Is your calendar full for January yet? As we head into the new year, now is a good time to touch base with other departments that you work with throughout the year to review procedures and plan for the coming year. In today’s blog, I discuss a few of the groups you might want to meet with. Looks like it’s going to be a busy month…
Payroll
Schedule a meeting with payroll to kick off the start of the year. A few items for the meeting agenda include reviewing W-2 reporting procedures for various stock plan transactions (see our “Form W-2 Reporting Checklist” and “W-2 and 1099 Reporting for Equity Compensation – FAQs“); reviewing tax rate and limit changes for the upcoming year; and reviewing current procedures–what’s working and what isn’t working.
Accounts Payable
Forms 1099-MISC are typically prepared by accounts payable. If you grant equity to outside directors and other non-employees, it’s a good idea to meet with this group to ensure that any of their taxable stock plan transactions for the year will be reported appropriately. Ditto for any taxable transactions that occurred after the death of an employee or subsequent to the transfer of options/awards pursuant to divorce.
Accounting/Finance
For calendar year-end companies that haven’t done so since last year, now is a good time to review your valuation assumptions (volatility, dividend yield, interest rates, and expected life) for stock option grants. It’s also a good time to revisit the expected forfeiture rate applied to options and awards. Set up a meeting with accounting/finance to have a conversation about this. If you’ve had unusual transactions that occurred during the year (acceleration of vesting, changes in employee status, option exchange programs, other option/award modifications), it’s a good idea to review how these transactions are accounted for as well. You don’t want any surprises when your auditors review your financial reports.
Legal/Finance
You’ve probably already done this if your company has a calendar year-end, but if you haven’t, you’ll want to schedule a meeting with the folks responsible for preparing your company’s Form 10-K and proxy solicitation statements to ascertain what your contributions will need to be. Reviewing last year’s statements to remind yourself of the information included relating to stock compensation can be a good preparatory step for this meeting. It’s also a good idea to review the number of shares available in your stock plans, expected share usage for the next two years, and plan expiration dates, so you’ll know if a shareholder proposal relating to your stock plans is necessary.
HR
Review your current grant guidelines with HR to determine if any tweaking is necessary and to find out if HR has planned any changes to your equity programs for the next year.
Brokers
With cost-basis reporting going into effect for the first time with 2011 Forms 1099-B, you’ll want to meet with your brokers to find out what will be reported as the cost basis for stock issued under your stock plans and what information they will be providing your employees about the new reporting procedures. See my November 30, 2010 bog, “Four Questions to Ask Your Brokers.”
Section 6039 Service
If you plan to use an outside provider to prepare and/or file Section 6039 returns with the IRS and provide statements to employees, don’t wait any longer to get the conversations with your provider started. The deadline for employee statements is January 31!
International Advisors
If you offer stock compensation to non-US employees, it’s a good time to check in with your external advisors for international compliance to find out if any local requirements have changed and if there are any year-end reporting requirements you need to comply with outside of the United States. Where US employees have relocated to other countries, or foreign nationals have moved into the United States, also review the US tax reporting requirements with respect to these folks (even for foreign nationals that moved back out of the US by the end of the year).
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.
I understand that Forms 3921 and 3922 still are not available from the IRS, so, in today’s blog, I provide instructions for requesting an extension of the filing deadline.
Note: I was not able to personally verify the availability (or lack thereof) of the forms prior to posting this blog entry because, of course, the IRS was closed yesterday for Presidents’ Day. Here at the NASPP, we were working–just one more way in which the NASPP is better than the IRS (see NASPP Discussion Forum Topic #6788 for more proof that the NASPP provides better service than the IRS).
Time is Running Out A week or so ago, when I placed my order for one copy each of Forms 3921 and 3922, I was told that it takes five to seven days to receive the forms. Thus, at this point, it seems unlikely that the paper forms will arrive in time for the filing deadline on February 28. Any company that is planning on filing on paper should probably go ahead and file for a 30-day extension.
How to Request an Extension
You can file Form 8809 to request a 30-day extension of the filing deadline. If you file Form 8809 electronically–which is easy peasy; the IRS provides an online fill-in form for this purpose–the extension is granted automatically, no questions asked. You don’t even have to state a reason for needing the extension (I know, I know, you really want to explain that the reason you need the extension is that the IRS HASN’T MADE THE FORMS AVAILABLE). You can file for the extension online, even though you will be filing the returns on paper. So long as you submit your extension request by February 28, there are no penalties for filing for the extension.
Log in. If you don’t have a login, you can easily create one for yourself. Follow the instructions provided.
Click “Main Menu” (in the left column). This will take you to the FIRE system main menu.
Click “Extension of Time Request” (in the left column). This will take you to the Extension of Time Request page.
Select “Fill-In Extension Form.” This takes you to a short explanation of the request form.
Read the explanation. Wonder to yourself why the IRS has to be so wordy all the time. Click the Continue button. This will take you to the online extension request form.
Complete the form and click the Submit button. You should get an online confirmation that your extension has been approved. (I say “should” because I didn’t actually click the Submit button myself when I tested this. The NASPP doesn’t have any Forms 3921 and 3922 to file so it didn’t seem very smart to confuse the IRS by filing for an extension on forms we aren’t filing. I can’t imagine trying to explain that to an IRS auditor.)
Print the confirmation for your records.
Once your extension request is approved, you’ll have until March 30 to file the returns. Hopefully the forms will be available long before then. If they are not, however, you can file for another extension. That extension isn’t granted automatically and you have to give a reason for the request, but I can’t really imagine a better reason than that the IRS hasn’t yet made the forms available.
Electronic Filers Don’t Need an Extension
If you are filing Forms 3921 or 3922 electronically, you don’t need an extension because: 1) you already have until March 31 to submit the filing and 2) you don’t need the actual forms from the IRS. You are submitting an ASCII text file via the FIRE system. If you have your file ready to go, you could submit it today, even though the official forms aren’t available yet.
More Information???
We are trying to get more information from the IRS about when the forms will be available. If we find out anything, you can be sure we’ll let our members know. Follow the NASPP on Twitter or Facebook to make sure you don’t miss any announcements we make about the forms.
Update: I spoke to two IRS representatives this morning, February 22. Forms 3921 and 3922 are still not available and they did not know when they will be available. They encouraged companies to request a filing date extension (as I’ve described in this blog) or to file electronically.
Last Chance to Submit Speaking Proposals for the NASPP Conference The IRS isn’t the only one with a February 28 deadline. All speaking proposals for the 19th Annual NASPP Conference must be submitted by February 28. (And unlike the IRS, the NASPP won’t grant an automatic 30-day extension, no matter how nicely you ask–you can chalk one up for the IRS, but I still think the NASPP is better.)
If you missed the big announcement last week, the NASPP Conference will be held from November 1-4 in San Francisco. Look for information on registering for the Conference soon.
Last Chance for the Early-Bird Rate for the Online Fundamentals This is also the last week to qualify for the early-bird rate on the NASPP’s acclaimed online program, “Stock Plan Fundamentals.” This multi-webcast course covers the regulatory framework and administrative best practices that apply to stock compensation. It’s a great program for anyone new to the industry or anyone preparing for the CEP exam. Register by February 25 for early-bird savings.
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.
Cost-Basis Reporting: Helpful Information or Disaster Waiting to Happen? Cost-basis reporting on Form 1099-B will be required for sales of any equity securities acquired after January 1, 2011. This includes sales of shares acquired under stock option, restricted stock/unit, and other stock plans, as well as shares acquired under ESPPs. But the rules apply slightly differently to shares acquired under these plans than for, say, shares acquired via a run-of-the-mill open-market purchase. The end result is likely to be a lot of confusion, a lot of employee inquiries, and, probably, a lot of overpayment of taxes.
Understanding Cost-Basis for Equity Compensation
For shares acquired through an open-market purchase, the cost basis is simply the amount paid for the shares plus any transaction fees (including fees for the sale transaction, if the broker doesn’t report the sale proceeds net of fees on Form 1099-B). But for shares acquired under a stock compensation program, the cost basis also includes any income reported on the employee’s Form W-2 in connection with either the purchase or the sale of the shares.
Maybe You Should Install a Second Phone Line
The proposed regulations on cost-basis reporting, however, only require brokers, et. al., to report the amount paid for the securities as the cost basis on Form 1099-B. Regulations requiring brokers to report the full cost basis won’t be effective until 2013 at the earliest. For stock compensation, this seems like a huge flaw in the reporting requirements.
If, as a stock plan administrator, you’ve been thinking that you don’t need to worry about these rules because it isn’t your job to issue Forms 1099-B, think again! I can only imagine how confusing this will be for employees–who are already pretty confused about how to report stock compensation on Schedule D. Unless you have some top-notch communications about this, you’ll need to be prepared for a lot of employee confusion and inquiries. And this goes for brokers too–employees are just as likely to look to the broker that issued the Form 1099-B for answers as they are to look to their company’s stock plan administrator.
Now I Understand the Additional Tax Revenue
I suspect that many employees will simply report the Form 1099-B cost basis on their Schedule D, not realizing that this is an understated amount. This will cause employees to pay capital gains tax on the amounts that have already been taxed at ordinary income rates. If the sale is less than a year after the stock was acquired (as in the case of a same-day sale exercise), it is a short-term gain, taxed at the same rate as ordinary income. This doubles the federal income tax paid on the transaction–for employees in the highest tax bracket, it could result in taxes paid of more than 80% of the spread.
I’ve been trying to figure out how cost-basis reporting is going to generate so much additional tax revenue, but now I think I understand.
And, if by some miracle, employees do manage to report the correct tax basis on their tax returns, what happens when the cost basis reported on Schedule D doesn’t match the basis reported on Form 1099-B? Currently, if there is a discrepancy in the sale proceeds reported on Schedule D vs. Form 1099-B, this triggers an automatic IRS notice that there is an error on the return. Will the same type of notice be generated if the reported cost-basis amounts don’t match? If so, how will employees explain the discrepancy to IRS auditors–who probably don’t understand cost-basis for equity compensation any better than they do?
Do You Know What Your Brokers Are Doing?
As I understand it, brokers are permitted to go above and beyond the minimum reporting requirements. If they have the full cost-basis information available and are so inclined, brokers can report the full cost basis (amount paid plus amounts included income) on Form 1099-B. Now would be a good time to ask your brokers a few questions about how they plan to comply:
What will they report as the cost basis for shares acquired under various types of stock compensation arrangements? Ask specifically about NQSOs, restricted stock/units, ISOs, and ESPPs if you offer all of these arrangements.
What sort of communication materials are your brokers going to provide to employees to help them understand the information reported on Form 1099-B and how will this information be provided? Will they actively distribute information to employees or will employees have to ask for it?
Thanks to Andrew Schwartz at BNY Mellon Shareowner Services for providing the background information on how the cost-basis reporting requirements apply to stock compensation. Be sure to check out Andrew’s interview on cost-basis reporting in the upcoming issue of The NASPP Advisor.
18th Annual NASPP Conference Don’t miss the 18th Annual NASPP Conference from Sept 20-23 in Chicago. We just posted this year’s program and it is phenomenal–we’ve planned over 40 sessions on critical and timely topics, like cost-basis reporting. Register for the Conference today.
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.
More Information on Forms 3921 and 3922 Last week I blogged about the general instructions for Forms 3921 and 3922, which will be used to report ISO and ESPP transactions to the IRS beginning in 2011 (for 2010 transactions). This week I discuss some of the details relating to these forms. (This information is also from the general instructions to the forms.)
Penalties
The penalties for late filings are as follows:
$15 per form if you file within 30 days of the deadline (maximum of $75,000 per year)
$30 per form if you file by August 1 (maximum of $150,000 per year)
$50 per form if you file after August 1 or never complete the filing (maximum of $250,000 per year)
At least $100 per form if the late filing or failure to file is due to intentional disregard (no annual maximum). It could be very expensive to intentionally disregard these filings.
In addition, if you fail to distribute the employee statements, you can be subject to an additional penalty of $50 per statement (maximum of $100,000 per year). The same penalty for intentional disregard applies–so if you intentionally disregard both filing the return and distributing the employee statement, then the minimum penalty is $200 per transaction with no maximum.
Corrections
If you make a mistake in a filing, you will correct it by re-filing the form with all of the same information (except, of course, with the error corrected) and selecting the “Corrected” checkbox on the form. This is the same process used to correct errors on Form 1099.
Corrections are subject to the same deadline and penalties for late filings as the original form. There is an de minimus exemption for corrections, however: no penalties if the corrections you file are fewer than 1% of the total number of returns you filed (or less than ten, if you filed less than 1,000 returns). To be eligible for the de minimus exemption, you have to file the original return on time and you have to file the correction by August 1.
If you have less than 250 corrections, you can file them on paper, even if you were required to file the original forms electronically. Just like with the original filings, you can always file the corrections electronically on a voluntary basis. But you don’t get anything special if you do. (Not even the gratitude of some poor grunt at the IRS that would otherwise have to enter your paper form into the database because that grunt doesn’t exist. All the paper forms are scanned into the system–that’s why you have to write very, very neatly.)
Combined Reporting for Acquirers/Targets
When a company acquires another company, the acquirer can agree to assume the target’s reporting obligations for the year with respect to Forms 3921 and 3922. If the acquirer doesn’t agree to assume the target’s obligations, then the target is still required to file the returns with the IRS and distribute the statements to the employees. This might be hard for the target to do, since it won’t exist anymore or have any staff, so it’s probably smart to discuss this at the time of the merger.
No Truncation of Employee IDs
The employee ID number that must be included in the form filed with the IRS and the statement provided to employees is the employee’s Social Security Number. You cannot truncate or mask this number on either the form filed with the IRS or the employee statement. The IRS has a pilot program allowing truncation on employee statements for Forms 1098,1099, and 5498, but unfortunately Forms 3921 and 3922 aren’t included in this program. Hopefully the pilot will be successful and the program will be expanded.
No Logos
You cannot include any company logos on the forms filed with the IRS or the statements distributed to employees. My guess is that the statements you currently distribute to employees include your logo; removing the logo is just one of the many changes you’ll need to make to the statements for 2011.
Last Chance for NASPP Conference Early Bird Discount–I Mean It! This week is your very last chance to save $200 on your NASPP member registration for the 18th Annual NASPP Conference. Get your registration in now, because the discount won’t be available after this Friday, May 14.
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 the 18th Annual NASPP Conference–don’t wait; the early-bird discount is only available until this Friday, May 14.
Complete the Compliance-O-Meter quiz on Excel Skills.
It’s a big week for local NASPP chapter meetings! Attend chapter meetings in DC, NY/NJ, Phoenix, Sacramento, San Francisco, and Seattle. I’ll be at the San Francisco meeting; I hope to see you there.
In our January webcast on the new regulations for filing Section 6039 returns for ISOs and ESPPs, Thomas Scholz of the IRS said that he expected the forms to be available by April. Since it’s now May, presumably the forms will be available soon. In the meantime, however, the general instructions to the forms have been updated.
Forms 3921 and 3922 Beginning for transactions in 2010, companies will have to file information returns with the IRS for ISO and ESPP transactions. The returns will be filed on Form 3921 for ISOs and Form 3922 for ESPPs. The general instructions include the deadlines for filing the forms, filing procedures, how to file corrections, information on distributing the employee statements, penalties, and other general information.
In addition to filing the returns with the IRS, companies are required to provide an information statement to employees.
Deadlines
As expected, the deadlines to file Forms 3921 and 3922 with the IRS are February 28 for paper filers and March 31 for electronic filers.
The deadline for distributing the statements to employees is still January 31. Even if you file the returns with the IRS electronically, you will probably still distribute the statements to employees in paper format because the requirements to distribute the statements in electronic format are so onerous. See the general instructions to the forms for a summary of these requirements.
Electronic Filing
You are required to file Forms 3921 and 3922 electronically if you have 250 or more returns to file with the IRS. This is a per-form requirement. So if you have 251 Forms 3921 to file and only 249 Forms 3922, then you only have to file the Forms 3921 electronically. Likewise, if you have 249 of each to file, then you don’t have to file any of the forms electronically. But you can always file electronically on a voluntary basis. Whether you are required to file electronically or do so on a voluntary basis, either way, you still benefit from the extended deadline, which gives you a whole extra month to get your act together on this. That would motivate me to file electronically.
Instructions for preparing the data files that must be submitted for electronic filing are available in IRS Publication 1220, but don’t get too excited because this publication hasn’t been updated since July of last year, which was before the final Section 6039 regs were published. Thus, it isn’t current for Form 3922 because the final regs added a data element.
Hopefully one of your service providers will come through with a solution and you won’t actually need to read Publication 1220 yourself. Now is the time to start talking to your payroll providers; providers of filing support for Forms W-2, 1099, etc.; and your stock plan administration providers. IRS Publication 1582 includes a list of providers that assist with filing electronic returns, but this list was last posted to the IRS website in January, so it doesn’t indicate which providers can assist with Forms 3921 and 3922.
You can request a waiver from the requirement to file electronically by filing Form 8508. Well, you can’t right now because the waiver form doesn’t include Forms 3921 and 3922, but presumably the IRS will fix this by the end of the year. Hopefully you won’t need it anyway; it seems like it would be real pain to complete all the forms manually. Interestingly, if you do have to complete the forms manually, handwritten forms are acceptable, so long as you write very, very neatly.
Less Than Two Weeks to Save on NASPP Conference We are offering a $200 discount on NASPP member registrations for the 18th Annual NASPP Conference that are received by May 14. This is your last chance to save on the Conference–we won’t extend the deadline for this rate.
The Conference will be held from September 20-23 in Chicago. Last year’s Conference sold out and we expect even more attendees this year.
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 the 18th Annual NASPP Conference–don’t wait; the early-bird discount is only available until May 14.
Complete the Compliance-O-Meter quiz on Excel Skills.
Companies, regulators, and even employees are changing the way they look at equity compensation. We’ve seen new equity vehicles, changes to taxation of equity compensation, a more global and more mobile participant population, and more rigid attention being paid to compliance when it comes to tax withholding and reporting. Companies are finding that they need to consider a broader scope of implications when granting and managing stock plans. In the spirit of casting a broader net on managing equity compensation, here are two ways to protect your company by building flexibility into your grant agreements.
Global Grant Agreement
At industry events over the past few years, I have heard more advisors and companies recommending the use of a global grant document. The way this works is to create a general grant document with appendices that cover the country-specific language. The most important reason to use a global grant document is that it helps cover the issue of mobile employees. If an employee is granted in one country and moves to another country with country-specific requirements, then you have the protection of having provided those limitations, definitions, or tax withholding requirements already laid out in the original grant agreement. This can afford the company some protection to maintain compliance and also give the employee the opportunity to better understand the impact the move will have on his or her grant. As an added bonus, having a global grant agreement can reduce the administrative burden of designating the appropriate grant package to participants. If you would like to see what this kind of grant document might look like, check out this example posted to our NASPP Document Library.
Exercise and/or Tax Payment Methods
Giving employees the ability to choose which exercise price and tax withholding method will be applied to their transactions isn’t as attractive as it may sound at first. This flexibility can be confusing to employees and may create a large administrative burden. However, your plan and grant agreements both include language that affords the company the flexibility to apply as many payment methods as possible. You can incorporate language that permits all available payment methods in the documents and use policy to clarify which will be actually be available to employees. This helps to permit the company to respond to new regulations, restrictions, or other unforeseen circumstances. Include the flexibility to withhold tax even for jurisdictions in which you do not currently need to withhold in case the company’s obligation to withhold taxes changes later.
Don’t miss our webcast today on tax reporting for stock compensation. Today’s session is one of our popular “Ask the Experts” series. Our panel of experts will cover everything you need to know to fulfill U. S. tax reporting requirements for all forms of stock compensation and address specific questions submitted by NASPP members. Don’t miss out! Join in at 4: 00 p.m. Eastern.