January 22, 2018 WPAdmin

New Year, New Tax Changes

It’s been a wild ride in the equity compensation world over the last few months. 

In November, Congress debated about abolishing AMT and Section 409A of the Internal Revenue Code.  Many participants would love to not worry about AMT, but abolishing 409A would have made options taxable at vest, not exercise.  This would have upset the equity compensation apple cart.  Thankfully the final bill passed by Congress (Tax Cut and Jobs Act) did not contain any earth shattering changes.  It did contain some changes that will impact the lives of equity compensation professionals.

The most visible changes are the new tax withholding rates published in the IRS Notice 1036, which provides withholding guidance for the new tax brackets and how to implement them.  At this time of year an equity professional’s plate is already full, but the IRS added to it, as these rates are effective February 15!  Make sure to check in with your Payroll department to confirm when they will be switching to the new rates.  It will be less confusing to employees if Equity and Payroll make the switch at the same time.

Meet your friends out on the slopes this ski season and let SOS step nimbly into your shoes while you’re gone.

Restricted Stock Awards ("RSAs")

In this fourth part of our Beginner’s Equity Series we are discussing Restricted Stock Awards (“RSAs”). 

Grant:  The Board of Directors or an authorized sub-committee grants the number RSAs and the time based vesting schedule.  Shares are issued at grant by the company in the name of the grantee, but held in escrow until vesting.  RSAs can be granted to employees or non-employees, US or non-US residents.  In the case of non-US residents, most countries consider the taxable event when the shares are issued and taxes would in effect be due at grant.

Additionally, RSAs normally have no “exercise price” unlike options.  The US taxpayer who receives an RSA has the choice to pay the taxes at grant or at vest.  If the choice is made to pay at grant, the recipient must file an election under Section 83(b) of the Internal Revenue Code with the IRS within 30 days of grant along with the taxes due on the difference between the price paid for the shares and the fair market value of the shares.  If the recipient forfeits the shares prior to vest, the IRS does not refund the taxes paid.

If the RSAs are granted to a Section 16 reporter at a publicly traded company[i], Legal will disclose the terms of the RSAs on a public filing (Form 4) due two days after the date of grant.

Vest and Release:   At release the shares of already issued common stock are distributed to the employee, usually deposited directly into a brokerage account.  This event can be called by one of several names:  vesting, release or lapse, although some systems may refer to this as an exercise due to system capabilities.

If the employee made a filing under Section 83(b), then the company does not withhold any taxes and simply releases all of the shares to the employee.

If the employee did not make a filing under Section 83(b) and already paid the taxes due, the full value of the shares released (market value multiplied by the number of shares released) or gain becomes taxable to the employee at regular income rates (Federal, State, Social Security, Medicare taxes are due on the gain)[ii].   Unlike stock options, the employee has no choice regarding the timing of this income and the release of the shares.

Payroll provides Stock Administration the year to date taxes for each employee and Stock Administration calculates taxes, collects taxes and releases shares to employees, usually into the employee’s brokerage account.  Employees may pay taxes by several methods:

● Electing to allow the company to withhold money from their paycheck(s).

● Electing to write a check payable to the company for the amount of taxes due.

● Electing to have enough of the shares sold on the open market to cover the taxes due. The broker then remits the funds to the company.  This election is usually available only to publicly traded companies.

● Electing to have all of the shares sold on the open market. The broker then remits the funds to cover the taxes to the company and gives the employee the remainder of the proceeds.  This election is usually available only to publicly traded companies.

● The company withholds shares in value equal to the amount of taxes due and deposits the remainder of the shares in the employee’s account. This is called either “withholding shares” or “net settlement”.

Accounting/Treasury reconciles the corporate bank accounts to ensure tax monies are collected.  Payroll pays the taxes collected over to the federal, state and local tax authorities and reports the taxes collected and gain on the release on the employee’s Form W-2.  The RSA taxes collected are subject to the same submission deadlines as taxes collected on stock options at exercise.  The taxes are due within 48 hours of vest/release, if the total Federal tax amount due from the all of the day’s stock transactions total $100,000 or more.  If the day’s taxes do not total $100,000 or more, Payroll may turn over the taxes on the next regularly scheduled payroll.

If shares are withheld to cover taxes for a Section 16 reporter, Legal will need to report the information in a public filing two days after the date of the transaction.

Share sale tracking after release:  Since the taxable event occurred at vest/release, there is no need to track the sale of shares for regular employees.  Sales must be tracked for Section 16 reporters, as they must be publicly reported two business days after the sale.

Tax implications for the company:  Generally, when the company reports income on behalf of the employee at vest, the company is able to take that income as a tax deduction on corporate tax returns.

Company’s US reporting obligations[iii]Once the company reports the income and taxes paid on the employee’s Form W-2, they are not statutorily obligated to make any further reporting.  As a courtesy, most companies do send a statement at year end to the employees that vested during the year, detailing the transaction.

[i] Section 16 reporters:  Section 16 of the Securities and Exchange Act of 1934 regulates the trading of company securities by key corporate insiders.  These insiders will usually be the entire Board of Directors, the CEO, CFO, General Counsel and others deemed to have broad decision making power in the company.

[ii] Non-Employee Board of Directors and Non-Employees are not subject to tax withholdings.  The company is required to report income from the gain on a 1099-MISC at year end.  For Non-US participants, taxes may be due at exercise or possibly at grant or vesting depending upon country tax laws which is outside the scope of this document.

[iii] International reporting obligations vary from country to country.  This document only addresses IRS reporting obligations for US taxpayers.

Upcoming Equity Compensation Webcast

Our webcasts cover high-priority equity compensation topics

SOS Educational Webcast: IPO Success Strategies

Tuesday, February 27, 2018 11:00 AM PST

An IPO is one of the biggest events in equity. But there are so many areas where something could go wrong at a time of high visibility. However, with the right preparation, an IPO can be a seamless event for the company/employees and time for the equity department to demonstrate preparedness and professionalism. 

Looking for tips on how to prepare? Join SOS’s Sorrell Johnson and Certent’s Michael Mauro to hear them discuss the strategies employed in successful IPOs and how you can use them to make your IPO a smashing success!

(One hour of Certified Equity Professional continuing education credit is available for attending. See the 
CEPI website for more information on CEP continuing education requirements.)

So Quotable:
"Preparing for a successful IPO starts at least a year before the company starts trading publicly. Waiting until a couple of months prior to the IPO date will put you behind the curve. Make sure you aren’t caught out at this time when all eyes are on the equity department!" - Sorrell Johnson, CEP, Stock & Option Solutions, Inc.


●  Sorrell Johnson, CEP, Stock & Option Solutions, Inc.

●  Michael Mauro, Certent, Inc.

SOS is the only true outsourcing firm within the equity compensation marketplace. We deliver a team-based approach to filling that empty chair in your department. SOS takes away the burden of hiring, retaining, managing, and replacing a direct hire.

SOS Product Spotlight: DTA Balance Application

Get your time back using SOS's DTA Balance Application. Tasks that would previously take experienced stock plan administrators hours to complete, can now be done in minutes!

Have you ever gotten this question from your tax or accounting team: “Can you give me the cumulative/life to date amount of expense booked for all the currently outstanding stock options?” If not, start getting ready for it since it’s coming up for more and more and more SOS clients. This is the tax accountant’s way of asking for the data they need to “prove out” or “validate” the Deferred Tax Asset (DTA) balance related to equity in your General Ledger.  Most systems don’t have a report that readily provides this number, but it IS something you can do in a spreadsheet (and sometimes in a custom report), generally bringing in data from two to three standard system reports.

Let SOS help you with your DTA Balance.

Read our white paper on this topic and see our data sheet for more information.

Watch the demo here.

SOS Front & Center: Sarah Roberts

Sarah began her focus on equity compensation following a successful earlier career as a finance and accounting professional. She has more than fifteen years’ experience as an equity specialist, and has worked as a Senior Equity Plan Consultant at SOS for over seven years.

Sarah is a well-rounded, experienced equity consultant who adapts easily to a variety of client work environments. In addition to equity accounting, Sarah has proven to be extremely effective in stock administration, process improvement, ESPP implementation, employee training, and other related areas. She is also experienced in a variety of equity platforms.

Sarah has presented the NCEO Level 1 Tax Webinar for the CEP exam for the past 3 years, and has spoken in a number of equity events.  She holds an MBA in Finance and Accounting from the Anderson School at UCLA, and received her CEP designation in 2007.

Here’s what Sarah’s clients are saying about her:

“I deeply appreciate all the hard work Sarah Roberts completed for Deckers Brands during the past year.  Her efforts helped us to stabilize and improve our stock administration function during an important and busy time for Deckers Brands.  Specifically, Sarah helped us improve, update and streamline many process and provided strong support as we updated our system for the implementation of ASU 2016-09.  In addition, she assisted our stock administration team to ensure all stock related tasks were completed accurately and on time.  Thank you Sarah!”  James Moesker, Accounting Manager, Deckers Brands

“I have had the pleasure of working with Sarah at various opportunities.   The last time she and I worked together, she was originally brought in to assist us during a vendor transition.  As is often the case, when you have someone as talented and knowledgeable as Sarah, you usually find that it’s helpful to keep them around longer than planned.   This was definitely the case with Sarah.  Since we decided to implement an option exercise extension program, RSUs, design an ESPP and go public during her stay with us, there was plenty of help needed and she met the challenges.  We were working with a young-ish employee population and there were many opportunities to educate them about equity compensation – understanding stock options, RSUs, ESPP and not to mention how a dual class structure would impact them when we came out of the lockup.  Sarah was there through it all and was a real asset to our team!  I will definitely ask for her again!”  Laura Reis, Director of Equity Administration, Cylance Inc.

Across Our Desk

Love those ESPPs!  ComputerShare is holding an ESPP day.

The SEC does actually extend some deadlines.  Click here to see who gets extra time to comply with new rules.

News about performance grants from MyStockOptions

Why you really shouldn’t be checking email while on vacation.

While everyone in equity compensation was worried about the tax rates going into effect, the accounting department realized the tax bill impacted them too.

CEO Pay ratio disclosures are looming.  Check out the details here.

10b5-1 plans are supposed to protect executives from allegations of insider trading.  But what happens when the exec keeps changing the plan?

NASPP warns us that phishing schemes may hit a little close to home for our liking.

SOS Xposé

...tender tidbits about people and players in our industry...

New Year, new job… Robyn Shutak is with Computershare as the Equity Advisory Services Practice Leader. Brit Wittman is the General Manager of Executive Compensation for Chevron.  Stacey Lombardi is now at Brady Corporation and serving as head of global compensation & benefits. Laura Gallerane is the Sr. Manager, Global Compensation at Haemonetics. Mo Febre is the Stock Plan Manager for Natera. Karen Marier is an Associate Compensation Analyst at Medtronic. In addition to his day job at Waller Lansden Dortch and Davis LLP, Ron Snitker is also the new President of the Board at Nashville LGBT Chamber of Commerce, which has more than 350 members and is celebrating its twentieth anniversary this year.

Animation looks good on you… Emily Cervino of Fidelity Stock Plan Services discusses broad-based employee equity and ESPPs in this fun, animated video with John Hammond of Aon.

Let it snowSOS’s Tim Nguyen vacationed in Colorado this month and skied Breckenridge and Arapahoe Basin. Check out the pic of him and his buddies in Arapahoe Basin. Shawna Casey of SOS vacationed in Lake Tahoe in late December with her two kiddos where they went tubing and ice skating at Heavenly Village.

Horsing around…Donna Hammer of Yelp is the proud new owner (as of October) of a new horse! Her name is Suzie Q, she's 15 and a registered thoroughbred.  Fun facts: her sire (father) was a stallion named Dance Floor who placed third in the 1992 Kentucky Derby, and at the time, he was owned by MC Hammer.  See Donna riding her in this great pic.

It’s a boy…Moe Zohny of SOS and his wife Brittany welcomed a baby boy, Zachariah in October.

Industry News… NASPP has new chapter presidents! Aftab Ibrahim in Seattle and Michael McComas in Salt Lake City. The 26th Annual NASPP Conference is headed to sunny San Diego!  The Conference will be held from Sept 25-28; register by April 13 for the early-bird discount.

SOS’s newest team members…

Alex Florea, Sales Team

Asia Leak, Outsourcing Team

Carol Pleva, People Solutions Team

From the SOS Library Vendor Analysis and Evaluation

From the SOS Webcast Archive… The Spin Cycle: Don’t Let Your Transaction Fade

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SOS Xtra Editor: Shawna Casey
Did you miss an issue of Xtra? View our complete newsletter archive from our website here.
Miss a webcast? You can find links to recordings, as well as the materials, on our webcast page.

Information provided in this newsletter is designed for educational and entertainment purposes only and is not provided as professional service or advice. Moreover, this newsletter should not be relied on as legal, accounting, auditing, or tax advice. Anyone reading this newsletter should not act upon this information without seeking professional counsel and/or input from their advisers. The preceding information does not necessarily represent the official views of Stock & Option Solutions, Inc. with respect to any of the issues addressed.