As of yesterday, the final versions of Forms 3921 and 3922, as well as the associated instructions, are available from the IRS. These are the forms that will be used to file the returns required under Section 6039 for ISOs and ESPPs with the IRS. No surprises–the forms are largely unchanged from the draft versions that the NASPP obtained earlier this year. See our alert on the final forms for more information and background.
Getting Ready for Electronic Filing of 6039 Returns – Part I
Based on the last Silicon Valley NASPP Chapter meeting, I think we are starting to get to panic mode on these returns. Alison Wright of Baker & McKenzie and Jessica Carbullido of Con-way, gave a great presentation on the nuts and bolts of filing the returns, particularly on the electronic filing process.
Here are few action items that I came away with. This is only Part I; I’ll have a few more action items for you next week. For general overview of the electronic filing process, read IRS Publication 3609 (look how happy the woman on the cover is, now that she files electronically with the IRS–that could be you!)
Figure Out Your Transmitter Control Code
If you are submitting the returns electronically, you need a TCC. Chances are, your company already has one, but now would be a good time to make sure.
If you are outsourcing the filing to a vendor that is going to submit the returns to the IRS on your behalf, the vendor will likely have their own TCC, so you won’t need to worry about this (but verify this with your vendor).
If you are working with a vendor that is going to create the submission file for you but you will have to submit it (or if you are creating the file yourself), you’ll need your company’s TCC code. If your company submits Forms 1099-MISC electronically (and there’s a pretty good chance that you do), your company already has this code. You just need to find out who has it and what it is. You don’t want to request a new TCC if your company already has one–the IRS frowns on this.
If you need a TCC and you’ve determined that your company doesn’t already have one, you need to apply for one using Form 4419. Might as well get started on this now.
Set Up Your FIRE Account
Electronic filings of Forms 3921 and 3922 will be submitted to the IRS via the FIRE system. (FIRE stands for “Filing Information Returns Electronically”–those IRS folks are so clever!) This is not the same system that is used to file Forms W-2 electronically (those are filed with the Social Security Administration, not the IRS), thus, your friends in payroll and your payroll service providers aren’t going to be much help here. It is, however, the same system that is used to file Forms 1099-MISC electronically. Accounts payable, which is typically the group that files this form, may be your new BFF.
If you are submitting the electronic filing yourself, then you’ll need a FIRE account as well as a TCC. You can (and probably should) set up your own FIRE account even if someone else at your company already has one. To set up your account, go to http://www.irs.gov/efile/article/0,,id=165534,00.html and follow the instructions under “Create Your Account.” (You’ll have to wait until after 8:00 AM Eastern today to do this–until then, the FIRE system is down for maintenance. It’s been down since last Thursday; that’s a lot of maintenance!)
Find a Vendor
If you were thinking that you could just download some data to Excel and create the submission file yourself, think again. Publication 1220 includes the specifications for the submission file. And, while at 136 pages, this publication is no picnic, the kicker is that the files must be in a fixed-width ASCII format, which requires some advance programming skills to create from Excel. Why the IRS couldn’t use a nice, easy, comma-delimited file–which anyone can create using the Save As function in Excel–is a mystery.
If you haven’t already, you probably want to get started on finding a vendor that can help you create these files (either that, or start making friends with your IT department). The NASPP’s just announced webcast on November 18, “Comparing Solutions for Section 6039 Compliance,” is a great place to begin your vendor search.
Free Conference Session Audio If You Renew by Dec 31 All NASPP memberships expire on a calendar-year basis. Renew your membership by Dec 31 and you’ll qualify to receive the audio for one NASPP Conference session for free!
Join Now and Get Three Months Free and Free Conference Session Audio! If you aren’t currently an NASPP member, now is the time to become one! Join the NASPP for 2011 and you’ll get the rest of 2010 for free. If that’s not enough, you’ll also get the audio for one NASPP Conference session for free. Tell all your friends!
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.
Renew your NASPP membership for 2011 (if you aren’t an NASPP member, join today). Renew or join by Dec 31 to qualify for the audio of one NASPP Conference session for free.
Don’t miss the local NASPP chapter meetings in Boston, the Carolinas, Orange County, San Diego, and Seattle. Robyn Shutak, the NASPP’s Education Director, will be attending the San Diego meeting; be sure to say hello!
Night of the Living Dead: Equity Compensation Horror Stories–The Sequel! By Emily Cervino, CEP Institute
The NASPP Conference agenda is full of best practices, emerging trends, and successful case studies. But, don’t forget about the darker side of equity compensation. At the 2009 Conference, the “Night of the Living Dead” panel was a huge hit…and 2010 will bring back the same concept, with a completely new slate of horror stories!
Why are we dwelling on epic failures, monumental disasters, and crippling catastrophes? Because we can learn just as much (if not more) from these fiascos as we can from stunning successes. Hearing these horror stories will help attendees avoid a similar fate, stockpile their ammunition for making a case to management, and sleep easier knowing that even with these calamities, not a single panelist has had to enter the witness protection program. A major problem doesn’t end your career…if you know how to handle the problem and ensure it doesn’t happen again.
For example, take the humble ESPP…these plans may not have the allure or status of other equity programs, but with broad participation, infrequent processing, and the final regulations for Section 423 plans providing for the possible inadvertent disqualification of the plan, the risks for ESPP are at an all time high.
One of the horror stories starts as many horrors do… as a new employee, quickly flung into the frenzy of processing an ESPP. The ESPP had been run on “autopilot” and on the date of the purchase, the fearless new stock plan administrator received the report of payroll contributions for the plan participants. Noticing that there were suspiciously high amounts for many employees, a frantic red flag was raised. The “investigative work” resulted in a shocking revelation–the company had been allowing employees who hit the $25,000 limit following a purchase to carry over those leftover funds to the next offering period. Just to be clear…the company was carrying forward the contributions, not the limit. So, if an employee hit the $25,000 limit, the company did not refund the excess contributions, but added those contributions to the payroll contributions for the next offering. This was clearly not permitted under the plan. Other employees weren’t permitted to make a lump sum contribution. So, what we have here is the dreaded violation of the equal right and privileges provision of Section 423.
The end result was a frantic scramble on the day of the purchase to recalculate, notify the impacted (and now unhappy) employees about sizeable refunds, and determine what those refunds were. Lessons learned? Read your plan. Don’t accept the status quo when you are in a new position. Get ESPP contributions (or, at a minimum, estimated contributions) at least a week in advance of the purchase. Educate and befriend Payroll. And, in case you missed that first one…it bears repeating–read your plan.
Join us as we frighten you with nightmare stories and set you on the path to safety with recommendations on how to avoid similar misfortune. Due to the popularity of last year’s premier, our panel is offered twice, during Session III on Tuesday at 1:45 PM and again during Session V on Wednesday at 9:00 AM.
Got your own horror story to share? The NCEO is soliciting stories for an edition of the book “Don’t Do That” focused on equity compensation. This is a great way for others to learn from the challenges you have overcome. Submit your story today!
NASPP Members Eligible for Discount on CEP Exam If you’ve been thinking about enrolling for the Certified Equity Professional exam, now is the time to do it. Because the NASPP serves on the CEP Institute Advisory Board, we are able to offer NASPP members a $200 discount on the November 6, 2010 exam.*
The CEP program is the certification standard for the equity compensation industry, comprised of a three-level, self-study program in the technical regulatory issues affecting equity compensation.
Visit the CEPI website for more information on the program. To take advantage of the NASPP member discount, contact the CEPI at (408) 554-2187.
* The Fine Print: Eligible registrations include new Level 1, Level 2 or Level 3 registrations for individuals who are involved in administering or managing their own company’s equity programs. Deferrals and re-tests are not eligible for a discount. Individuals already registered are not eligible for a retroactive discount. Candidates from service providers do not qualify. Questions regarding eligibility can be directed to the CEPI at (408) 554-2187.
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!
As you know, this year’s NASPP Conference is completely sold out! It’s a first for the NASPP. Luckily, this year not only can you purchase the audio online with the course materials; you can even choose how much of the Conference you would like to receive! Of course you won’t want to miss out on any of the spectacular sessions we have for this year, but if your budget is limited, you can opt for a single-session or five-session package. If you order before the Conference, you will receive a 10% discount off the standard pricing!
Barbara Baksa, Robyn Shutak, and I will be hosting a timely session on encouraging ESPP participation in a down market. Now is the perfect time to get your employees excited about your company’s ESPP program! In the spirit of that, I’d like to offer you my top five ways you could be drumming up participation for your ESPP, but probably aren’t.
Tip #1: Put notices in employee paystubs.
This is a great way to reach all employees, especially those that do not spend time at a computer and won’t be able to access your more technology-driven approaches to ESPP communications. Congratulate those that are participating in the ESPP, announce your open enrollment, or distribute an FAQ.
Tip #2: Get managers involved in your enrollment campaign.
Circle the wagons and get all your managers on a unified message! Provide managers with talking points and require them to spend time with the employees on their team promoting your ESPP program.
Tip #3: Create employee focus groups to test new communications strategies.
Your ESPP campaign is a marketing campaign; why not treat it like one? As you brainstorm ideas, get focus groups of employees from different segments of your employee population together and run your ideas past them. This is especially helpful when trying to explain your ESPP to employees and offers you a perfect opportunity for feedback in a personal and dynamic setting.
Tip #4: Publish or record short interviews with ESPP participants.
You have employees who are excited about the ESPP, who understand it and value it. Let them tell their peers in their own words why they participate, how long they’ve held their stock from ESPP purchases, what they’ve done with their sale proceeds, or how the return from the ESPP compares to their other investments. Once you have enough interviews, put together a short advertisement with an inspiring soundtrack with a clip from each interview!
Tip #5: Get creative – Blog it!
I’m sure you know that we’re a fan of blogging here at the NASPP. Don’t be shy; you can get out there and blog, too! You can include questions you get from employees, participation increases you are excited about, announce when purchases are complete, and include quotes from happy participants.
Want more? This is just the tip of the iceberg on all we have in store for you at our session, Leveraging Your ESPP in a Down Market. We also have great supplemental materials for this session including a second slide deck on communicating your ESPP to your employees. I’m really excited to get my hands on the final Conference materials this year! Almost all of our sessions include supplemental information you can’t get anywhere else–like sample documents, extended outlines, additional slide decks, checklists, and articles. If you made the cut-off and you’ve already registered, I’ll see you in San Francisco!
We all know that the quality of your employee communications program is essential to gaining employee support and enthusiasm for your stock programs. But, sometimes it’s hard to find fresh ideas on exactly how to go about communicating with your employees. You know the general idea; presentations, FAQs, intranet, information packets, e-mails, etc. There are two basic pieces to conquer: what communication methods work best for your employee groups and what content should you provide.
It’s great if you can ramp up your learning curve by taking advantage of others’ experiences. You can do this by seeing how other companies communicate to their employees and by learning what has been effective for them. Unfortunately, because many companies are hesitant to make their employee communications public it can be difficult to find sample communications to compare against your own.
One big exception to this is any program or corporate transaction that involves a Tender Offer (such as options repricings or mergers). Because every communication regarding the transaction must be included as an exhibit in the Schedule TO, you can find great samples on how other companies have approached the communication process. You can search for these filings on the SEC website either by company or by the Form type (“SC TO” for Tender Offers). Even better, you can use the Full Text Advanced Search to drill down on your search criteria. For example, you can use the Boolean phrase search to find the phrase “options exchange” (keep the quotes in there) used in any Form SC TO-C. You can even narrow it down by Standard Industrial Classification (SIC).
You may also choose to search the news first for companies that have filed a Schedule TO with the SEC. For example, Intel’s option exchange progam has been in the news recently. VP and Director of HR, Richard Taylor, has been doing a great job of trying to stay ahead of the rumor mill with informative updates like this one. In this communication, Taylor has taken some of the common questions that he’s received regarding the options exchange program and addressed them publicly (and in several languages). This is a fantastic strategy not only for options exchanges, but for all of your equity compensation programs. The truly advantageous part of finding communications like this for the rest of us is that it provides a window into the types of problems that companies may be encountering. If you see that another company has had to address a particular issue, you can turn around and try to proactively provide information to your employees to squelch that particular issue.
Of course, there are many other types of communication that would be wonderful to have samples of. We do have a variety of sample communications in our Document Library. Remember, though, that sample documents are just that; samples. You can use them to get ideas or to see if other companies are dealing with similar issues, but you should not expect them to be templates that you can just plug your company’s information into and use. I would like to encourage all our members to submit whatever communications materials they can to the Document Library. Sometimes the best resource a stock plan professional has is another stock plan professional!
Also, if you are looking to put some zing into your ESPP communications strategy, don’t miss the Conference Session of the Week from Barbara’s Tuesday entry!