Just in the nick of time, the IRS has released the final regulations for cost-basis reporting on Form 1099-B, the first phase of which goes into effect for stock sales occurring on or after January 1, 2011. Thanks to Andrew Schwartz of BNY Mellon Shareowner Services for providing the NASPP with an alert explaining how the regulations apply to stock compensation.

Final Regulations on Cost-Basis Reporting
Andrew’s alert covers the key impacts to stock compensation in just two pages, but for those of you that still don’t have time to read it, I provide a few highlights below.

What the…?

Hopefully this hasn’t caught you by surprise, but, in case it has, here’s a refresher. The Economic Stabilization Act of 2009, as a revenue-raising measure, requires brokers to include cost-basis information on any Forms 1099-B reporting sales of securities (stock, options, etc.)–see our earlier alert “Cost Basis Reporting to Impact Stock Plans.” The requirement is phased in over several years; the first phase, which applies to sales of stock, is effective beginning in 2011.

If you are wondering how this will raise revenue, given that the most common mistake employees make when reporting stock sales on their tax returns is to underreport their basis, so was I. That is until I realized that the way the requirements are phased in for stock compensation is actually likely to increase the likelihood that employees will underreport their basis, at least for the first few years. See my June 2, 2010 blog entry, “Cost-Basis Reporting: Complicating an Already Confusing Topic.”

The Final Regulations

Under the final regulations, as under the proposed regulations, cost basis will have to be reported for any sales of stock acquired on or after January 1, 2011. This includes stock acquired through option and SAR exercises, ESPPs, and restricted stock and unit awards.
The final regulations carve out an exception for stock that isn’t acquired “for cash.” For our purposes, this includes restricted stock and unit arrangements and also most likely SSARs, because employees do not pay cash to acquire shares under those types of awards. For stock acquired under options and ESPPs, where employees are required to pay for the stock, the broker must report a cost basis at least equal to the amount the employee paid for the stock (the cost basis also includes any ordinary income recognized in connection with the stock, but brokers aren’t required to include this in the cost basis until 2013–hence the likelihood for underreporting).

Unfortunately, the regulations don’t do much to address the complications involved in reporting the cost basis for shares acquired under an ISO or ESPP, which often can’t be fully calculated until the shares have actually been sold.

Why Do You Care (If You Aren’t a Broker)?

I know that it feels like this is something that only applies to brokers but the fact is that these requirements are likely to have an impact on stock plan administration, from additional data that your brokers and transfer agents are going to need from you, to employee confusion, to higher fees that brokers and transfer agents are charging to pay for the additional infrastructure necessary to fulfill the reporting requirements. If you haven’t yet discussed these regulations with your brokers (and transfer agents, this implicates them as well), now is the time to have that conversation.

Conference Audio Available
Andrew moderated a great session on this topic at the 18th Annual NASPP Conference, “IRS Cost-Basis Reporting: Are Your Stock Plans Ready?” If you missed it and want to know more about cost-basis reporting, you can purchase the recorded audio for this and any other Conference sessions in downloadable MP3 format. Purchase just the session(s) you want or save by purchasing a package of sessions.

Free Conference Session Audio If You Renew by Dec 31
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!

Join Now and Get Three Months Free and Free Conference Session Audio!
If you aren’t currently an NASPP member, now is the time to become one! Join the NASPP for 2011 and you’ll get the rest of 2010 for free.  If that’s not enough, you’ll also get the audio for one NASPP Conference session for free. 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. 

• Purchase the audio for the 18th Annual NASPP Conference.
• Complete the Compliance-O-Meter quiz on Grant Agreements.
• Take the “Question of the Week” challenge.
• Renew your NASPP membership for 2011 (if you aren’t an NASPP member, join today).

– Barbara