Yesterday, I blogged about the uncertainty around the expiration of the social security payroll tax cut that has been in place for 2011. Hours later, House Republican leaders agreed to basically the same deal they had rejected just two days prior, providing temporary resolution to a last minute debate.
The agreement includes extending the social security payroll tax cut for another two months, through February 29, 2012. This means the social security withholding rate would remain at its present 4.2% for now; government leaders will have two months to figure out a longer term plan. The House of Representatives, in a pro forma session, could pass the bill as early as today, December 23, 2011, after which the Senate would do the same. If an objection is raised on the floor of the House, then House speaker Boehner would summon Congress back for a formal vote next week. Never say never, but Thursday’s events made considerable progress towards securing an extension of the payroll tax cut.
Over the past week there has been a struggle in Washington over whether or not to extend this year’s payroll tax cut (also known as the payroll tax holiday), and, amongst other things, continue unemployment benefits for the jobless. In today’s blog I summarize the issues.
In a Nutshell
Last year around this very time, President Obama signed into law tax legislation that, for one year, reduced the rate of social security payroll tax withholding by 2 percent: from 6.2% to 4.2% (see the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010). With Obama’s approval coming late in the year, and the payroll tax cut to take effect for 2011, payroll processors around the nation scrambled to adjust social security withholdings to the new rate by the deadline of 1/31/2011. In effect for only a year, the payroll tax cut is scheduled to expire on 12/31/2011 – about 9 days from now. This means that effective January 1, 2012, the social security withholding rate will revert back to 6.2%.
Not so Fast…
With the payroll tax cut set to expire next week (on the heels of an election year, amongst other things), our branches of government cannot agree on how to handle the situation. Many argue it wouldn’t look good in an election year to raise taxes, especially with so many Americans still facing economic struggles. The payroll tax cut is only one component of the issue at hand – other affected areas include the extension of unemployment benefits for the jobless.
What’s a Government to Do?
On December 17, 2011, in an unusual Saturday vote, the Senate voted to approve a $30 billion package that included extension of the payroll tax holiday for another two months. The Senate theorized that a two month extension would allow time for all parties to reach a mutually agreeable longer term fix. It seemed possible that the payroll tax holiday would continue, at least in the short term. The “victory”, however small, was short lived. Only 3 days later, House Republicans rejected the Senate bill, placing the future of the social security payroll tax cut in jeopardy. If no agreement can be reached and finalized by December 31, 2011 (and Senate action is unlikely, since the Senate has left town for the year), social security rates will increase to 6.2% on January 1, 2012.
A Holiday in Limbo
With only 9 days left in 2011, and a holiday season in full swing, uncertainty fills the air. While the House does have options available that would allow them to essentially change their minds and affirm the Senate bill, whether they will pursue those options is uncertain. So the clock ticks towards 2012 with one thing certain: that payroll withholding processors need to be prepared for either outcome.
– Jennifer
It’s renewal time! All NASPP memberships expire on December 31; renew your membership today so you don’t miss out on the NASPP in 2012.
It was great to see everyone at the NASPP Conference last week. One session I look forward to every year at the Conference is “The IRS Speaks“–which I consider to be my chance to get the inside scoop on various IRS projects that impact stock compensation. For today’s blog, I have a few updates from this year’s panel, as well as some other recent tax news.
For highlights of the NASPP Conference, check out my blog entries on November 2 and November 4.
COLAs for 2012 The maximum amount of earnings subject to Social Security tax will increase to $110,100 in 2012 (up from $106,800 this year) (those of you that follow the NASPP on Facebook and Twitter already know this). The tax rate is also scheduled to return to 6.2% (up from 4.2% this year), making the maximum withholding $6,826.20 for 2012 (see the NASPP alert). But stay tuned on this one; President Obama has proposed reducing Social Security tax for 2012.
Also, if any of you exclude highly compensated employees from your ESPP, note that the threshold for who is considered highly compensated increases to $115,000 in 2012.
BTW–COLAs stands for “cost of living adjustments.”
Updates from “The IRS Speaks“ Here are areas where the IRS hopes to issue guidance in the next year or so:
409A income inclusion rules. Note however, that this doesn’t include Code Y reporting. That isn’t likely to happen until some time after the 409A income inclusion rules are finalized.
Finalizing the proposed regs that were issued earlier this year under Section 162(m).
The treatment of dividends and dividend equivalents under Section 162(m).
A model election under Section 83(b) that includes examples illustrating the tax consequences of making (or not making) the election. (Fascinating–I had no idea the IRS even thought there was a need for this.)
Guidance on Section 162(m)(6), which relates to the deduction limit that applies to health insurance providers.
Something about foreign pension plans under Section 402(b) (I have no idea what this is–sorry, when I hear the words “foreign pension plans,” I tune out).
The panel also covered a number of issues relating to Section 6039 returns for ISOs and ESPPs. I don’t have time to cover them all today, but maybe in a future blog.
In terms of cost-basis reporting, the panel did say that the IRS is considering adding a checkbox to Form 1099-B that would indicate whether the reported cost basis includes W-2 income recognized in connection with the shares. We think this brilliant suggestion from Andrew Schwartz of BNY Mellon Shareowner Services would be a big help in explaining the form to employees, but if the IRS makes this change, it won’t be until the 2012 form comes 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.
Honestly, I anticipated that the Bush-era tax cuts would lapse at the end of this year–and I know I’m not the only one. It’s is unusual for Congress to be this active this late in the year. But, yesterday the Senate did approve the tax plan which includes an extension of those tax cuts for two more years. The bill is up for a vote in the Senate today and is expected to pass. (See this article from Reuters.)
So, if your company has been grappling with what, if anything, should be done in anticipation of tax increases, you’ve just been given a couple more years to sort through the issue. If you are wondering what in the world this has to do with your stock plans, since employers can just use a flat rate for withholding on equity compensation, then you must have missed our July webcast, How Upcoming Tax Rate Changes Impact Your Stock Plans. Don’t worry; the full webcast and transcript are still available!
Where this bill could really hit home is this: In addition to the extension of the individual tax rates, the bill includes a one-year decrease in payroll taxes. Specifically, the 6.2% Social Security tax paid by employees would be reduced to 4.2%. Employers would not be given the same tax holiday; employer “matching” stays at 6.2%. The bill doesn’t appear to impact the changes to the Medicare portion of payroll taxes, which are set to increase from 1.45% to 2.35% for wages above the threshold amount starting in 2013. (For more information on the implications of the Health Care and Education Reconciliation Act of 2010, check out that great webcast I mentioned above.)
If this bill does pass, there are a few things you will want to be sure and prepare for. Obviously, you’ll need to make sure to update the Social Security tax rate in your stock plan administration database. Additionally, it will be a good idea to sit down briefly with your payroll department to confirm that there won’t be any glitches exchanging Social Security withholding and year-to-date levels after the payroll system is updated.
On the communication front, this isn’t really the kind of issue that warrants a whole campaign. It’s not confusing and lower taxes are always well received. It is, however, a great reminder of the value of a good disclaimer. Your educational materials, particularly those pertaining to taxes on equity compensation, should have a disclaimer that includes verbiage indicating that the information in the materials may not reflect current regulatory developments. This bill would mean a pretty straight-forward decrease in tax withholding, but the next development may not be so simple. Having a quality disclaimer helps protect the company in case there is a delay in updating your educational materials or if employees are inadvertently referring to outdated printed material. If you’re feeling ambitious, a handy little asterisk notation on any examples you have available to employees noting the one-year reduction in the Social Security withholding rate would be fantastic.
Finally, and maybe only after the dust settles from the changes that 2010 has brought us, take a look at what 2013 might look like for your employees, particularly those making over $200,000 annually, and decide if there are any changes your company may want to implement in anticipation of the tax rates increasing.
This week I discuss a hodge podge of tax related updates: IRS Notice 2010-80, Code Y reporting, and the Social Security wage base for 2011.
IRS Expands 409A Documentation Corrections Program to Include Stock Rights Early this year, when the IRS issued Notice 2010-6, I got a much appreciated reprieve from having to understand it because it handily didn’t apply to stock rights. (Well, handily for me at least; others may not have been so thrilled with this outcome.) Alas, my reprieve lasted less than a year; last week the IRS issued Notice 2010-80, expanding Notice 2010-6 to cover stock rights.
I’m surprised at this development because I wasn’t aware that very many, if any, companies needed this relief. I thought that, by now, companies had pretty much dealt with 409A in terms of their stock plans. If companies are in need of this relief, however, it may be necessary to take action by December 31, 2010–which is coming up quick; you’d think the IRS could have provided a little more time on this.
Luckily, I’m not sure that many companies are in need of this relief. It applies only to options that were not intended to be exempt from Section 409A. In my experience, this is pretty rare. So long as options are granted with a price equal to FMV at grant, it’s relatively easy to ensure that they are exempt. Where a company inadvertently grants a discounted option, assuming the option was intended to be exempt from 409A, it isn’t eligible for correction under Notice 2010-80 (however, it may be eligible for correction under IRS Notice 2008-113, which provides relief for operational errors).
I don’t know any companies that are granting options that aren’t intended to be exempt under 409A. Even where companies had pre-409A grants that weren’t exempt, I think the typical fix was to modify the options to be exempt, rather than to try to comply with 409A. So the bad news is that this relief probably isn’t that helpful for most of you but I guess the silver lining is that you probably don’t need to scramble to understand it by December 31.
Thanks to Art Meyers of Choate Hall & Stewart and Mike Melbinger of Winston & Strawn for helping me with my rudimentary understanding of Notice 2010-80.
Code Y While we’re on the topic of 409A, I thought I’d mention that Code Y reporting still hasn’t gone into effect. You will recall–or maybe you won’t, it’s been so long since 409A was enacted–that 409A requires companies to report amounts subject to deferral in Box 12 of Form W-2 using Code Y. IRS Notice 2008-115 suspended this requirement until Treasury can issue regulations on it. So far no regulations have been issued so chances are you won’t have to worry about Code Y for this year (but, then again, there are still 23 shopping days left until December 31, so I suppose the IRS could still come through with a late December Code Y surprise).
Thanks to Mike Melbinger of Winston & Strawn for confirming that there wasn’t some announcement about Code Y that I had missed.
Social Security Wage Base Pursuant to a Social Security Administration press release issued on October 15, the maximum amount of wages subject to Social Security is not increasing for 2011–it will remain at $106,800 for another year. See the NASPP alert on this announcement for more information.
Vote for Broc and Dave! Broc Romanek and David Lynn’s blog on TheCorporateCounsel.net was selected by the ABA Journal as one of the Top 100 Legal Blawgs. Readers can vote on their favorite blogs and we want Broc and Dave to win (they won last year), so we’re asking our readers to vote. I know you all would vote for the NASPP Blog if you could, but we don’t count as a legal blog, so this is as close as you’ll come to voting for us. Come on, don’t make me beg!
Anyone can vote, you don’t have to be a member of the ABA. If you read and enjoy Broc and Dave’s blog–or even if you don’t–I hope you’ll vote for it. BTW–if you have multiple email addresses, you can register and vote under each one. See Broc’s December 6 blog entry for instructions on voting.
If you’ve never checked out the blog; it’s definitely worth a read. Unlike the lazy folks here at NASPP Blog, Broc and Dave manage to post an entry every day. And it’s free to anyone, whether you subscribe to TheCorporateCounsel.net or not. At a minimum, someone in your legal department should be reading it.
Less Than One Month Left to Get your Free Conference Session Audio All NASPP memberships expire on a calendar-year basis. Renew your membership by Dec 31 and you’ll qualify to receive the audio for one NASPP Conference session for free! Don’t wait any longer–the new year will be here before you know it!
This offer is also available to anyone the joins the NASPP before December 31–tell all your friends!
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.
Renew your NASPP membership for 2011 (if you aren’t an NASPP member, join today). Renew or join by Dec 31 to qualify to receive the audio of one NASPP Conference session for free.
When all or a portion of a nonstatutory stock options is transferred to the former spouse of one of your employees subsequent to a divorce, there are no income reporting or tax withholding obligations on the transfer. However, the exercise of those option shares requires special handling by the company.
When an incentive stock option is transferred in a divorce settlement, it no longer qualifies for preferential tax treatment. Once the ISO has been transferred, the income reporting and tax withholding obligations are the same as for NSOs. However, if the transfer of the shares happens only at exercise, then the ISO shares maintain their preferential tax treatment. The transfer of the shares at exercise does not constitute a disqualifying disposition. The transferred shares are then subject to the same holding requirements from the date of grant and exercise to determine if the sale is a qualified or disqualified disposition.
Revenue Rulings
There are two important revenue rulings that govern the income reporting and tax withholding on options transferred pursuant to a divorce.
Revenue Ruling 2002-22 establishes that a transfer of nonstatutory stock options as part of a divorce settlement does not constitute an income event. For stock plan managers, this means that there is no need to establish the fair value of the option, report any income, or withhold any taxes on the date of transfer. It also establishes that the former spouse realizes income on the exercise of those option shares.
Revenue Ruling 2004-60 clarifies the withholding and reporting obligations for an exercise made by the non-employee former spouse of options that were transferred in a divorce settlement.
Withholding and Reporting at Exercise
So, we know from Revenue Ruling 2004-60 that the former spouse realizes income at the exercise of options transferred pursuant to a divorce. What’s more, FICA and FUTA are both applied to the income at exercise. But, don’t worry; you won’t need to collect a Form W-4 from the former spouse. The income and FICA tax rates are applied based on the employee’s supplemental income and the Social Security tax she or he paid in that tax year as of the exercise date.
When the former spouse exercises the option, the company withholds income, Social Security, and Medicare from the exercise proceeds based on the employee’s withholding rates. The income tax withholding is attributed to the former spouse, but the FICA taxes are attributed to the employee even though they are paid by the former spouse. The income (i.e.; spread at exercise) and the income taxes withheld are reported on a Form 1099-MISC to the former spouse. That same income amount is reported to the employee as Social Security and Medicare wages on Form W-2. Additionally, the Social Security (if applicable) and Medicare withheld are reported on the employee’s Form W-2. For a great example of this, see our Tax Withholding on Option Exercises Subsequent to Divorce alert. You can also find more information in these recorded webcasts: Death and Divorce: The Lighter Side of Equity Compensation and The 2nd Annual NASPP Webcast on Tax Reporting.
Last Chance for Special Conference Rates
Registrations for our 18th Annual NASPP Conference are pouring in! If you haven’t already registered, don’t miss out on the special $200 discount on registration fees. This special rate is only available through tomorrow, May 14th!