The NASPP Blog

Tag Archives: retirement

December 13, 2012

The Tax Man Cometh…Even in Retirement

I know many retirees look forward to starting a new, carefree life free of winter weather, the 9 to 5 grind, and high tax brackets. One such retiree in Connecticut with similar hopes encountered a setback and learned the hard way about state-to-state mobility nuances after the New York State Division of Tax Appeals upheld the assertion that his stock option related income (and other deferred compensation income) received after retirement should be partially allocated to the state of New York, even though he resides in Connecticut.

Hungry States

State-to-state mobility is not a new topic. We know that states are becoming more assertive in claiming tax revenues associated with wages and benefits earned during the period of time the employee worked in their state, regardless of when the benefit was actually realized or paid. In many states, the employee never needs to reside there – only work there – in order for allocation claims to surface. In the appeals case at hand, an American Airlines employee resided in Connecticut during his employment and after his retirement. During his period of employment with the airline, he worked both in and outside of New York. He was granted a variety of stock options during his employment relationship with the airline (grants were awarded from 1996 – 2001, and again in 2003). The employee retired in 2005 and exercised his stock options in 2006. The state of New York maintained that a portion of the income from the transaction should be allocated to New York, reflecting the employee’s time worked there. Like many other states, New York does have regulations requiring that non-residents pay income taxes on wages that are earned in the state (regardless of residency). There are a few exclusions on taxing non-residents mandated by federal law, such as that no non resident can be taxed on qualified retirement distributions. As a result, New York wanted the taxes from stock option gains based on the number of days worked in New York between the date of grant and the date of retirement. This translated to about two-thirds of the gains being taxable in New York.

The retired employee (who I’m guessing probably had no clue that he’d be taxed in New York, since he never lived there and was now well into retirement) challenged the New York Tax Division’s claim to his income taxes on a number of grounds, including that the regulations were unfair to non-residents. Predictably, the New York State Division of Tax Appeals upheld all regulations in question.

They Don’t Know What They Don’t Know

This story is a good reminder that state-to-state mobility is not something that is going away. Even more troubling than learning how to administer the nuances of tracking and allocating income between states is the fact that many employees (regardless of employment status) have no clue about these intricacies. I’m thinking about the retiree that heads off to a warmer state with no state income tax, believing they’ve finally settled into retirement bliss. Moving to a state with no tax rate does not mean the employee is going to avoid paying state income taxes. They could very well owe the state they just left behind. While this may logically be entertained by current employees, and perhaps even those recently terminated, there is an aura around retirement that may cause many retirees to miss this concept in their tax planning.

Tax season is just around the corner, and it may be a good time to take a fresh look at the pool of possible current or former employees who may be subject to these very types of mobility issues and, at minimum, recommend that they take a hard look at the details with their tax planners.

-Jennifer

Tags: , , , , ,

September 13, 2012

Navigating Retirement Provisions

Whether you’re new to the industry or have been involved in stock compensation for a while, chances are you’ve run into some retirement provisions as part of managing equity programs. What makes these provisions a bit different and often more tricky to administer compared to other situations, such as termination, is that some plans treat the mere act of becoming eligible for retirement as an event, regardless of whether or not retirement actually occurs. In today’s blog I examine some of the more challenging aspects of managing retirement provisions.

Timing is Everything

Ah, it would be so easy if people became eligible for retirement and then retired on the same day. Somehow I think the forces of the universe would think that’s letting us off the hook way too easy. So, instead, many companies increase or guarantee benefits once someone becomes eligible to retire, even if it’s months or years before the actual retirement will occur. Stock compensation is certainly one of those “benefits” that can be affected upon retirement eligibility.

Restricted Stock and Restricted Stock Units are two award types that are often affected by retirement eligibility provisions. Two common scenarios include acceleration of vesting upon retirement eligibility, or simply removal of the “substantial risk of forfeiture” conditions on the award. An example of the latter would be a provision that says that although no acceleration of vesting will occur upon retirement eligibility, the employee will be guaranteed to continue to vest in their shares until retirement.

One tricky aspect of administering the above provisions is tax withholding. Both RSAs and RSUs are subject to FICA taxes once the risk of forfeiture no longer exists. If the shares are not released to the employee at that time (let’s say that vesting will occur in the future, after the retirement eligible date, even though the risk of forfeiture no longer exists), then selling or withholding shares to pay for the FICA withholding is not an option. Many companies do rely on the IRS’s “rule of administrative convenience”, which allows FICA withholding to occur by 12/31 of the year of the triggering event. This means that companies can delay the mechanics of actually withholding until the end of the year, when many employees may have already met their annual FICA limit. In this case, no additional FICA withholding would be necessary and the company is off the hook in terms of having to figure out how to collect FICA on the shares. However, if the employee hasn’t met their FICA limit as year end approaches, then an appropriate amount of FICA will still need to be withheld. As such, the stock plan administrator needs to work with Payroll to ensure close coordination and monitoring of FICA status.

We’ve talked about FICA, but other taxes cannot be forgotten as well. Depending on award type (RSA or RSU) and the type of retirement eligibility event (accelerated vesting? guaranteed vesting in the future?), the timing of withholding for federal, state and medicare taxes may be different than the timing of FICA withholding.

Don’t Forget 409A

For companies with RSUs that vest upon retirement eligibility, the RSU will be considered “deferred compensation” under 409A if the shares will be released within a year of the retirement eligible (vest) date. In that event, 409A payout rules and deadlines need to be followed.

Evaluate Your Practices

I’ve highlighted a few of the considerations around retirement eligibility provisions and have just scratched the surface. Our newest Compliance-O-Meter on Retirement Practices gives you an opportunity to rate your retirement practices and see how other companies are handling these situations.

-Jennifer

Tags: , , ,