We are pleased to bring back our popular “Meet the Speaker” series, featuring interviews with speakers at the 24th Annual NASPP Conference. These interviews are a great way to get to know our many distinguished speakers and find out a little more about their sessions in advance of the Conference.
For our first “Meet the Speaker” interview, we feature Deborah Walker of Cherry Bekaert, who will lead the session “The IRS and Treasury Speak.” Here is what Deborah had to say:
NASPP: Why is your topic particularly timely right now?
Deborah: Our presentation features IRS and Treasury speakers involved in regulatory and legislative initiatives involving equity compensation. This is a chance to hear the government’s enforcement focus and new guidance that could affect your equity plans and programs. In prior years, the session has been interactive, giving you a chance to question the government officials about an issue that concerns you and discuss their response, often giving the government ideas for ways to approach various issues that are less obtrusive than what the government may think about. We look forward to another interactive session this year in Houston.
NASPP:What is one best practice companies should implement?
Deborah: The IRS is implementing new computer audit procedures, enabling them to determine that withholding taxes are unpaid in a matter of days rather than in a matter of months. To avoid unnecessary intrusions in the form of “soft letters” from the IRS, you should review your payroll tax withholding and deposits for equity compensation, focusing particularly on the timeliness of deposits for the vesting of restricted stock and the exercise of non-qualified stock options. This should be done on a regular basis. Correction of failure to deposit amounts should be done as soon as possible.
NASPP:What is something companies should know about penalty assessments from the IRS?
Deborah: As the IRS computer systems are becoming more modern, there is an increase in penalty assessments. If you are assessed an IRS penalty, the IRS has a program allowing for the waiver of penalties when a penalty notice is a first time assessment. The program is only available to those who have had no penalties in the prior three years. There is no limit on the amount that can be waived. If this program is not available to someone when a penalty has been assessed, the taxpayer or their representative should always ask for waiver of the penalty for reasonable cause.
NASPP:What is something people don’t know about you?
Deborah: I had a speaking part as a terrified nun in the Three Stooges movie produced in 2012 by 20th Century Fox and directed by the Farrelly brothers.
The 24th Annual NASPP Conference will be held from October 24-27 in Houston. This year’s program features close to 100 sessions on today’s most timely topics in stock and executive compensation; check out the full agenda and register today!
A riddle: what do the Trade Adjustment Assistance Program, the African Growth and Opportunity Act, and HOPE for Haiti have to do with Forms 3921 and 3922? You might think “not much” but then you aren’t a member of Congress. The Trade Preferences Extension Act, which includes provisions relating to those three things and a couple of other global trade-related items, also increases the penalties for failure to file Forms W-2 and forms in the 1099 series, which includes Forms 3921 and 3922 (why forms 3921 and 3922 are considered part of the “1099” series is another riddle for another day).
The New Penalties
Timing of Correct Filing
New Penalty (Per Failure)
New Annual Cap
Old Penalty (Per Failure)
Old Annual Cap
Within 30 days
$50
$500,000
$30
$250,000
By Aug 1
$100
$1,500,000
$60
$500,000
After Aug 1 or never
$250
$3,000,000
$100
$1,500,000
With intentional disregard,
regardless of timing
Min. of $500
uncapped
Min. of $250
uncapped
Make That a Double
The penalties apply separately for returns filed with the IRS and the statements furnished to employees. If a company fails to do both, both the per-failure penalty and the cap is doubled. Thus, if both the return and the employee statement are corrected/filed/furnished after Aug 1, that’s a total penalty of $500, up to a maximum of $6,000,000. If intentional disregard is involved, that’s a minimum total penalty of $1,000 (and this amount could be higher) with no annual maximum.
Effective Date
The new penalties will be effective for returns and statements required after December 31, 2015, so these penalties will be in effect for 2015 forms that are filed/furnished early next year.
Penalties At Least As Interesting As the Trade Provisions?
Interestingly, when I Googled “Trade Preferences Extension Act,” so I could figure out what the rest of the act was about, the first page of search results included as many articles about the new penalties as about the trade-related provisions of the act.
If you want to know what the rest of the act is about, here is a summary from the White House Blog. There’s not a lot more to say about the penalties but if you want to spend some time reading about them anyway, here are summaries from Groom Law Group and PwC.
The IRS has announced an audit initiative focused on Section 409A compliance. Frankly, I’m a little surprised that they haven’t undertaken this sort of audit initiative sooner–I’ve heard from practitioners that, up until now, Section 409A has rarely been a focus of IRS audits. Given the complexity of this area of the tax code and the fact that every time I have a question about it, my sources never seem to be entirely sure of the answer (and I sometimes get conflicting answers), it seems like 409A could be an untapped wealth of compliance errors for the IRS.
Who Are the Lucky Winners?
Some companies are just lucky. The IRS has picked 50 companies to be the subject of the audits, all of which have already been selected for employment tax audits–I guess the IRS is a believer of “when it rains, it pours.” The good news is that if you haven’t already been selected for an employment tax audit, you won’t be part of the initial 409A audit initiative.
What Is the IRS Looking For?
The audits will focus on deferral elections (both initial deferrals and re-deferrals) and payments (including payments to key employees upon separation of service). It’s pretty rare that we see deferral elections for stock compensation; only 29% of respondents to the NASPP’s 2013 Domestic Stock Plan Design Survey (co-sponsored by Deloitte Consulting) allow deferrals for time-based RSUs and only 24% allow deferrals for performance awards. Based on this, it seems that the audits will concentrate primarily on more traditional NQDC plans, rather than stock compensation.
This seems like a missed opportunity for the IRS–I’ve always found the application of Section 409A to stock compensation to be particularly confounding and full of traps for the unwary. Moreover, I think this is an area of the tax code that often is overlooked when we are thinking about potential concerns related to stock awards. But perhaps the IRS will expand to stock compensation in the next phase of the audit initiative.
The Next Phase?
I say “next phase” because this could be a precursor to a larger, more intensive audit of Section 409A compliance. In a memo on the initiative, Groom Law Group says “The IRS will assess what further steps, if any, to take after the results of these audits are in.” Now is a good time to get out ahead of this and perform your own self-audit of 409A compliance. In his blog on CompensationStandards.com, Mike Melbinger of Winston & Strawn points out that there is a corrections program available for some operational errors under 409A, but that the corrections program is no longer an alternative once you are the subject of an audit.
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.