It’s a slow news day here at the NASPP. I don’t have anything pressing to blog about so I thought it would be a good time for a poll. Below are a few questions that were recently posted to the NASPP Q&A Discussion Forum that are largely unanswered at the moment. If they apply to you, please take a moment to indicate your answers so we can help these folks out. Thanks for indulging me!
If you can’t see the poll below, click here to participate in it. As always, if you are a contractor that works with multiple clients, please answer for just one of your clients (preferably one that won’t otherwise complete this poll).
– Barbara
Tags: broker, China, DWAC, employee communication, employee communications, exercise, RSU, RSUs, SAFE, share withholding, stock option exercise
How does your company approach the issue of in-the-money options that are nearing their expiration date? This has always been a potential issue for terminated employees whose vested shares are no longer exercisable for the full term of the option. We now also see more companies with options that are actually nearing full term, especially when the options have remained underwater for an extended period of time.
Communications
The first decision on expiring options is whether or not the company will endeavor to notify participants of the impending expiration. At face value, this appears to be a fantastic idea, but there are still issues to consider. Ideally, these communications would be automated to some degree to avoid the administrative burden of manual distribution.
Identifying the grants and employees who should receive a notice regarding expiring in-the-money options may not be easy. Even if your stock plan administration software has a report that generates a list, you could be faced with a daily verification depending on the vesting schedules for your employee options. Most brokers have the ability to alert employees of upcoming option expirations through the employee accounts and some may even be able to send out automated email notification.
Another important consideration is how to ensure that the communication is universal. It is reasonable to exclude specific groups of employees (e.g., employees holding underwater options), but it is important that the exclusion is consistent to avoid even the appearance of discrimination. When considering the timing of communications, keep your termination parameters and typical administrative delays in processing terminations in mind. As with any communication, you run the risk of an employee relying on the notification, not receiving it due to an administrative anomaly, and find yourself in the middle of a lawsuit.
Automatic Exercise
More brokers are now willing and able to support a company’s policy to have expiring in-the-money options automatically exercised on the day before they expire. Automatic exercise has existed for many years for publicly traded options, so it’s not a stretch to apply the same logic to an employee plan. However, there are more considerations for employee stock options.
Exercise Type
When instituting an automatic exercise policy, careful consideration should be given to how the employee will pay the exercise price and tax withholding associated with the transaction. It is possible to initiate a same-day sale on an expiring option on behalf of the employee providing you have the appropriate permissions to do so and your broker is willing to execute the transaction. However, my opinion is that the best fit for an automatic exercise is some form on net share settlement. The key advantage is that employees would simply receive the net shares in their account, which could be held or sold at their discretion. You won’t have to ensure that brokerage accounts are open and unrestricted and you don’t have to worry about coordinating a market transaction. Regardless of the exercise type you choose, there should be a way for employees to opt out of the automatic exercise.
How Much is Enough?
Another consideration for automatic exercise is just how in the money options need to be for an exercise, especially if you are doing a net share settlement. Even with a sell-to-cover transaction, it is better if the employee receives more than a fraction of a share in value for the transaction. For non-qualified stock options, you have to account for not only the exercise price, but also the tax withholding, which could dramatically reduce the value returned to the employee. Although in general some value is better than nothing, there are many situations where the exercise of an option that is barely in the money could actually do more harm than good. If you set a minimum value, be sure that it can be consistently administered and is clearly communicated to employees.
Documentation
If you are instituting a new automatic exercise policy, confirm with your legal team on how to handle both existing options and new grants. Does your plan accommodate and will your company feel comfortable simply making it a policy and notifying employees, or will you need to have some kind of agreement from employees. For future grants, will you need to include specific language for an automatic exercise in the grant agreement?
Early Bird Special for the 19th Annual NASPP Conference
Speaking of expiring options, don’t miss out on your option to register for the 19th Annual NASPP Conference at a reduced price! Now through May 13th, NASPP members will receive a special discount on Conference registrations. Register today!
-Rachel
Tags: cancellation, communication, exercise, expiration, option, policy
As the deadline for Section 6039 returns and information statements gets closer, the activity on the NASPP Discussion Forum regarding them increases. This week, I’d like to highlight some of the issues that have been coming up for stock plan administrators and give a couple reminders.
If you don’t already peruse the Discussion Forum, submit your questions, or share your experience there, you really should check it out. It is a great place to bounce ideas off other stock plan professionals before you confirm with your own advisors.
Paper Forms
If you planning on ordering Forms 3921 and/or Forms 3922 for paper filing with the IRS, they aren’t yet available. (Thanks to Bruce Brumberg of myStockOptions.com for bringing this to my attention!) It’s my understanding that you should be able to place an order by the end of January, giving you plenty of time to complete them even with the 7-10 day processing period. Alternatively, you may choose to do an electronic filing even if your company is eligible for paper filing.
If you are planning on ordering the forms to use for employee information returns and are concerned about the timing, consider using a substitute form. We have examples available on the Section 6039 portal. To order official IRS forms or to check on the status of availability, call 1-800-TAX-FORM (1-800-829-3676).
Same-Day Sales
Unlike W-2 reporting, a disqualifying disposition of ISO shares does not impact your Section 6039 reporting. Even if the exercise is a same-day sale, you are required to report the exercise on Form 3921. (See Topic 6689.)
Multiple Transactions
If you have multiple transactions for an employee to report, you may choose to create a substitute form that consolidates all ISO exercises into one substitute Form 3921 and all ESPP transfers into one substitute Form 3922. However, you may not report multiple transactions on a paper filing of either form with the IRS. Electronic filing, of course, is not impacted by the format you choose for the employee statements. Also, if you have more than one transaction for an employee, you will need to include a unique account number for each transaction on the filing to the IRS and most likely also need to include it on any substitute form that you use for employee communications. (See Topics 6782, 6778, and 6710.)
Foreign Nationals
You will most likely need help to identify any foreign nationals for whom a Form 3921 or 3922 is required because of the complexity surrounding resident status. You do not need to file for foreign nationals who are considered nonresident aliens and who have not received a Form W-2 from the company between the grant and the ISO exercise or ESPP transfer. However, you should file a return and send an employee statement to all U.S. citizens with applicable transactions regardless of their current location. (See Topics 6790, and 6713.)
Unusual Situations
For ISOs that are treated as an NQ at the time of the exercise (e.g. more than three months after termination), you should not have a Section 6039 reporting obligation for the exercise. (See Topic 6787.)
If you have an ISO that was exercised in 2010 by the beneficiary or estate of a deceased employee, it would be safe to file Form 3921 and provide an information statement to the beneficiary or estate for the exercise. There is nothing in the Section 6039 regulations to indicate that there is an exemption for these types of transactions, a you would absolutely want to check with your advisors if you are leaning towards not filing in this situation. (See Topic 6773.)
Reminder #1: The returns are due to the IRS by February 28 (if filing on paper) or March 31 (if filing electronically). You can, however, receive an automatic 30-day extension by filing Form 8809, which can be filed electronically or on paper by the applicable deadline for filing returns.
Reminder #2: If you are filing electronically and haven’t already sent a test file, the FIRE system is accepting test filings through February 15th. IRS Publication 3609 details the electronic filing process. If you still need a TCC Number, you must apply for one 30 days prior to the filing deadline.
-Rachel
Tags: 3921, 3922, ESPP, exercise, Form, information statements, IRS, ISO, purchase, Section 6039