Staying Cool with Xtra

Several heat waves have hit the country from east to west and everywhere in between. Stay cool with a tall iced beverage and the latest issue of Xtra.

In this issue we have the last article in our equity education series on Restricted Stock Awards, the latest industry gossip, info on the is the SOS/TD Ameritrade webinar and more. And while you are waiting out the heat, make sure to choose your sessions for the 26th Annual NASPP Conference in September. We can’t wait to see you there (we'll be in booth 706)!

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.

All About ESPPs

In our final installment in the Beginner’s Equity Series, we discuss the 423 Qualified[i] Employee Stock Purchase Plan (the “ESPP”).  ESPPs are generally only offered to employees by publicly traded companies.  Private companies usually do not offer ESPPs due to illiquidity and securities law issues.  Another form of ESPP is the non-qualified 423 ESPP.  These types of ESPPs are complex and are not suited for a beginning equity series.

Enrollment period:  The eligible employee enrolls in the ESPP during the open enrollment period.  During this period the employee commits to having a percentage of his/her salary deducted during the offering period to purchase company stock on the next purchase date.  The percentages allowed are defined in the company plan document but generally fall between 1-15%.  No deductions are made during this period for new enrollees. This period usually runs 2 to 4 weeks prior to the beginning of the offering/purchase period.

Offering/Purchase[ii] period:  Payroll deducts money from the employee’s salary in accordance with the percentage chosen and the company deposits employee contributions in a separate bank account that does not co-mingle the funds with the company’s general funds.  Employees may be able to change their contribution percentage (either increase or decrease) in compliance with the plan rules during this time.  Depending upon the plan rules, employees may be able to withdraw during the period and obtain a refund of all contributions during the period.  The plan also may offer the employee the choice to suspend their contributions.  Suspension of contributions means that the employee will stop future contributions but will leave any period to date contributions to be used to purchase shares on the purchase date.

Purchase date:   At purchase, the company calculates the number of shares each employee can purchase, based on the plan parameters.  Some plans will stipulate that the purchase price is 85% of the fair market value on the purchase date.  Other plans state that the purchase price is 85% of the lesser of the fair market value on the purchase date or the offering period begin date.  This type of price calculation is called a “look-back” feature.  Once the number of shares purchased by the employees is finalized, the company deposits shares into employee accounts.  If the purchase is for a Section 16 reporter, Legal will need to report the shares purchased in a public filing.

No Federal or state taxes are due at purchase (except in Pennsylvania).

Accounting/Treasury reconciles the bank account to ensure the correct amount of money was received from employees and deposits the purchase funds into the company’s general account.

Finance reports in the 10-Q/K information about the purchase and the number of shares still available for purchase under the ESPP.

Share tracking after purchase:  Since the taxable event for US employees occurs at sale, it is vital to track the sale of ESPP shares for US employees.  If shares are sold within the required holding period (two years of the beginning of the offering period and one year after the purchase date), the discount amount (difference between the Fair Market Value on the date of purchase and the purchase price) must be reported on the employee’s Form W-2 in the year of the sale.  This is called a disqualifying disposition.[iii]

If the employee holds the shares and sells after the holding period requirements have been met, this is a qualifying disposition.  A qualifying disposition results in the company reporting income on the employee’s Form W-2 equal to the lesser of (1) the gain on the actual sale (sale price minus purchase price) or (2) the purchase price discount on the date of grant.

Generally, the broker tracks these sales and reports the sale information to Stock Administration.  Stock Administration uploads this information into the stock administration system and generates a report for Payroll.  Payroll includes the information on the employee’s Form W-2, but does not withhold taxes from the employee’s paycheck.

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:  If the company tracks disqualifying dispositions and reports them on the employee’s Form W-2, they are entitled to a corporate tax deduction in the amount of compensation they report on behalf of the employee.   The Tax Department will request reports from Stock Administration regarding the amount of disqualifying dispositions on a quarterly basis to estimate the tax deduction for the year.

Stock Based Compensation Expense:  Finance will start calculating and disclosing expense (in the 10-Qs and 10-K) until the purchase date.  The ESPP expense treatment depends on the amount of discount offered under the plan.  If the purchase price is 95% or more of the fair market value on the purchase date, the plan is considered to be “non-compensatory” and no expense calculations are required.  If the plan does not meet those guidelines, then ESPPs are valued much like stock options.  ESPP expense can become very complex depending on the plan features such as discount, employee ability to increase contributions and the existence of a “look-back” feature.  Any true up expense calculations are also performed by Finance and reported after the conclusion of the purchase period as a result of terminations or salary changes.

Company’s US reporting obligations[iv]The company reports the income from a disqualifying disposition on the employee’s Form W-2 for the year of sale.  The company also is required to report any qualifying dispositions on the employee’s Form W-2 for the year of sale.

The company is also statutorily obligated to make additional reporting.  Under Internal Revenue Code Section 6039, the company must provide a statement to the employee regarding certain details of the purchase(s).  The statement(s) must be mailed no later than January 31 of the calendar year following the year of the purchase(s).  Additionally, the company must also transmit electronically this information to the IRS by March 31 of the calendar year following the year of purchase(s).

Non-US employees:  While an ESPP may be allowed in certain counties, others have very different plan features and taxation rules and therefore are out of the scope of this document.


[i] A Qualified ESPP is one that qualifies under Internal Revenue Code Section 423.  The ESPP must meet the following requirements:

  • Only employees may participate in the ESPP;
  • The ESPP must be approved by the company’s shareholders;
  • No employee may participate if they own 5% or more of the company’s shares;
  • The employee’s right to purchase is non-transferable;
  • An employee may not purchase more than $25,000 worth of company stock in each calendar year, based on the price of the stock on the enrollment date;
  • The purchase price may not be less than 85% of the lesser of the fair market value on the first day of the offering period or the purchase date;
  • The offering period may not exceed 27 months; ; and
  • All eligible employees must be allowed to participate; although some categories of employees may be excluded based on length of employment and customary work hours
  • [ii] The Offering period and purchase period terms are used interchangeably in some plans, but this is not true for all plans.  Generally, this is the period preceding the purchase during which the company is withholding contributions from employee paychecks in anticipation of the purchase date.

    [iii] A qualifying disposition is a sale that occurs after satisfying the holding period (two years from the beginning of the offering period and one year after the date of purchase).  The employee recognizes compensation income equal to the lesser of:  (i) the discount at enrollment date, or (ii) the actual gain on the sale.  No taxes are withheld by Payroll - the employee reports sales and pays taxes on the Form 1040 for the year in which the sale occurred.

    [iv] 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: Empower your Employees: Best Practices for Equity Plan Communications

    Thursday, September 13, 2018 11:00 AM PDT

    Crafting communications never seems to be the highest priority in equity administration. But the importance of communication is underestimated. We will cover the importance of knowing your audience, leveraging existing communications and utilizing non-standard avenues of communication. Join us to learn about what makes communications clear and effective for your employee population.

    (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.)

    Speakers:

    ●  Rachel Southorn, CEP, Stock & Option Solutions, Inc.

    ●  Scott Shuryn, TD Ameritrade

    There’s no time like the present. Don’t wait another minute to get the support you need.

    SOS Front & Center: LoAn Nguyen

    LoAn brings almost 15 years of finance and stock administration experience to the table. She started her journey in finance, tackling the banking and mortgage worlds and coming out with a can-do attitude, impeccable attention to detail, and a strong management foundation. As she has worked her way up from stock administrator to account manager, she has demonstrated expertise in both equity Edge Online and Fidelity PSW. LoAn wrangles the day-to-day tasks of stock administration while seamlessly balancing multiple special projects and multiple clients.  LoAn just recently earned her CEP Designation in November 2017 and was recently promoted to a Team Leader, Client Management role with SOS.

    Here’s what LoAn’s clients have to say about her:

    “LoAn is a great resource partner to our small compensation team.  In the past year, she has helped us improve our equity process, communications with external vendors, and other internal processes.  She is a great communicator and efficiently interacts with all functions.  LoAn is very well versed in the various equity administration tools and is able to provide simple solutions to head scratching issues.  Most importantly, LoAn is a relator and is truly invested in her client’s success.  I enjoyed very much working with LoAn this past year and look forward to our continued partnership.” Angelica Jusino, HGV

    “We have partnered with SOS for almost 5 years and over that time, we have expanded the services that SOS provides where they are now an integral and valued part of our equity administration model in the United States.  Their knowledge of our programs, their professionalism, and prompt response times are very much appreciated by our employees.  Equity plans can sometimes be complex and confusing, and the time that SOS takes to explain these topics and resolve issues is invaluable. A significant reason why our relationship with SOS is so successful are the efforts demonstrated by LoAn Nguyen.  Her attention to detail, in depth knowledge of equity plans, her professionalism, dedication, and work ethic are all key traits why our relationship with SOS is so strong.  She is committed to seeking resolutions quickly, is always empathetic to participants’ frustrations, is always solutions oriented, yet remains consistent with the plan rules.  I thoroughly enjoy and very much appreciate the value that LoAn brings to her work.  Stock plan administration is always a challenging topic, but LoAn makes working through even the most challenging of issues an enjoyable experience.” Andy Genecki, Sanofi

    Across Our Desk

    SCOTUS rules on stock options.

    What will we sip iced coffee from?  The iconic green straws are going away.

    Return of the IPO on the horizon for several companies?

    First GDPR in Europe, now AB 375 in California……

    Is eating your vegetables really that good for you?

    SOS Xposé

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

    Work, work, work… Julie Ray is Director, Global Stock Plan Administration at Zynga.  Guy Schouten is the new Global Equity Administration Specialist for Hewlett Packard Enterprise.  Alex Florea is the new Director, CEP Institute at Santa Clara University. Dan Walter and Melanie Jameson are both now working for FutureSense, LLC. Dan as a Managing Consultant and Melanie as a Senior Consultant, Director of Marketing & Communications. David Hanes is a Strategic Service Manager with the Equity Plan Advisory Service group at UBS.

    Putting down roots… SOS’s Clint Goodin and his fiancé, Carly, have purchased their first home together in Nashville and they can’t wait to hear “wedding bells” with friends & family in October!

    Industry News… SOS is hiring! We are looking for contract Stock Plan Administrators to fulfill several projects. We are specifically looking for coverage for a 12-month project in the Nashville area (onsite or remote), a 6-month project in Seattle (onsite or remote) and also we have a great contract to direct with a pre-IPO company in San Francisco. For more details contact Carole Dubas. The 26th Annual NASPP Conference and Exhibition, scheduled for Sept. 25-28 in San Diego, is fast approaching. Register by August 10 to save, and be sure to check out the full line-up of sessions and featured speakers here.

    SOS’s newest team members…

    Vangie Alconis, People Solutions Team

    From the SOS Webcast Archive...SOS Educational Webcast: RSU Basecamp-Your Staging Area for the Climb Ahead 

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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.