much. Worker classification is determined by HR and/or payroll; the stock plan administration group most likely just assumes their determination is correct and treats each individual’s options and awards accordingly. And, I can’t think of any reason why stock plan administration should question the classification made by HR/payroll; it’s unlikely you have sufficient information to determine an individual’s employment status.
But, while stock plan administration may not be involved in classifying workers as employees or consultants, you should be aware of the impact misclassification can have on stock compensation awarded to the individuals in question.
Tax Withholding on Options and Awards
Of course, the first issue that comes to mind is tax withholding. Individuals classified as consultants aren’t subject to tax withholding. If these individuals should have been treated as employees, however, then taxes should have been withheld on all of their compensation, including their NQSOs and stock awards. Failure to withhold the appropriate taxes can result in penalties to the company up to the amount of the taxes that should have been withheld, as well as interest and administrative penalties.
In addition, the company should have made matching FICA payments on all of the individual’s compensation, also including NQSOs and stock awards. This is even more of a mess because consultants don’t pay FICA, they pay self-employment tax, which is equal to both the individual and company portion of FICA. The misclassified workers will have overpaid their taxes because, as employees, they would only have been responsible for the employee portion of FICA.
ESPP
The company’s Section 423 ESPP is a significant concern. By law, substantially all employees of the company have to be allowed to participate in the ESPP, but, of course, also by law, consultants aren’t permitted to participate. Where consultants should have been treated as a employees, however, it is likely that they should have been permitted to participate in the ESPP. Where an individual that should have been allowed to participate is excluded from the ESPP, the entire offering(s) that the individual should have been allowed to participate in can be disqualified. A mistake here could impact not just the misclassified individual but all other employees participating in the ESPP. When assessing your company’s risk with regards to worker misclassification, this is an important consideration.
Thanks to McGuireWoods for the alert that gave me the idea for this blog entry.
Conference Hotel Almost Sold Out The 19th Annual NASPP Conference is quickly approaching and the Conference hotel is nearly sold out. The Conference will be held from November 1-4 in San Francisco. The last Conference in San Francisco sold out a month in advance–and that was without the reality of Dodd-Frank and mandatory Say-on-Pay hanging over our heads. With Conference registrations going strong–on track to reach nearly 2,000 attendees–this year’s event promises to be just as exciting; register today to ensure you don’t miss out.
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.