July 8, 2009
Volume 2, No.7
In this Issue:
Webinar on July 15th: Accounting for Modifications
SOS Focus: Best Practices in RSUs
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Introducing the SOS Library
We are pleased to announce a new, one-stop shop for many of the articles and whitepapers we produce: the SOS Library.Here you'll find the equity compensation-related articles we produce for SOS Xtra and many of the materials for our monthly webcasts as well, all categorized by topic for your easy reference.
More content is always in the works, so feel free to drop us a line and let us know what other topics you'd like to see addressed.
Elizabeth Dodge
Vice President, Product Management
Stock & Option Solutions
Free Webcast:
There's No Accounting for Modifications:
Modification Accounting Explained
July 15th
Please join us for our next free webinar on Wednesday, July 15th at 11am Pacific Time.
Description
(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.)
For more information, please feel free to contact us at xtra@sos-team.com.
Many companies have engaged in option exchanges, which trigger modification accounting under FAS 123(R). Other transactions, such as spin-offs and
changes to the terms of grants can also trigger modificaton treatment. Yet many equity compensation systems cannot fully support the requirements of
modification accounting so companies struggle with manual workarounds, hoping that their solutions will pass audit.
This session will explain modification accounting in plain English, even to the non-accountants, including incremental expense calculations, accrual
rules, tax accounting and the impact on diluted EPS calculations.
Speakers:
SOS Focus: Best Practices for RSUs
SOS's own Mike Hom, CEP, recently presented "Refining Restricted Stock Units: Tackling the Trickier Traps" along with
Alison Wright Dew, CEP,
of Howard Rice and Carrie Kovac, CEP, of Symantec Corp., at the Silicon Valley
Chapter NASPP All-Day Conference.
The following article is a quick summary of just a few of the best practices that were discussed during that presentation.
Quick Review of RSUs vs. RSAs
Remember that the main difference between Restricted Stock Units and Restricted Stock (also known as Restricted Stock Awards) is that a unit is a promise to
deliver stock at a later date, whereas restricted stock is actual stock. From this fundamental difference all the other dissimilarities arise. Below is a
table of some of the differences:
*In some cases may not be included, if written into agreements and participant consent acquired.
RSAs
RSUs
Issuance of Shares
At grant
At release/ delivery
Voting Rights
Yes*
No
Dividend Rights
Yes*
Sometimes (Dividend equivalents)
§83(b) Election Permissible
Yes
No
Income Taxation Event
Vest
Release, can be deferred
FICA Taxation Event
Vest
Vest
Deferrals Permissible
No
Yes, if plan/ agreement allows
Subject to §409A?
No
Yes
Best Practices for RSUs
Limiting Releases
Probably the most common issue we see in the management of restricted stock units is the tendency to "clone" the company's practices from those of stock options,
including frequent grant dates, and therefore frequent vest/release dates - sometimes also involving monthly vesting.
Frequent vesting is much more administratively challenging for RSUs than for options, as each time a vesting/delivery occurs, a taxable event is triggered, tax
must be collected somehow and remitted to the IRS (generally via a special payroll run for large releases). In addition, participant communications are generally
required informing the participant of the outcome of their transaction.
The easiest way to manage this issue is to limit the number of releases each month or each year. Grant RSUs only once per month and limit the vest/release dates
to once a month as well. At Symantec, releases are limited to only once per quarter, even if granted more frequently, to reduce the amount of administrative
effort required.
One potential downside to limiting the number of releases is that obviously more shares will be released at the same time which, if shares are sold to cover
tax liability and depending on the trading volume of your stock, may impact your company's stock price. Also, if shares are withheld to cover taxes, more tax is
due to the IRS on each release date because of the greater number of shares involved. But to mitigate this, with fewer vest/release dates, advance planning for
the tax liability becomes a much simpler matter.
Vesting during Blackout
Another issue frequently encountered is a vesting event that occurs during a blackout period when shares delivered to blackout-subject participants may generally
not be sold to cover the tax liability.
Again, limiting the number of vesting/release events can help to resolve this issue - when planning for your vest/release dates, ensure that they do not occur
during a regular blackout period.
Other ways to tackle this challenge may be:
Fungible / Flexible Share Counting
Newer stock plans are often written to include share counting provisions that treat restricted stock and restricted stock units differently from options granted
from the same plan. While an option may reduce your plan reserve by 1 share for each option granted, restricted stock and units may deplete your plan by 1.5 to
4.0 shares for each award granted. Many systems / software cannot yet support this relatively new practice, so companies are left to manual workarounds.
Many companies track the share reserves in a separate spreadsheet. However, companies are now beginning to track the shares granted from these plans in a separate
"sub plan" and simply applying the correct "multiplier" on a regular basis to keep an eye on share reserve levels and adjust the total plan share reserve
accordingly.
In addition, administration systems are now beginning to support this provision, so your solution, in some cases, may be as simple as an upgrade to a newer software
version.
Leaves of Absence
Companies often run into issues when participants are on a leave of absence and a vesting and/or release occurs during the leave. In some cases the vesting still
occurs, but the release is delayed, potentially triggering a "deferral" of sorts and all the questions that arise with RSUs deferrals. When is FICA due? When are
Federal and State taxes due?
The simplest solution to this matter is to continue vesting and releases during the leave period. Another potential solution is to rely on the Short-term Deferral
Rule for FICA taxes [IRC Section 31.3121(v)(2)-1(b)(3)(iii)] if the shares are paid out within 2.5 months after the calendar year in which the shares vest. This rule
allows you to use the delivery date as the FICA tax date in addition to the Federal and State taxation dates. However, please note that the rule must be applied
consistently to all participants and all similar types of deferred compensation. And 409A implications may also be triggered by the vesting occurring separately
from the delivery of shares (although a similar short-term deferral rule is available under 409A if certain requirements are met).
Retirement Eligibility
Some plans contain provisions which accelerate the vesting of shares at the time of retirement. Other plans allow shares to continue vesting after retirement.
In either case, however, the outcome is the same: the participant has in effect "earned" the shares once they become retirement eligible. There is no longer a
substantial risk of forfeiture for the shares so they have, in effect, "vested" at the time the participant becomes retirement eligible and FICA taxes are
therefore due.
A few companies have attempted to avoid this by adding a clause to the acceleration/vesting continuation provision which makes the provision subject to discretionary
approval by the board. This solution may be risky, however, since the IRS is likely to consider the facts and circumstances around the practice, rather than the mere
existence of the clause. Has the board ever denied any participant their shares? If not, the provision may not hold up to scrutiny.
A straightforward approach to avoiding this concern is to eliminate retirement acceleration/vesting continuation from the plan. Since, for many companies, the grants
are intended as retention tools, this approach makes a good deal of sense.
Another approach is to rely on the Rule of Administrative Convenience [IRC Section 31.3121(v)(2)-1(e)(5)], which allows deferral of FICA collection to any date
within the calendar year. Hopefully, many participants have met their FICA cap by 12/31, which minimizes the required withholding.
Again you may be able to rely on the short-term deferral rule if the shares are paid out within 2.5 months after the calendar year in which the shares vest. As noted
above, this rule allows you to use the delivery date as the FICA tax date in addition to the Federal and State taxation dates.
With either rule, please note that the rule must be applied consistently to all participants and all similar types of deferred compensation. And 409A implications
will also be triggered by the vesting occurring separately from the delivery of shares.
Market Research Survey
Periodically, SOS will ask for issuing companies' participation in a market research survey to enhance our understanding of current practices and trends
in the industry and to provide our clients insight into the practices of other issuing firms. Our surveys are brief, taking no more than 5 to 10 minutes
to complete. Complete the survey today!
Please note that only issuing companies, not vendors or consultants, should complete the survey. Thank you for your cooperation!
Participant Question of the Month:
By MyStockOptions.com
My company is now granting restricted stock, and the current share price is much lower than I think it will be in a few years. Any tax-planning ideas?
For restricted stock, you can make what the tax code calls a Section 83(b) election (not available for restricted stock units). This taxes the value of the award
immediately at grant instead of taxing the value at vesting, when your stock price, and thus your tax rate, may be much higher.
Before you make your decision, realize that you need to make the 83(b) election with the local IRS office within 30 days of grant, and that it is nearly
impossible to rescind or revoke the election. Realize also that if you make the election, you cannot sell any of the stock to pay the taxes. Furthermore, if
you leave the company before the vesting date and thus forfeit the grant, you will not get back the taxes that you paid. Therefore, there are risks.
However, the election can make sense for you if your stock price were to rise significantly between now and vesting.
Example:
However, it is important to remember the risks and to be realistic about your company's stock price.
You will be granted 5,000 shares of restricted stock when the stock price is $17. If you're in the current 35% federal tax bracket, after making the
Section 83(b) election your federal tax at the $17 price ($85,000 total grant value) will be $29,750. Instead, if you wait to pay taxes until the price per share
at vesting is $50 ($250,000 total) three years from now, your tax bracket will probably be 39.6% (up from the current 35%), and thus you will owe $99,000 in taxes.
Assuming you sell the stock at $50 per share, making the Section 83(b) election would allow you to convert $69,250 ($99,000 – $29,750) into capital gains
that would be taxed at the probable rate of 20% ($13,800). Making the election would therefore result in $43,550 ($29,750 + $13,800) of total taxes: a savings, before
considering the opportunity costs of paying taxes up front, of $55,450 ($99,000 – $43,550).
SOS Exposé
...tender
tidbits about people and players in our industry...
Congrats!...
Daniel Moody taped a pilot for a new cooking show, title yet to be announced...
Events!...
Christine Zwerling welcomed Levi Zwerling to the family on July 6th. He was a week early and still a whopping 9lbs 7oz...
SOS' Justin Docter's wife, Elizabeth, is expecting their first child on December 6th!
On the Move!...
Anthony Eppert moved from San Francisco to Houston to join the law firm Winstead PC... Jon Doyle
joined the new firm International Law Partners... Marlene Zobayan has started two entrepreneurial
careers; she will be working on a website which allows consumer to advocate green practices to
businesses and she has also joined Rutlen Associates where she will be doing some independent equity
consulting...
Donna Hammer started as Manager of Stock Administration at VMware in Palo Alto on June 1st...
Melanie Tom-Warner joined UBS As Head of Client Management for CEFS...
Amy Douglas has joined Corefino as Executive Assistant/Equity Admin.