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.
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.
If you are in the area, don’t miss the half-day Philadelphia chapter meeting at Lincoln Financial Field on April 9. Last year’s meeting was a blast. Jenn Namazi, the NASPP’s Editorial Director, will be there–be sure to say hello!
In my very first NASPP blog, I chose a topic that was particularly passionate for me: employee communications. I like all the aspects of communicating with employees about their stock plan benefits. I recently came across an article that touched on an interesting fact: most people who achieve “millionaire” status (from stock options, lottery wins, working hard for a long time, inheritance, and several other ways to obtain a large sum of cash) don’t maintain that status for long. In fact, an analysis of IRS data on millionaires revealed that between 1999 and 2007, 50% of millionaires only stayed so for one year, and at the end of the 9 tax years, only 6% of those who were millionaires back in 1999 remained millionaires.
I know you’re just to the point of asking what an analysis of millionaires has to do with employee communications. I’ll get to that in just a minute. Back to the millionaire analysis – it struck me that many people work so hard to make money, and I was floored to see that so many fell off the millionaire bandwagon so quickly after achieving that status.
This data didn’t parse down executives vs. mid and lower level employees within organizations – this was an analysis of all millionaires filing tax returns in the U.S. during that period. However, if we were to look at organizations, I’d be willing to bet the amount of downfall from millionaire status incrementally increases the lower you go within the organization (my opinion only, I have no facts to back this up). Regardless, I began thinking about how we spend so much time putting together stock plans, educating employees on the mechanics of the plans, and even in some cases providing tools that allow employees to “model” future outcomes. I’m guessing many employees plug in some high stock prices and start dreaming about a windfall of cash. That raises a question from me: why do we spend so much time preparing, maintaining, and generally communicating about stock plans if the windfall is going to be so temporary? Yes, of course we don’t have control over what the employee will do with the money – certainly responsibility for squandering a chunk of it would fall squarely on the employee’s shoulders. But for those who are offering broad based stock plans, I ask the question – should more be done to help employees manage their rewards, or at least direct them to resources that can help them do so? As a communicator, I sometimes am frustrated that companies generally are advised to stand squarely outside the realm of “financial advice.” I realize most organizations don’t have trained financial planners, so an edict to stay clear of advice seems appropriate. However, there must be a way to offer a more integrated communication program to employees. Perhaps this type of communication can occur closer to the timing of a stock option exercise or large restricted stock vesting.
I know there are many firms that provide a wealth of stock plan services, including financial planning. Many issuer firms rely on these companies to assist in the financial planning arena, and employees seem to find this of benefit. As a communications nut, I would love to see more evolution in employer messaging, with increased talk about the full gamete of resources available to help employees manage the full life cycle of their stock plan grants and awards, which includes the financial planning component. I’m not suggesting that companies offer financial advice – but we tend to stay away from mentioning these resources in our communications like it’s a taboo topic. We highlight all the tools that will help employees imagine wealth (calculators, modeling scenarios, etc.). Why not pay some attention to what happens when they really do receive a windfall? After all, companies are giving the benefits to employees – shouldn’t we also help them figure out how to handle the upside?
I threw in a poll, because I want to know how you feel about companies taking steps to offer more communications on the financial planning resources that may be available to stock plan participants.
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.
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.
On June 23, the IRS and Treasury proposed new regulations under Section 162(m) relating to the requirements for options and SARs to be considered performance-based compensation and the transition period for newly public companies.
Not-So-Surprising Proposed Regs for Section 162(m) (Well, Maybe a Little Surprise for IPO Companies)
Section 162(m) limits the tax deduction public companies can take for compensation paid to specified executive officers to $1 million per year. As I’m sure you all know, however, performance-based compensation is exempt from this limitation.
The recently issued proposed regs are not nearly as controversial as the IRS’s 2008 surprise ruling on 162(m), but are still worth taking note of–especially since, as the Morgan Lewis memo we posted on the proposal points out, some of these clarifications are the direct result of compliance failures the IRS has encountered during audits.
Stock Options and SARs
Normally, for compensation to be considered performance-based, it must meet a number of rigorous requirements. At the time that Section 162(m) was implemented, however, at-the-money stock options and SARs were considered inherently performance-based, so the requirements applicable to them are significantly more relaxed (a decision I can only imagine regulators regret today, given current public sentiment towards stock options). The primary requirements are that the options/SARs be granted from a shareholder approved plan, individual grants are approved by a committee of non-employee directors, the exercise price is no less than the FMV at grant, and the plan states the maximum number of shares that can be granted to an employee during a specified period.
The proposed regs clarify that, for this last requirement, the plan must state a per-person limit; the aggregate limit on the number of shares that can be granted under the plan is insufficient (although, the stated per-person limit could be equal to the aggregate limit).
Disclosure
For all performance-based compensation, including stock options and SARs, the regs already require that the maximum amount of compensation that may be paid under the plan/awards to an individual employee during a specified period must be disclosed to shareholders. For stock options and SARs, it’s pretty hard to determine what the maximum compensation is, since this depends on the company’s stock price over the ten years or so that the grant might be outstanding. The proposed regs clarify that it is sufficient to disclose the maximum number of shares for which options/SARs can be granted during a specified period and that the exercise of the grants is the FMV at grant.
Newly Public Companies
For a limited “transition” period, Section 162(m) doesn’t apply to arrangements that were in effect while a company was privately held (provided that the arrangements are disclosed in the IPO prospectus, if applicable). This transition period ends with the first shareholders’ meeting at which directors are elected after the end of the third calendar year (first calendar year, for companies that didn’t complete an IPO) following the year the company first became public (unless the plan expires, is materially modified, or runs out of shares or the arrangement is materially modified before then).
For stock options, SARs, and restricted stock, the current regs are even more generous–any awards granted during this transition period are not subject to 162(m), even if settled after the transition period ends. The proposed regs don’t change this, but they do make it clear that RSUs and phantom stock are not covered by this exemption. My understanding from some of the memos we’ve posted in our alert on this is that this reverses a couple of private letter rulings on this issue (see the Morrison & Foerster, Morgan Lewis, and Edwards Angell Palmer & Dodge memos). The current regs specifically state that the exemption applies to stock options, SARs, and restricted stock, but are silent as to the treatment of RSUs and phantom stock–providing the IRS/Treasury with the leeway to exclude them now.
Subtle Changes
Several of the changes are pretty subtle–so subtle that when comparing the proposed regs to the current regs, I couldn’t figure out what had changed. So I used the handy-dandy document compare feature in Word to create a redline version of the new regs, which I’ve posted for the convenience of NASPP members.
Chickens, Stock Plan Administrators, and Whiskey The author of the joke that appeared in last week’s blog entry is John Hammond of AST Equity Plan Solutions (and poet laureate of the NASPP blog). Ten points to Erin Madison of Broadcom, who was the only person to email me the correct the answer. I can’t believe no one else figured it out!
In late 2009, the IRS announced a major audit initiative for executive compensation that will ultimately involve at least 6,000 companies (see “IRS Audits: Are You Ready to Rumble?” January 26, 2010). We’re now over a year into that project, so I thought it might be a good time to revisit the subject.
No Need to Be Surprised
If you’ve been wondering what the IRS might audit relating to stock compensation, it turns out that there’s no need to be surprised. The IRS explains what they are looking for relating to stock compensation on their website. Here are a few highlights of what you can expect IRS auditors to investigate:
In the case of restricted stock and units, whether there has been a transfer of property (e.g., does the employee have voting and/or dividend rights) and whether there is a substantial risk of forfeiture for the award. According to Stephen Saxon in the March issue of PLANSPONSOR (“Saxon Angle: Audit Trials“), companies that offer accelerated vesting upon retirement should be especially wary of this issue for their retirement-eligible employees.
Whether ISOs and ESPPs meet the statutory requirements, especially the $100,000 and $25,000 limitations.
Whether income has been properly reported (on Form W-2 or Form 1099-MISC) and taxes withheld (if required) on all types of stock plan transactions.
Whether tax withholding for stock compensation has caused companies to exceed the $100,000 next-day deposit threshold that Rachel blogged about a couple of weeks ago (“Timely Tax Deposits,” May 26), and, if so, if companies complied with the deadline.
Recordkeeping practices relating to grants, exercises, and other stock plan transactions.
Compliance with Section 162(m)–but that’s a topic for another blog.
Things I Sure Hope Won’t Be a Problem
There are a few items highlighted in the IRS’s audit instructions that I sure hope won’t be a problem for any NASPP members–I know you are all too smart to fall for these traps:
Back-dated stock options. No explanation needed on this one.
Transfers of options to a related party. Under this strategy, an executive would “sell” stock options to a family member or trust in exchange for an unsecured, long-term, balloon payment obligation (essentially, the related party just “promises” to pay the executive for the stock option at some point in the future, a long ways in the future). The idea was to get around the gift tax that could apply if the option were simply transferred to the family member/trust. This type of a arrangement has been a no-go with the IRS for some time.
Not issuing stock upon same-day-sale exercises of an ISO or ESPP. Although the tax code itself is not clear, the IRS’s audit instructions specifically state that if, rather than issuing stock on a same-day sale, the underlying shares are simply cancelled in exchange for the spread–in other words, a net exercise–the arrangement is subject to withholding for both income tax and FICA purposes.
Issuing loans to executives for option exercises and then later forgiving or reducing the loans. Public companies shouldn’t be issuing loans to executives at all, much less forgiving those loans.
Last Chance to Qualify for Survey Results This week is your last chance to participate in the NASPP’s 2011 Domestic Stock Plan Administration Survey (co-sponsored by Deloitte). Issuers must complete the survey by this Friday, June 10, to qualify to receive the full survey results. Register to complete the survey today–we’ve already extended the deadline once, we can’t extend it again!
NASPP Conference Program Now Available The full program for the 19th Annual NASPP Conference is now available. Check it out today and register by June 24 for the early-bird discount–this deadline will not be extended.
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.
Register for 19th Annual NASPP Conference (November 1-4 in San Francisco). Don’t wait; the new early-bird rate is only available until June 24.
Participate in the NASPP’s 2011 Domestic Stock Plan Administration Survey (co-sponsored by Deloitte, with survey systems support provided by the CEP Institute). You must complete the survey by June 10 to qualify to receive the survey results.
The details surrounding exactly when tax deposits are due on stock compensation come up regularly in the NASPP Discussion Forum. In honor of our NASPP Ask the Expert’s webcast today on Restricted Stock and Unit Awards, I’d like to summarize the issue.
IRS $100,000 Deposit Rule
Most public companies that offer stock compensation are semi-weekly filers, meaning they must make tax deposits with the IRS two times each week. These deposits are due within three business days after the deposit period. For example, if your period includes Tuesday, Wednesday, and Thursday, then the tax deposit for those three days would be due the following Wednesday. This is the company’s normal deposit schedule.
However, once the total tax liability reaches $100,000 for any corporate entity the deposit is due the next business day. (See IRS Publication 15.) For example, if the entity’s total tax liability reaches $100,000 on a Tuesday, the IRS would expect that deposit to be made on Wednesday of the same week. For those of you keeping score, the total tax liability to the IRS includes all taxes that get reported on the company’s quarterly tax return–Form 941. That is the total of income tax and both employee and employer Social Security and Medicare after adjustments, although that is more of a detail for the payroll team than for stock plan managers. Also, the liability only accumulates beginning after a deposit period. For example, if your deposit period includes Tuesday, Wednesday, and Thursday, then you do not need to combine Thursday’s liability with Friday’s liability.
T+4
The IRS issued a Field Directive in 2003 instructing IRS auditors not to challenge tax deposits from “broker-dealer trades” (i.e., broker-assisted cashless exercises) made the business day after the settlement of the exercise, provided the settlement is no longer than three days. This doesn’t change companies’ tax deposit timeframe; it simply instructs auditors not to challenge these deposits. In spite of this technicality, most companies rely on this Field Directive for remitting taxes to the IRS on all same-day sale NQSO exercises.
Restricted Stock
RSUs and RSAs are where stock compensation and tax deposit liability get really tricky. There isn’t any specific rule, regulation, or even Field Directive or instruction that specifically addresses how to handle the timing of the tax deposit due on restricted stock. Rather, it’s the fact that it isn’t addressed as an exception that is most important. Until or unless it is addressed, it’s safest for companies to assume that the income for deposit timing purposes is paid out on the vest date. If the vest date falls on a day when the total tax deposit liability reaches $100,000 or more, the taxes from that vesting event are due to the IRS no later than the following business day.
Penalties
Yes, there are penalties for late deposits. Yes, the IRS does audit this. It is true that there are companies who still do not make timely deposits intentionally because they either can’t figure out how or have determined that the cost of compliance is higher than the potential fines. However, the penalties range from 2% to 15% of the late or unpaid tax amount, which could be very expensive if late deposits are a regular occurrence. Remember that the late deposit is the entire amount due, not just the amount in excess of $100,000. Of course, there are a litany of approaches to try and get the penalties reduces or recalculated. However, even if your company is successful at reducing the amount due it still has to pay someone to negotiate with the IRS and that does not come cheaply, either.
Time Crunch
The reality is that your payroll department needs processing time and your payroll service provider requires processing time. There is pretty much no way for you to send tax amounts to your payroll team after the close of market on the day that restricted stock vesting events have created a next-day deposit liability for your company and actually have that deposit made to the IRS before the close of business the next day.
So, aside from defining the FMV for restricted stock vests as some component of trading value three days prior to the vest, how do you make a timely tax deposit and avoid the penalties? Although it isn’t the only possible approach, the most common method for compliance according to the NASPP’s most recent Quick Survey on Restricted Stock is to estimate the tax liability in advance of the vesting event and then make corrections after the actual tax liability is known.
As the deadline for filing Forms 3921 and 3922 draws near, I have finally heard from the IRS on a nagging question (see Topic #6810 in the NASPP Discussion Forum): if a company offers an ESPP in which employees purchase another corporation’s stock–for example, a subsidiary that sponsors an ESPP in which employees purchase the parent company’s stock–which company should be listed on Form 3922?
Which Corporation Should Be Listed on Form 3922? For ISO exercises (reported on Form 3921), this matter is easily resolved because the form includes space to list both corporate entities. The corporation that transferred the stock to the employee (presumably the plan sponsor–in my example, the subsidiary) is indicated in the “Transferor” box and the corporation whose stock was transferred (in my example, the parent company) is indicated in box 6.
Form 3922, however, only has space for one corporation. §1.6039-1(b)(1)(ii) of the final regulations states that the return for the transfer of ESPP shares is required to include “The name, address and employer identification number of the corporation whose stock is being transferred.” Based on that, the company whose stock is purchased (in my example, the parent company) should be the corporation indicated on Form 3922.
Why the Confusion?
Some companies would prefer to include the plan sponsor on Form 3922, rather than the company whose stock was purchased under the plan. For example, in the case of subsidiary sponsoring an ESPP in which employees purchase stock of a foreign parent company, there is concern that including the foreign parent as the corporation on Form 3922 could cause the IRS to think that the foreign parent has employees or a permanent establishment in the United States, which could trigger other tax-related issues.
Even where the company whose stock is purchased is not a foreign company, there is concern that listing this company, instead of the actual plan sponsor, on Form 3922 could cause the IRS to think that the individuals for which Form 3922 is filed are employees of the company indicated, causing confusion with regards to other tax matters (e.g., would the IRS then be looking for a Form W-2 from this company for the individuals).
What Do the Form Instructions Say?
The instructions to Form 3922 are not as specific as the final regulations with regard to what corporation must be listed. Per the instructions, the term “corporation” could include (but is not even limited to) the corporation issuing the stock, a related corporation of the corporation, and any party in control of the payment of remuneration for employment to the employee. The box itself on the form is labeled “Corporation,” not “Transferor,” as on Form 3921. These instructions seem to allow some leeway for companies to make their own determination as to which corporate entity should be indicated on the form.
What Does the IRS Say?
Given the confusion on this matter, I contacted the IRS for guidance. Just yesterday, I received an informal response from the IRS Chief Counsel’s office that the corporation listed on Form 3922 must be the corporation whose stock was purchased/transferred. The Chief Counsel recognizes that this could cause some problems with foreign corporations, but is nevertheless sticking to what the final regs say.
What Do You Say?
I’m curious to know what our members think about this and how much of a concern it is for you. It has been suggested to me that if we approached the IRS reasonably about this, we might get some additional relief. If you send me your carefully considered and professionally presented concerns, including the reasons why you would like to have the employer corporation listed on Form 3922 instead of the corporation whose stock was purchased/transferred, I will present those comments to the IRS. You can send your comments to me at bbaksa@naspp.com.
I wouldn’t count on getting any relief by the end of March, however. So, for this year filings, I would include the corporation whose stock was transferred on Form 3922.
Register Now for Early-Bird Savings on the NASPP Conference I’m excited to announce that the 19th Annual NASPP Conference will be held in San Francisco from November 1-4, 2011. Register by May 13 to receive the special early-bird rate!
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.
Register for 19th Annual NASPP Conference (November 1-4 in San Francisco). Don’t wait; the early-bird rate is only available until May 13.
We’ve gotten a two-week reprieve from the risk of a U.S. government shutdown, leaving everyone to worry over what a shutdown would mean exactly. First, it certainly doesn’t mean that everyone working for the government just stays home and that the machine of the U.S. governmental infrastructure comes to a screeching halt. Only non-essential functions would be suspended. In the world of stock plan administration, we are most interested in whether or not the SEC and the IRS will still function normally. Most importantly, will we be able to file required forms through the SEC’s EDGAR and the IRS’s FIRE system? I’m sure our partners in the Payroll department are also wondering if they will still be able to submit payroll withholding through EFTPS (or, more likely, that the service provider they are using will be able to), but don’t worry, I’m sure that the government will consider functions that bring tax money in are essential.
The truth is that nobody really knows, but we can all speculate. There hasn’t been a government shutdown since 1995 and the rules for determining which government positions are considered nonessential haven’t been updated since the 80’s. One section that is already covered is that all “activities essential to the preservation of the essential elements of the money and banking system of the United States, including borrowing and tax collection activities of the Treasury” are included in the list of essential government functions. This could potentially cover the personnel required to run both the electronic filings for the IRS, including the forms 3921 and 3922 if you haven’t taken care of that already. What probably won’t be deemed “essential” are personnel to help answer any questions you might have. According to this article, the SEC is already working on a contingency plan that would include stopping all audit processes, but I assume would keep EDGAR up and running. So, we are in a “wait and see” mode right now, both on whether or not a shutdown will take place and what exactly that would mean for stock plan managers.
On a related note, one of the fears expressed in this article is the threat posed by a lack of cyber-security in the event of a government shutdown; the list of critical-need computer security employees hasn’t been updated since 1995. With how much we rely on electronic filing in the world of equity compensation, that also has me a little concerned.
Electrifying Section 6039
Speaking of electronic filing, many companies that had originally planned on submitting paper returns the IRS have either requested an extension or decided to go ahead and file electronically. If you either missed the February 28th deadline to file for an extension or have decided to brave the electronic filing, you’re now faced with the problem of actually creating the file to submit through the IRS’s FIRE system.
Unfortunately, if you weren’t expecting to file electronically, then I suspect you didn’t send a test file to the IRS while the test files were still being accepted. This means that you have two choices: 1) engage a service provider to create and/or submit file on your behalf or 2) create the file yourself and hope you get it right. The first choice is, of course, the easiest. To make it even easier, the NASPP has a great matrix of service providers who are prepared to help you through this from our November 18th webcast. If you decide to go it alone without a test file, we can still help. Stock & Option Solutions recently provided NASPP members with an example of what the files for forms 3921 and 3922 should look like. Whatever your decision, the NASPP has got you covered!
Ah, 1969–the summer of love…and the birth of AMT. The Tax Reform Act of 1969 created a minimum tax designed to ensure that individuals with high incomes could not avoid paying federal income tax (thus, the concept of a minimum amount of tax that must be paid by high income filers). This was in response to a scandalous statement that 150 tax payers making over $100,000 paid no income tax. This minimum tax evolved into what is now the Alternative Minimum Tax. Although AMT receives regular bombardment on all sides, the revenue stream that AMT provides the federal government has made it prohibitive for anyone with the power to change the system to speak up and push for a solution (However, many politicians are perfectly happy to talk about the problem).
The Confusion
The fundamental differences between regular income tax and AMT are that AMT has only two tax brackets and that many exemptions and itemized deductions are not available under AMT. Because AMT is a parallel tax system, it’s difficult for many individuals to even determine if they are subject to AMT or not. In any given year, all tax payers theoretically need to consider whether they are subject to ordinary income tax or AMT. There is no one test to determine if you need to pay AMT; essentially, you must compute your taxes due under both systems and determine which is higher. A lot of middle income tax payers assume that their tax filing is so simple that surely they don’t need to worry about AMT. However, even if you have only personal exemptions and take the standard deduction, it is possible (extremely unlikely, but possible) to end up being subject to AMT. Fortunately, virtually all tax programs incorporate questions to help you determine whether or not you are subject to AMT and the IRS provides a handy little AMT Assistant that will help you determine if you should even bother.
ISOs and AMT
Incentive stock options create a special set of confusions and misunderstandings when it comes to AMT. Here are a few reasons why:
If an employee exercises an ISO and doesn’t sell shares in the same tax year, she or he needs to file Forms 6251 and 8801 for the year of exercise – regardless of whether or not AMT is due. Now that the IRS is being notified of ISO cash exercises courtesy of Form 3921, it’s especially important that your employees are aware of this.
If an employee exercises and sells ISOs in the same year, resulting in a disqualifying disposition, there is no AMT income from the ISO exercise (provided all the shares are sold) because you the preferential tax treatment on the exercise is eliminated. It’s important that your employees are aware that Form 3921 does not take any disposition into account.
ISOs fall into a special category of AMT income that is eligible for a tax credit in subsequent year. However, in order to calculate–or even qualify–for the credit, a tax payer must file Forms 6251 and 8801 every year until the credit can be claimed. Claiming an AMT credit is particularly tricky and a fabulous reason to rely on a tax professional, which brings up the topic of tax and financial planning resources for your employees. Calculating the credit is difficult, too, because it is limited to AMT income that is in excess of regular income. Consider partnering with your broker(s) or other service provider to help put employees in contact with tax professionals.
Disqualifying dispositions that occur in a year subsequent to exercise are a mess because the employee could end up with AMT in the year of the exercise and ordinary income in the year of the sale. However, that ordinary income could result in a favorable AMT adjustment when calculating AMT in the subsequent year.
Find out more about ISOs on the NASPP’s Incentive Stock Options portal. Also, the NASPP’s fabulous and freshly updated Stock Plan Fundamentals course starts in April. The entire second session (of six) is dedicated to the taxation of equity compensation, including ISOs.