November 30th, 2010
Volume 3, No. 11

In this Issue:


Free SOS Educational Webcast: Section 6039 Jeopardy!

Cost Basis Changes - Much Ado About Nothing for Stock Plan Professionals?

Get Me to the Church On Time (AKA, Get my RSU Taxes to the IRS On Time)

Product Spotlight: Customized Year-End Tax Statements

SOS Across Our Desk

SOS Xposé

Subscribe to Xtra!

Follow us on

Join us on

Watch us on

Recordings and Materials from our latest webcast on the new cost basis regulations

Cost Basis Confusion: What Do the New Regs Mean for Stock Plan Professionals?

Recording Materials

SOS Employment Opportunities
From the SOS Library:

IFRS is Coming! (Part I)

A recorded demo of "Email Xpress", the SOS automated solution for emailing participant stock plan confirmations and statements, is now available:

Email Xpress Demo

Our Services:


Equity Compensation Projects/Consulting

SOS-TEAM Outsourcing

Contact Us:




Check out the new SOS Website
Ideas or Questions:

Do you have ideas for our next newsletter or webcast? Topics you're dying to see addressed but haven't yet? Please send us an e-mail with your ideas to: xtra@sos-team.com.


"Be Prepared" - Boy Scout Motto

Stock & Option Solutions welcomes you to the 2010 Holiday Season. As always, I am excited and inspired to share the joy of the season with my family and friends. I spent this past weekend preparing for social outings, gift-giving, and other special events, and now, I feel I am ready to participate in the good spirits only the holidays can bring. As I reflected on the energy I spent, I realized "being prepared" is how we provide the best service to our employees, clients, friends and ourselves. When we are prepared, we are able to be present for the task at hand and can receive the most out of each moment.

Therefore, here are a few items you might find helpful in preparing for the holidays and year end:

Holiday Actions:

  1. Spend an hour brainstorming on your Holiday Shopping List. Use Facebook, LinkedIn, or even historical instant messages or text messages to help generate ideas for gifts.
  2. Review sales online and plan to buy before December 10th. Who needs the stress of shopping malls for a late gift?
    • This article describes the best websites for finding these sales
    • Need a family gift? My current favorite is Just Dance 2 for Wii. There is nothing like humility and humor to make your holiday even better.

Okay, now a little on Equity Compensation Year End Actions:

Tax Compliance Actions:

  1. Review the SOS Year End Equity Administration Tax Compliance Checklist
  2. Spend one hour writing a plan on when and how you will meet these requirements
  3. Communicate your plans to the dependent departments so their expectations are set
Employee Education Actions:
  1. Read this article on year end communications
  2. Spend an hour reviewing your overall participant communications. The better your participants understand their equity compensation, the more they will value it. Learn more by watching our recent webcast, Employee Education on a Shoestring Budget: How to Get it Done within Your Limited Means
  3. Talk to your captive brokers about their reporting deadlines and inform employees when they should receive their tax forms and who to call if they do not receive them
  4. Prepare standard responses to typical employee questions. Post an FAQ on a company intranet site if it is available
These are just a few ideas to prepare you and help you service your company in 2011. We at SOS hope you have a wonderful and safe Holiday Season!!

Barrett Scott and the entire SOS-TEAM

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Free SOS Educational Webcast

Section 6039 Jeopardy!

December 9th, 2010

Click here to register.

Please join us for our next educational webcast on December 9th at 11am Pacific Time, 2pm Eastern Time.


Still finalizing your plans for 6039 compliance for 2010? Still scratching your head over a few, last minute issues? Join our panel of experts for a fun, but fact-filled discussion on some of the most commonly asked questions about THE NEW Section 6039 REPORTING RULES. From e-filing with the IRS, to using substitute forms, this panel will hit on all the hottest 6039 compliance issues.

Please submit your advance questions to our panelists to xtra@sos-team.com. (You can also ask panelists questions live on the webcast, but submitting them in advance will allow for some additional research, if needed, beforehand.)


(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.)

Cost Basis Changes - Much Ado About Nothing for Stock Plan Professionals?

The title of this piece is a bit glib, because these recently released regulations are going to be extremely painful and extraordinarily costly for your broker, your transfer agent, and/or your outsourcing provider. However, most stock plan professionals are likely to be impacted only minimally.

I can just imagine the hundreds of brokerage-house and transfer agent programmers burning the midnight oil and frantically writing millions of lines of code to deal with these changes and the literally massive system enhancements that will be needed. And all by 1/1/11 when the final regulations were only released in mid-October of 2010!

For many of our readers, however, the only real impact may be the cost of these enhancements that many providers are passing on to their clients. Painful and annoying, but not necessarily impactful to your day-to-day life and not requiring the stock plan team to take steps or change processes.

Some of you may have to give your broker or provider a few new pieces of information (e.g. is your ESPP 423-qualified; how you calculate ordinary income on NQ exercises), but will have little else to worry about.

However, there are those among you that these new regulations will impact a bit more and, for some of you there are steps you should take, or at least consider taking. You are more likely to be impacted, if:

  • You issue ISOs and/or 423-qualfied ESPP plan shares,
  • You use brokers unaffiliated with your software or provider system and
  • Your provider(s) are planning to report price as the cost basis for stock plan transactions (which is allowed under the final regulations) as opposed to the real cost basis.1
First we'll provide a little background on the new regulations, then we'll discuss the different types of companies this is likely to impact for stock plans and why.

Note: This article is specifically targeted to cover the parts of the new regulation that we think most likely to impact stock plan professionals. A discussion of the entirety of the regulations is outside the scope of this article.


What is cost basis?

Cost basis is used to calculate taxes on sales of securities. It is the expense incurred with the purchase of an equity asset. This includes the price paid for the stock plus fees or commissions.

For securities acquired via a stock plan transaction (option exercise, RSU release, etc.), however, cost basis is not simply the price paid, but the amount on which taxes have already been paid (i.e. the "ordinary income" of the transaction in which the shares were acquired). For example, when a non-qualified option is exercised or an RSU vests and shares are delivered, the issuing company withholds taxes on the transaction gain using market value on the day of the transaction less any price paid2. Therefore that market value becomes the cost basis for those shares. Taxes have been paid on the income up to that market value. When shares are sold, gain is computed based on the difference between the transaction market value and the sales price. This is the capital gain amount, either short-term or long-term depending on how long the shares have been held before they are sold.

Cost basis for shares acquired via a stock plan transaction varies based on the type of instrument. The chart below summarizes the treatment based on instrument type:

Type Cost Basis
ISO Options Qualifying Disposition: Price
Disqualifying Disposition:
   Gain: min(MV at Exercise, Sales Price)
   Loss: Exercise Price (if exercise price >    sales price)
NQ Options Market Value at Exercise
Stock-Settled Stock Appreciation Rights Market Value at Exercise
Restricted Stock Awards Market Value at Vest
Restricted Stock Units Market Value at Release (often Vest)
423 ESPP Qualifying Disposition: Price Paid + Ordinary Income
Disqualifying Disposition: Market Value at Purchase
Non-Qualified ESPP Market Value at Purchase

Why all the fuss? What is changing?

Brokers and Transfer Agents have never been required to track or report this cost basis information to their customers. When the shares are sold, it has been the seller's responsibility to backtrack through (sometimes years of) statements to excavate the price that was originally paid for the stock, to report that on the IRS' Schedule D and calculate the gain (or loss) on the transaction.

Starting on January 1, 2011, however, the brokers and transfer agents (recordkeepers) will begin to be responsible for tracking and reporting cost basis. When shares are sold the recordkeepers will have to report the cost basis on the revamped 1099-B (draft shown here). When shares are transferred, the institutions involved in the transfer must exchange the cost basis information.

For stock plans, the regulations are, in my humble opinion, a little, well...odd. They do not require the recordkeepers, at least initially3, to report the cost basis shown in the table above. Instead, they are requiring the tracking and reporting of the price paid which, for most stock plan transactions, is not the correct amount. Using this amount when completing a Schedule D is likely to result in participants paying too much tax - paying tax twice on the same gain - once at acquisition of the shares and again at the disposition. And any instruments types that do not involve the payment of a "price", such as restricted stock awards and units, and even stock-settled SARs, are "non-covered" securities for whom reporting is not required.

If your employees, by some miracle, do get the cost basis right by not using the amount shown on the 1099-B, this may result in non-compliance notices from the IRS to your stock plan participants, since the amounts reported will not match the 1099-B sent to the IRS.

But don't panic, good news! We've been reaching out to many of the stock plan providers, brokers, and vendors in our industry and those we've spoken to are all planning to report the correct cost basis, as shown in the table above, not just the price paid. Phew. So this means that the 1099-Bs sent to your participants will be correct and we can all stop worrying, right?

If that's true, why are the companies mentioned above still impacted?

We'll take one category at a time and explain:

ISOs and 423-Qualified ESPPs

As I'm sure you're already aware, the taxation for ISOs and 423 ESPP shares is not triggered at the time of exercise or purchase. Tax liability is triggered by the disposition (typically sale) of the shares. Therefore, at the time the shares are acquired, the broker may not know the cost basis. When the shares are sold, the broker may be able to calculate, and thereafter report, the correct cost basis depending on the type of disposition (qualifying or disqualifying).

However, if you participant exercises or purchases and holds the shares, then later chooses to transfer shares out of the designated brokerage account, the designated broker will not have the cost basis information to send and therefore the receiving broker will not be able to store and track the information and, ultimately, when the shares are later sold, the cost basis will not be available or reported.

Again, some mitigating circumstances may apply: most ISO exercises are still same-day sales, in which case the shares won't be held and therefore won't be transferred. ESPPs are likely to be a bit more of an issue since employees tend to hold these shares longer.

We think a little employee education is called for to explain the advantages of keeping their shares with the designated broker and the ramifications of not doing so.

Brokers unaffiliated with their software or provider system

Many companies now outsource their stock plan administration to a third-party provider who either is a brokerage firm or has an affiliation with a brokerage firm or transfer agent. If your company has chosen this approach, your provider should have (nearly) all the necessary information to calculate, track, and report cost basis to your employees correctly. Talk to your broker to confirm that they are planning to report the real cost basis, not merely the price paid for the shares as the regulations allow.

Other companies use a system or software and an unaffiliated brokerage or transfer agent (Software A and Broker Z). When shares are delivered to the brokerage, these companies are using some sort of statement, report, fax or spreadsheet to communicate with their broker as to how to allocate the shares being transferred from the transfer agent among the participant brokerage accounts. Many companies use the same DWAC instructions that they send to their Transfer Agent to initiate the transfer and simply send a copy to the broker. These statements should be updated to include the correct cost basis for the various types of instruments.

Though the regulations include exhaustive details about the format of these "Transfer Statements" they also say that "any format" that is agreed upon by the furnisher of the transfer statement and the recipient broker will suffice. So the guidelines for the format of the statement really need not concern you as long as your broker agrees to the format you employ.

On a side note, I'd like to encourage all of you to start looking into ways to automate the creation of this statement (custom reports, exports, etc.). Not only will automation save you manual effort (and therefore time and money), but it will significantly reduce the chance of an error in the creation of these statements. If the data can go directly from the stock plan database to the broker with little or no manual intervention, the risk of error is minimal and your SOX audits may take a little less time to boot.

Brokers Planning to Follow the Letter of the Law

As discussed above, the new regulations:

  1. Do not immediately require the broker to track and report the correct cost basis, only the price paid for the shares
  2. Do not apply to shares for which no price was paid, such as RSAs, RSUs, and stock-settled stock appreciation rights
Many brokers are planning to go above and beyond and report the cost basis of stock plan shares correctly on the new 1099-Bs. But what if your broker isn't? If you are concerned about your participants reporting the correct cost basis (and therefore paying the correct amount of tax) you may want to consider an employee communication campaign sometime next year, before the "incorrect" 1099-Bs start arriving in mailboxes across the country. Further, I'd suggest you kick off this campaign in the later part of summer of 2011, after your quarter or year close nightmare has subsided. As the calendar/tax year draws to a close you have enough other responsibilities to keep you busy and once tax season hits, you'll be busy answering employee questions and request for duplicate confirms, the last thing you need is an education campaign at the same time.

Some practical suggestions on ways to educate your employees (on this and all other stock plan topics):

  • Get management onboard
    Often, if you can demonstrate that your communication plans really are a benefit to your employees and that you can accomplish them with little-to-no out-of-pocket expense, they will readily get behind your efforts and back you up when stretching outside of your comfort zone.
  • Communicate early, communicate often
    Here you walk a fine line to avoid communicating too often and having employees tune out instead of paying attention to your message. With a little effort and keeping an ear out for employee grumbles, you can make your point and educate your employees despite their best intentions to avoid it.
  • Keep communications concise
    Really. Truly. Do your best to keep key points in an email "above the fold" (don't make your employees scroll down to get to the meat of the communication - many won't). Yes, it can be a challenge after legal has put in their comments and caveats, but do your best to arrive at a compromise.
  • Try new forms of communication to get their attention
    Do a quick webcast (under 5 minutes long) on the basics of the how they will be impacted, and record it so they can listen at a convenient time. Try a broadcast message on your voicemail system. Create a humorous cartoon video on the site www.xtranormal.com (see this example of an equity-comp-themed cartoon video). Trying a new, lighter approach is likely to get more employees paying attention and they may actually retain some of the information you provide.

In closing, despite the title of this article, please don't take these regulations too lightly. For your providers, these really are fundamental, sweeping changes to systems that are already groaning under the weight of their own complexities. You should see the pages and pages of examples of cost basis calculations sent to me by one provider (wash sale transaction calculations are particularly baffling). And there are other aspects that will impact your company such as the Corporate Action Reporting, but most of it, thankfully, should not impact the stock plan group.

Questions? Comments? Please feel free to contact me at edodge@sos-team.com.

1This should be a minority however, as we'll discuss later.
2In same-day sales of NQ options, the company can choose to calculate the gain based on the market value of the stock or the actual sales price of the stock.
3It is unclear from the wording of the final regulation whether the recordkeepers are required to begin reporting the "correct" cost basis in 2013 or if the ability to report price paid is a permanent exception.

Special Thanks: Many thanks to Andrew Schwartz, of BNY Mellon Shareowner Services, for teaching me everything I know about cost basis reporting (and therefore providing nearly ALL of the content for this article), while still maintaining a sense of humor.

Elizabeth Dodge, CEP, Vice President
Stock & Option Solutions


Elizabeth is the Vice President of Product Management for Stock & Option Solutions, Inc. (SOS). Her responsibilities include monitoring new developments in the equity compensation arena, performing market research, speaking at industry events and helping to define the product roadmap for SOS.

Elizabeth regularly speaks on industry trends and product development at client and industry events including NASPP and NCEO webcasts, GEO and NASPP Chapter meetings, and the NASPP Annual Conference. She was also selected to speak at the West Coast FASB Roundtable on FAS 123(R) and has recently co-authored the chapter on accounting for equity compensation in The Stock Options Book, 11th edition, by Alisa Baker. She became a Certified Equity Professional in 1999 and continues to volunteer for the Certified Equity Professional Institute. She also volunteers for the Silicon Valley Chapter of the NASPP and serves on the Board of Directors of the NCEO.

Get Me to the Church On Time (AKA, Get my RSU Taxes to the IRS On Time)

Just when you thought you had your stock plan tax withholding under control, another IRS tax headache seems to be getting more limelight: meeting the requirements of the "next business day" remissions of taxes when your cumulative corporate tax liability exceeds $100,000.

RSU releases are the most common type of event to trigger the need for this lightning-fast remission of funds, since often a spate of RSUs are released on a single day and there is no three-day "grace period" as there is for NQ option same-day sales.

And what are the penalties for non-compliance? I've heard one stock plan professional tell horror stories of a former employer where they were fined into the 8 figure range. Ouch.

But can you get these taxes remitted on time? How on earth can you get the market value for the day (usually after market close), process your (sometime colossal) RSU release, audit it, and get your release data to payroll all before the window of time for payroll processing closes (often 8pm ET/5pm PT or earlier1)?

Generally, you can't. That's why more and more companies are using an estimate process to get the required funds to the IRS within the microscopic timeframe and then doing a true up, if needed, as soon after the release as possible.

So how does the estimate process work?

There are a couple of different approaches of which we're aware:

Early Estimate Base your estimates on a "To Be Released" report that your stock plan system produces. Some systems call this the "Shares Subject to Release" report, though names vary across the platforms in our industry. This report can generally be produced several days, or even weeks in advance to allow you to plan ahead and submit taxes early. If you choose to use this approach, you simply export the report to a spreadsheet, add a field for market value, multiply shares by market value for estimated gain, and multiply by 25% for most participants' Federal tax rate. (For those who are likely to be at a different Federal tax rate, such as 35%, you can flag them as such). Put the report into a format that your payroll system can import (leaving columns for non-Federal taxes blank) and send off to payroll! Your taxes will be in on time! Remember to use a slightly inflated market value when producing your estimate file, you don't want to underestimate/underpay your IRS liability.

Pre-Reconciliation "Actuals" Wait until the day of the Vesting event, process the release, entering the market value and letting the system calculate the taxes (including the 25% vs. 35% Federal split for anyone impacted). Then, do a couple of very quick reconciliations, but not the full spate you have planned. Export the report you normally send to payroll, do the required reformatting for payroll's format and again...away you go!

Both of these approaches will generally require that you perform a true up once you have finished reconciling your release. Simply create your standard payroll export and vlookup() to pull in the data from the original file, create another column with the difference, and send only the difference to payroll. (For example, if the estimate file had $102 as the Federal tax amount and the actual file ends up with only $100, the true up file will contain a -$2 to true up to the correct amount.)

Automation Possibilities

Keep in mind that this estimate/true up process can also be automated to save you time and reduce risk. If you are using an in-house software that leverages Crystal Reports as its reporting engine, consider creating custom reports for both the estimate and true up files.

If you are outsourced, talk to your provider about their report customization capabilities, or think about exporting the data to a spreadsheet and then using MS Access to do the heavy lifting, calculations, and reformatting. Letting a query do the work for you will not only reduce the chance of error but will save you time and help you speed through your SOX audit.

1Deadlines for payroll submissions vary widely between payroll providers and also vary if this is a 'special run' vs. a standard run.

Michael Hom, CEP
Stock & Option Solutions


Michael Hom is a Senior Equity Consultant for Stock & Option Solutions. He has been in the equity compensation business for over 10 years. Mike has worked with over 50 SOS clients assisting them with the management of their stock plans as well as on a number of consulting projects, including mergers and acquisitions, expensing, stock splits, and developing and implementing equity compensation tools to help manage their most complex equity compensation requirements. Mike has been a member on both the SVC NASPP Chapter Executive and Program Committees.

Product Spotlight: Customized Year-End Tax Statements

This month's Product Spotlight focuses on SOS solutions for year-end tax reporting to participants.

Year end is a hectic time for Stock Plan Administrators. Information hemorrhages out from Stock Plan Services to employees and former employees. Questions come flooding in as recipients work their way through the sometimes complex and confusing information. Stock & Option Solutions can provide customized reports that help you clarify the information you send to minimize questions and maximize your productivity during this challenging time of year.

How SOS can help:

Simple Statement Additions

A little basic text added to your statements can eradicate common questions or eliminate cover letters that explain the statement and its purpose. Such additions may include:

  • Addition of Broker or Stock Plan Services contact information (phone #, email address, website) and hours
  • Disclaimers, for example "Please consult your Tax Advisor"
  • Reminders, such as "Please save for your records"
  • General information or examples about stock plan income calculations
  • Information on what's not included on the statement
  • Change the names of column titles that consistently cause participant confusion
  • Include helpful information about data points that tend to trigger a flood of participant questions
Combined Reports

Many stock plan systems have separate year-end statements for different instruments, such as ESPP on one statement and Option and RSU data on another. SOS can consolidate all this data onto a single statement. Benefits include:

  • Reduced environmental impact
  • Lower mailing costs
  • Reduced risk of mailing errors (often caused by failing to match up multiple statements for a single person into a single envelope).
Changes in Report Layouts

Your systems' standard statements layouts may require use of mailing labels or creative folding to fit in window envelopes. SOS can work with you to change the statements layout, resulting in:

  • Faster folding and stuffing time (reducing costs and headaches!)
  • Less returned mail (where address did not appear in window correctly from non-standard folding)
  • Reduced risk of mailing errors (often caused by placing the wrong label on the wrong envelope - avoid labels!)
Total Equity Plan Statements

Your company may not store all of its equity-related data in one stock plan system. Yet it may be helpful or necessary to include this data in your year-end communications. SOS can help by customizing your statements to incorporate this external data, tracked in a spreadsheet or separate database, which may include items such as:

  • Phantom stock
  • Performance grants
  • Cash payouts and/or other acquisition related transactions occurring during the year
  • ESPP contributions or shares
Disposition Surveys

If you're still performing mail merges to update the outdated information on your systems' standard disposition surveys, SOS can help!

Let us:

  • Remove outdated/unnecessary information (references to certificates, etc.)
  • Reformat to allow reporting of several lots on a single page
  • Add fields to collect updated employee info

SOS Email Xpress

And don't forget, all of these statements and many more can be quickly and easily emailed to your participants with a few simple mouse clicks after the implementation of the SOS Email Xpress application. Benefits include:

  • Eliminate postage and fulfillment costs
  • Save time of printing/folding/mailing
  • Reduce risk of mailing errors

SOS Press Release: SOS releases 6039 Xpress, website for consent collection.

Watch the latest demo in this 6039 Xpress video on YouTube.

SOS Across Our Desk: Equity Compensation in the News...

In confirmation of what SOS has been espousing for several weeks, the NASPP received confirmation from the IRS that the Account Number field on the new forms 3921 and 3922 is NOT optional in many cases, and must be unique to the transaction, not the employee: From the NASPP Blog...Instructions for new forms available on the IRS website

World Accounting
G-20 directs accounting standards boards to converge rules...Earlier in the month, Grant Thornton Survey: CFOs in No Hurry to Adopt IFRS

Understanding the power and pitfalls of pay-for-performance

From the DealLawyers.com Blog - M&A Survey: Optimism for Second Straight Year - Are mergers about to get even hotter?...SOS can help

Backdating Scandal Ends With a Whimper

ISS Issues 2011 Policy Updates
See here

Want to get these updates as we find them? Follow us on Twitter or become a fan on Facebook.

SOS Xposé

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

ShareComp 2011...SOS is pleased to be sponsoring ShareComp 2011, the share-based compensation industry's virtual conference, to be held on February 23, 2011. Registration is open, and as a friend of SOS, you can do so for free by following this link and entering our sponsor code "SOS". Look for more news on this event in next month's issue of Xtra.

On the Move...Kate Daniels, CEP, has moved to Boston and is the new Supervisor of Stock Administration for Vertex Pharmaceuticals. Congratulations Kate!

New offerings...The staff at myStockOptions.com has started a new site devoted to nonqualified deferred compensation at www.myNQDC.com. In addition to covering salary and bonus cash deferral plans for executives and key employees, it has FAQs on RSU plans with a deferral of share delivery feature. This site will complement www.myStockOptions.com, as many executives and highly paid employees have both stock compensation and the ability to participate in NQDC plans for amounts over the 401(k) plan limits. See Press Release

News was thin this month, and we'd love to hear from you for our next newsletter. If you or someone you know is taking a new job, expecting a child, getting married, releasing a new product, or has just done something that might be interesting to the good readers of this publication, please drop us a line: xtra@sos-team.com

Happy Holidays!

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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 advisors. The preceding information does not necessarily represent the official views of Stock & Option Solutions, Inc. with respect to any of the issues addressed.
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