For stock plan administrators that work for US companies, the lives of their counterparts at non-US multinationals must seem glamorous–the multi-cultural environment, cool accents of overseas co-workers, early-morning and late-night meetings to accomodate worldwide time zones, and overseas travel. But now, stock plan administrators at US companies have something to be thankful for–they don’t have to worry about FATCA.

What the Heck is FATCA?
Despite the acronym, FATCA has nothing to do with overweight Californians.  And, even though you might be tempted to think so, none of the letters in the acronym stand for a four-letter word. It refers to the Foreign Account Tax Compliance Act that was enacted as part of the 2010 HIRE Act. The purpose of FATCA is to prevent US tax payers from avoiding paying tax on foreign securities by holding them at non-US financial institutions. So if some US billionaire holds a bunch of stock of some European company in an offshore account in the Cayman Islands, he still pays tax on his gains. I think most of us can get behind that.

The part of FATCA that you aren’t going to like is a requirement for US taxpayers (whether they live in the US or not and whether they are US citizens or not–basically, anyone paying US tax) to report any securities of non-US companies that they own that they don’t hold at a US financial institution. And, well, you can guess what is coming next because we’ve all been down this path before–stock options, SARs, RSUs, etc., as well as any stock acquired under stock compensation programs are all considered securities. So where US taxpaying employees have the right to acquire stock of a non-US company (e.g., via an option, SAR, or RSU) or have acquired stock of a non-US parent, they have to report that right, and underlying stock acquired pursuant to the right, to the IRS if they don’t hold these securities at a US financial institution.

It’s fairly clear that the reporting requirement applies to stock held in certificate form, book entry, in DRS accounts, or at non-US brokerages firms or financial institutions (e.g., an Israeli trustee). Likewise, it could apply to restricted stock held in an escrow arrangement or at a transfer agent. Restricted stock held in a restricted account at a US brokerage firm would be exempt from the reporting requirement.

In the case of options, SARs, and RSUs, application of the reporting requirement is less clear. Even if employees log onto an online website hosted by a US brokerage firm to view their option and RSU holdings, those holdings really aren’t held at the brokerage firm. The grants are issued in the employee’s name and are held by the employee; it is only when the grants are paid out that the underlying shares will likely be issued into an account at the broker (and held in the broker’s name). So technically, the grants could be considered to be subject to this reporting requirement, even though once they are paid out, the underlying shares probably won’t have to be reported.

I cornered Valerie Diamond of Baker & McKenzie on this at the CEP Symposium last week, who offered a glimmer of sanity on this. Valerie told me that despite the technical requirements here, based on conversations she’s had with an IRS staffer, it might be reasonable to take the position that outstanding grants under a program that is administered by a US broker are exempt from the reporting requirement. The operative word here is “might”–how much of a risk are your employees prepared to take? The penalty to the taxpayer for failing to comply starts at $10,000, enough to make a taxpayer think twice.

Reporting Thresholds

Another glimmer of sanity is that the US taxpayer’s holdings have to exceed specified thresholds for the reporting to be required. But immediately, we’re back to insanity because the thresholds are too complicated for me to explain here in the blog (we have some great memos that provide a table illustrating the thresholds–e.g., see the Baker & McKenzie and PwC memos). They vary based on filing status and whether the taxpayer lives in the United States and are also based in part on whether the value of the securities exceeded the stated threshold at any point during the year (yep, you read that right, if the value of the securities exceeded the threshold for a mere five minutes of trading on one day during the year, that could trigger the filing requirement). Good luck to your employees on calculating that amount.

Unvested options and RSUs don’t count towards the thresholds, but if the thresholds are exceeded, must be reported (at a value of $0). Restricted stock does count towards the thresholds.

How Clever Is Your CEO?

Since execs often aren’t required to hold their stock at the company’s designated broker, it bears mentioning that if they are acquiring non-US securities through your company stock plans and, say, your CEO is one of those billionaires that will take the acquired shares and squirrel them away in an account in the Cayman Islands, he’d better report those shares to the IRS. Maybe it would be best to ask your general counsel to break this news to him.  Just sayin…

Is an Extension Necessary?

The report is completed on Form 8939, which is included with the taxpayer’s tax return. This is in effect for last year’s tax return, due to the IRS in just a couple of weeks.

There are a lot of unknowns here, particularly with regards to how the requirements apply to stock compensation. If this isn’t something you’ve been paying attention to and you have employees that might be required to file Form 8939, you may want to suggest that they file for an extension on their tax return, so that both you and they have some additional time to figure out the reporting requirements.

For more information, check out the NASPP’s alert “New IRS Reporting Requirements for Employees Holding Non-US Securities,” which includes several memos on the Act.

Spoof S-1
If you missed it on Sunday, the Motley Fool announced they were going public as an April Fools joke and included a spoof S-1 statement.  It’s definitely worth ten minutes of your day to read through it; I laughed out loud several times (although some parts are a little too close to the truth for comfort).

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 we keep an ongoing “to do” list for you here in our blog. 

– Barbara