The NASPP Blog

December 7, 2017

Participant Year End Planning – Avoiding Advice, Providing Resources

Many of us in stock compensation do our best (either formally or informally) to avoid deep dive conversations with stock plan participants around “year end” logistics. The logistics I refer to mostly center on the dreaded concept of tax and/or financial planning. Fearful of meandering into the realm of giving financial or tax “advice,” the policy among stock administrators is quite often to be silent or provide limited information on those topics. Not surprisingly, this can result in a communication gap between the participant and the issuer – creating a void. Looking for ways to bridge that gap without putting on an adviser hat? I have some ideas.

Pre-Approve Communications that Include Details

For a while now, I’ve really liked the idea of a pre-approved FAQ. This is an FAQ that anticipates the most common questions participants are likely to ask (think lots of tax questions) and provides an answer that is approved by the company’s counsel and advisers. Getting ahead of the questions and answers allows time to craft a response that is likely to include some details that you may have been wary to discuss without first passing the question to advisers – something that can be time consuming and cause delays in communication when a question is asked on the spot. An advance FAQ is as simple as drafting a list of questions and answers, sending them to advisers to review, edit and approve, and then determining how to distribute these answers to employees. I’ve seen the entire FAQ distributed, and I’ve seen the FAQ answers used as piecemeal responses when someone asks a question. This approach can work well with year end questions, but can also work with other communications as well (think merger, large vesting event, ESPP offering/purchase, new equity roll out or new terms).

Third Party Resources

Another option in bridging the gap in participant year-end communications is to send employees to 3rd party resources for information. This seems like it would reduce the possibility of the administrator playing the role of potential adviser, and gives the participant more of what they seek. One website I often use when looking for participant oriented communications is And, lucky for stock plan participants everywhere, they’ve recently updated their year-end planning information for 2017 (Top Ideas for Year-End Planning With Stock Compensation – Part 1). What I like about this resource is that it gives a detailed lay-of-the land about the current and prospective tax landscape, as relates to stock compensation. It takes that information and creates a series of considerations and recommendations around year end. Additionally, there are alerts, editor notes, and even a chart that shows how changes in income can push a participant to a different tax bracket. This article is free (other content on the site is premium).

Finally, your own advisers likely work with many clients who offer stock compensation. It’s also worth an inquiry to find out if these advisers have prepared any communications of their own that may be participant friendly in addressing year-end questions.

The year will be over soon, and some of your participants are already contemplating whether they need to take any action with stock compensation before year-end, and mulling over the tax considerations. It’s time to arm them with as much information as possible.







December 5, 2017

Tax Reform: Scorecard Update

The Senate passed its version of the Tax Cuts and Jobs Act late Friday night (well, technically, it was very early Saturday morning in DC).  Here’s a comparison of where the final Senate and House bills stand with respect to the provisions that directly or indirectly impact stock compensation:

Individual Tax Rates

  • The House version of the bill has four individual tax rates: 12%, 25%, 35%, and 39.6%
  • The Senate version of the bill has seven individual tax rates: 10%, 12%, 22%, 24%, 32%, 35%, and 38.5%. The rates sunset after 2025, at which time they revert back to the current rates.
  • In both bills, the highest rate kicks in at $500,000 of income for single taxpayers ($1 million for joint filers)

Supplemental Withholding Rate

  • For employees who have received supplemental payments of $1 million or less during the year: 35% under the House bill; 22% under the Senate bill.
  • For employees who have received supplemental payments of more than $1 million during the year: 39.6% under the House bill, 38.5% under the Senate bill.

AMT (for Individuals)

  • Repealed under the House bill.
  • The Senate bill doesn’t repeal the AMT, but it does increase the exemption amounts and phaseout thresholds.

Corporate Tax Rate

  • Both bills reduce the corporate tax rate to 20%. The reduction doesn’t take effect until 2019 in the Senate bill.

Estate Tax

  • Both bills increase the estate tax threshold to about $11 million.
  • The House bill repeals the estate tax altogether after 2024.
  • The Senate bill sunsets the increased threshold after 2025.

Section 162(m)

  • Both bills expand the employees subject to 162(m) to once again include the CFO and to include anyone serving as CEO during the year (rather than only the CEO at the end of the year).
  • Under both bills, once individuals are covered employees, they remain covered employees for as long as they receive compensation from the company.
  • Both bills also eliminate the exception for stock options and performance-based pay.
  • The Senate bill includes a transitional provision that would exempt compensation paid via a written binding contract that was in effect as of November 2, 2017. This is broader than the transitional provision that was originally proposed, which would have only exempted arrangements vested as of December 31, 2016. There is no transitional provision in the House bill, so all prior awards would be subject to the new rules under that bill.

Qualified Equity Grants

  • Both bills include a provision that would allow employees in privately held companies to elect to defer tax on stock options and RSUs until five years after the arrangements vest, provided certain conditions are met.

Stock Options and RSUs Taxed at Vest

  • This provision has been removed from both bills, so there is no change to the tax treatment of stock options, SARs, or RSUs.

Determination of Cost Basis

  • The Senate bill still includes the provision I blogged about last week that requires taxpayers to sell securities of the same type on a FIFO basis (when held in the same account). This provision is not in the House bill.

What’s Next?

As you can see, there are lots of areas where these two bills don’t agree (and this is just the tip of the iceberg—there is even more disagreement in areas of the bills the don’t relate to stock compensation). All of these differences have to be reconciled before the bill can become law, so the bill now goes to a conference committee comprised of members of both the Senate and House that will resolve the differences between the two bills.

– Barbara

Tags: , ,

November 30, 2017

CEO Pay Ratio: Planning for Employee Reactions – Part 2

A few weeks ago, in the NASPP Blog entry “CEO Pay Ratio: Planning for Employee Communications,” I wrote about planning to communicate with employees on the topic of the upcoming CEO pay ratio disclosure. Since my initial post on this subject, I’ve come across some helpful content that is further food for thought when contemplating a communication strategy.

I keep hearing that companies have a range of emotions about communicating around the disclosure. In particular the concept of discussing the median employee aspect of the disclosure seems to trigger words like “panicked,” “petrified,” and “concerned.” It seems many companies do worry about how their employees will react to information about the median employee’s compensation.

Two recent blog posts by Margaret O’Hanlon, CCP further explore what you should and shouldn’t say to employees about the CEO pay ratio disclosure (thanks to the’s Advisor’s Blog for leading me to this information.) Some of the ideas O’Hanlon explored are:

In her first post (“Imagine CEO Pay Ratio Communications Going Well“), O’Hanlon suggests that instead of focusing on a panicked state or reluctance to communicate about this (and asking yourself the question “What good can come of this?”), ask yourself “What can I make of this?” Changing your focus should pave the way to different insights.

She also suggests imagining employees approaching the disclosure with the following reactions:

  • Not immediately overreacting to the numbers
  • Being willing to listen to the rationale for the numbers with an open mind, even though they are skeptical (or more)
  • Being able to spend a limited time mulling over with their colleagues what they have heard
  • Not going on social media to comment on the announcement

In her second post (“Imagine CEO Pay Ratio Communications Going Well – Part 2“), O’Hanlon offers a number of concrete suggestions for talking about the ratio with employees. Here are a few of her suggestions:

  • Prepare your employees. If you don’t, the CEO Pay Ratio and median employee information is bound to be a shock.
  • Use end-of-the-year focal review and merit pay communications. Articulate, repeat and reinforce what you do to make sure employee pay is competitive, how your practices are fair and how employee salaries are only one part of your company’s whole reward package.
  • Use people not technology. Distancing the message from the personal will leave your company open to employee claims that leadership is ducking responsibility. Identify a spokesperson to present the details of the CEO Pay Ratio, back it up with email or intranet information, but be sure that your communication strategy gives employees a chance to discuss their reaction with someone that they can open up to.

O’Hanlon mentions some other important idea in her blogs; they are definitely worth a read.

The CEO Pay Ratio disclosure time frame will be here before we know it, and companies are running out of time to take advantage of some of these proactive communication opportunities. It’s time to get ahead of the disclosure, imagine this going over well with your employees, and take realistic steps in advance to ensure the messaging results in a positive experience for employees, rather than a communication fail.

– Jennifer

November 28, 2017

Tax Reform Could Impact Tax Basis

The proposed tax reform bill is the gift that keeps on giving in terms of blog entries. Emily Cervino of Fidelity pointed out this gem to me: the Senate version of the bill would no longer permit investors to identify which lot of securities they are selling if they have securities in their account that have different bases for tax purposes.

What the Heck?

Say an investor makes the following purchases of stock in a single company:

  • 100 shares at $10 per share on January 10
  • 100 shares at $15 per share on March 15

Next, assume the investor chooses to sell 100 shares in April at $17 per share.  Under current tax law, the investor could decide which of the two “lots” to sell. In this example, the obvious choice would be the shares purchased at $15; this would minimize the capital gain on the sale, making it more profitable on a post-tax basis.

Under the proposed rules in the Senate version of the Tax Cuts and Jobs Act, investors would be required to sell shares held in a single brokerage account on a first in, first out (FIFO) basis. In my example, the investor would be required to sell the shares acquired at $10 per share first, which would increase her capital gain.

Couldn’t Investors Just Transfer the Shares to Another Account Before Selling Them?

Andrew Schwartz of Computershare pointed out to me that there’s a big loophole to the proposed rules: if the investor in my example is savvy, she’ll quickly figure out that all she needs to do is transfer the shares she bought at $15 to a different brokerage account (in which she doesn’t hold any other shares of the company’s stock) and sell the shares from that account. Problem solved.

What About Stock Compensation?

That solution works great for stock purchased on the open market but it doesn’t work so well for stock acquired under stock compensation programs.

The new law is written very broadly and appears to also apply to sales executed in connection with same-day-sale or sell-to-cover transactions. Currently, there’s little to no capital gain or loss on these transactions because the sale price is very close to the basis of the stock being sold. But if employees already hold company stock in their plan accounts and we have to assume that the shares being sold are the shares acquired earliest, this would no longer be the case, potentially making both of these transactions significantly more expensive for employees.

In the case of ISOs and ESPPs, companies don’t want employees to transfer the shares to another brokerage account (and sometimes even prohibit employees from doing so), because this makes it significantly harder to track dispositions. But if employees hold shares acquired under ISOs or ESPPs in their plan account, same-day-sale or sell-to-cover transactions might inadvertently force a disposition of the qualified shares.

Finally, for those of you who handle Section 16 reporting, the last thing you want is for insiders to open additional brokerage accounts to manage their sales. Keeping tabs on insider transactions is hard enough as it is.

When Does This Apply?

It doesn’t—yet. The bill hasn’t yet been passed by the Senate and this provision isn’t in the House version of the bill, so there is hope that, just like the rules requiring options to be taxed at vest, it will be removed from the bill before the Senate votes on it.  If it isn’t removed before the vote and the bill passes, there’s still a chance it could be removed during the reconciliation process for the two bills. But if it is enacted into law, it will be effective for sales starting next year.

– Barbara

Tags: , ,

November 21, 2017

Year-End Tax News: COLAs

Back in mid-October, just before the NASPP Conference, the SSA and IRS announced the cost-of-living adjustments for 2018.  I had expected to get around to blogging about this sooner, but then the House released its version of the Tax Cuts and Jobs Act and the topic of tax reform and its potential impact on stock compensation eclipsed all other topics.


I’ve provided a description of the adjustments that impact stock compensation below. Here is an IRS chart that provides a complete list of updates.


The maximum amount of earnings subject to Social Security tax will increase to $128,700 in 2018 (up from $127,200 in 2017). The Social Security tax withholding rate will remain at 6.2%. With the new wage cap, the maximum withholding for Social Security will be $7,979.40.

Medicare tax rates also remain the same and are not subject to a maximum (the threshold at which the additional Medicare tax applies is likewise unchanged).

Highly Compensated Employee Threshold

The threshold level of compensation at which an employee is considered highly compensated for purposes of Section 414(q) will remain unchanged at $120,000 in 2018. This threshold defines “highly compensated” for purposes of determining which employees can be excluded from a qualified ESPP under Section 423.

Update on the Tax Reform Bill

And, for your tax reform fix, here is an update: the House passed its version of the bill and the Senate Finance Committee approved its version to proceed to the full Senate. Debate on the bill is expected to start in the Senate after Thanksgiving. One GOP senator (Ron Johnson, WI) has already said he won’t vote it and a few other GOP senators appear to be undecided. None of the Democrat senators are expected to vote for it, so the bill won’t pass if the GOP loses two more votes (at least not this time—they could always go back to the drawing board and bring a new bill to a vote).

The provisions in both bills that directly impact stock compensation are the same as they were last Thursday (taxing stock options at vest is out, Section 162(m) expansion is in, and tax-deferred arrangements for private companies are in).

For what it’s worth, GovTrack reports that Skopos Labs gives it a 46% chance of passing (as of November 20, when I last checked it).

Happy Thanksgiving!

This will be our only blog this week because of the holiday. I wish you all a happy Thanksgiving and I hope you have a celebration that is completely free from discussions of both tax reform and equity compensation.

– Barbara

Tags: , , , , , ,

November 16, 2017

What’s the Score?

Late Tuesday, the Senate Finance Committee released modifications to the Senate’s version of the Tax Cuts and Jobs Act.

Nonqualified Deferred Compensation, Stock Options, and Restricted Stock Units

The provision that would have required all forms of NQDC, NQSOs, and RSUs to be taxed at vest has been struck from the bill. That means that 409A still stands (I bet you never thought you’d be glad to read those words) and the tax treatment of stock compensation is unchanged. Hopefully this is the last time I’ll have to blog about stock options being taxed at vest, at least until the next time Congress decides to take on deferred compensation.

Section 162(m)

The provision that would expand the employees covered under Section 162(m) and repeal the exemption for stock options and performance-based pay is still included in the bill (see “Tax Reform Targets 162(m)“). This provision was amended however, to grandfather awards granted before November 2, 2017 that were vested as of December 31, 2016, so long as they aren’t materially modified after November 2, 2017.

Is that language confusing to you? It is to me. I’m not sure how an award could be vested before it is granted. Maybe there are other types of compensation where this is possible but, in the context of stock compensation, what I think it boils down to is that options and awards granted and vested prior to December 31, 2016 will be exempt from the new requirements but anything granted or vesting after that date will be subject to it. So it’s too late to accelerate vesting on stock options to exempt them from the new requirements.

Qualified Equity Grants

The “Qualified Equity Grants” provision that was added to the House bill (see “Another Tax Reform Update“) has also been added to the Senate bill. This provision creates a new type of qualified equity award that would allow employees in private companies to defer taxation of stock options and RSUs for up to five years.

Now that it’s in both bills, I spent a little more quality time with the summary of it and, frankly, I think there are a lot of problems with it. The five-year deferral is measured from the vesting date, even for stock options; the deferral election has to be made within 30 days of the vest date, even for stock options; taxable income is based on the value of the stock at vesting, even if the stock is worth so little at the end of the deferral period that it is no longer sufficient to cover the taxes due; and taxes have to be withheld at the highest marginal income tax rate. I just don’t see this being helpful to private companies.

The Scorecard

For those of you keeping score, here’s the wrap-up of where the two bills stand with respect to the provisions relating specifically to stock compensation:

  • NQDC and Stock Compensation Taxed at Vest:  House 0, Senate 0 (out of both bills)
  • Changes to 162(m): House 1, Senate 1 (in both bills)
  • Deferral of Tax on Stock Options and RSUs for Employees of Private Companies: House 1, Senate 1 (in both bills)

– Barbara

Tags: ,

November 14, 2017

Tax Reform: More Than Just Stock Options

It feels like I did nothing last week but talk about whether stock options would be taxed at vest. The tax reforms bills proposed by the House and Senate are much broader than you might think based on last week’s blog entries. Today I look at some of the other provisions in the bills that could have at least an indirect impact on stock compensation.

Supplemental Withholding Rate

The bills don’t expressly change the supplemental withholding rate but they could have an impact on it. Currently, the optional flat rate for supplemental payments of less than $1 million per year is tied to the third lowest tax marginal income tax rate. Under the House’s proposal, which has only four income tax brackets, this rate will be 35% (for single filers, this is the rate that applies to the $200,000-$500,000 income tax bracket). Under the Senate’s proposal, which has seven income tax brackets, this will be 22.5% (for single filers, the $38,700-$60,000 income tax bracket). The 25% rate under current law is the rate that applies to the $77,400-$156,150 bracket (for single filers).

The difference in tax rates and brackets is clearly one of the most significant areas of the two bills that will have to be reconciled. As you can see, the bills will produce very different results when it comes to withholding on supplemental payments: the rate under the House bill is likely to result in overwithholding for many employees, while the rate under Senate bill will result in underwithholding on supplemental payments paid to executives and other highly paid employees (intensifying the pressure for companies to allow excess withholding on equity awards). It’s also possible that both bills could be amended to address what rate should apply to supplemental payments.

There isn’t currently anything in either bill that would eliminate the requirement to withhold at the maximum individual rate for individuals who have received supplemental payments in excess of $1 million during a year. Under the House bill, the maximum individual rate would remain 39.6%, but under the Senate bill, it would drop to 38.5%.


Both bills would repeal the AMT, which makes ISOs a little less complex. I’m not sure this is enough, by itself, to trigger a resurgence of ISOs. But in combination with a significantly reduced corporate rate and the fact that ASU 2016-09 has already equalized ISOs and NQSOs for diluted EPS purpose, maybe this would be enough to at least trigger some renewed interest in ISOs.

Long-Term Capital Gains

Both proposals generally keep the long-term capital gains rates the same. But to the extent that ordinary income rates (and, by extension, short-term capital gains, since short-term capital gains are generally taxed at ordinary income tax rates) are lower, employees may be less inclined to hold stock acquired under equity compensation vehicles.

Estate Taxes

Both bills increase the threshold at which the estate tax applies to $10 million (currently the threshold is about $5.5 million).  The House bill would also repeal the estate tax after six years. If the estate tax is repealed, there would be no reason to transfer stock options prior to death for estate planning purposes; with the threshold increased, fewer employees would need to worry about this.

– Barbara


November 10, 2017

Groundhog Day

A summary of the Senate version of the Tax Cuts and Jobs Act was released late yesterday and guess what? Yep, it includes the same provision changing the taxation of NQDC and stock compensation that the House bill had. It’s beginning to feel a little like the movie Groundhog Day. But hey, at least we aren’t talking about the CEO pay ratio anymore.

(Because it’s Friday and my fourth, no fifth, blog this week, I have a picture of a groundhog for you.)

Senate Version

The summary from the Senate version bill looks a lot like the same text that was in the JCT report of the House bill, so I did a document compare just for fun, because that is the sort of thing that is fun for me.

Turns out there are a few minor differences. Most significantly, the Senate version still exempts ISOs and ESPPs, but it sounds like the exemption might only apply if the shares acquired under these awards are sold in a qualifying disposition. This probably doesn’t impact ESPPs, since I think the purchase date would be considered the vest date in most cases, but it could impact how income on a disqualifying disposition of an ISO is determined.

The Senate version also includes the provision that modifies Section 162(m) to update the definition of covered employee and eliminate the exception for performance based compensation.

What’s the Score?

So, if you are keeping score, here’s where the two bills stand with respect to the provisions relating specifically to stock compensation:

  • NQDC and Stock Compensation Taxed at Vest:  House 0, Senate 1 (out of the House bill, in the Senate bill)
  • Changes to 162(m): House 1, Senate 1 (in both bills)
  • Deferral of Tax on Stock Options and RSUs for Employees of Private Companies: House 1, Senate 0 (in the House bill, not in the Senate bill)

What’s Next?

Well, for sure, what’s next is the weekend, during which I don’t expect anything to happen on either of these bills. I’m guessing we all could use a little break. Go enjoy yourselves.

The Ways and Means Committee has approved the House bill; next stop for it is floor of the House for debate and a vote. This is expected to happen next week. The Senate bill starts committee markup next week and still has to be voted on by the Senate Finance committee before it can go to the full Senate for a vote.

Once passed by both the House and Senate, both bills will have to be reconciled so that they agree. There are major differences in the bills right now in areas that don’t directly impact stock compensation; the topics I have been writing about are just tiny parts of very broad legislation. But if the differences I’ve noted above aren’t reconciled during committee markup in the Senate or in the floor debates, they will have to be addressed during the reconciliation process.

I will keep you posted.

– Barbara

Tags: ,

November 9, 2017

Another Tax Reform Update

Just this morning, the House Ways and Means Committee Chairman issued a press release announcing additional changes to the House’s tax reform bill.  The changes include removing the section of the bill that would change the tax treatment of NQDC, including stock options and RSUs.

So here’s where things stand with the areas of the bill that I have covered in my blogs this week:

Section 3801: Nonqualified Deferred Compensation

Based on the summary of the Chairman’s most recent mark-up of the bill, this section is removed in its entirety. Thus, the bill would not change the tax treatment of stock options, RSUs, or other nonqualified deferred compensation.

Section 3802: Modification of Limitation on Excessive Employee Remuneration

This section is still in the bill. It redefines who is a covered employee for purposes of Section 162(m) and makes stock options and performance awards subject to the $1 million deduction limitation. See my blog on Tuesday (“Tax Reform Targets 162(m)“) for more information.

Section 3804: Treatment of Qualified Equity Grants

The section is still in the bill. It creates a new type qualified equity award referred to as “Qualified Equity Grants” that would allow employees in private companies to defer taxation of stock options and RSUs for up to five years.  See my blog from this morning (“Tax Reform Update“) for more info.  The Chairman’s mark includes some technical amendments to the language of this section, but the intent of it does not appear to have been changed.

What’s Next?

At this time, we are still awaiting the Senate version of the bill. There’s some preliminary information available about it but we’re going to have to wait for the full bill to know if it makes any changes to stock compensation. I will keep you updated.

– Barbara

Tags: ,

November 9, 2017

Tax Reform Update

The impact of the Tax Cuts and Jobs Act on stock compensation continues to be a focus here at the NASPP. My understanding is that the bill is supposed to come out of committee in the House possibly as early as today and that we might also see the Senate version of the bill today.

Here are a few updates based on what we know so far.

ISOs and ESPPs Exempt

The Joint Committee on Taxation (JCT) report on the bill clarifies that ISOs and ESPPs are intended to be exempt from the definition of NQDC. That’s good news for those of you who, like myself, are big fans of qualified ESPPs. It also could mean that I wasn’t completely off base on Monday when I suggested this bill might lead to a resurgence of ISOs.

At-the-Money Options NOT Exempt

I know some folks were holding out hope that the failure to exclude at-the-money options from the definition of NQDC was a drafting error but that doesn’t appear to be the case. The JCT report says:

The proposal applies to all stock options and SARs (and similar arrangements involving noncorporate entities), regardless of how the exercise price compares to the value of the related stock on the date the option or SAR is granted. It is intended that no exceptions are to be provided in regulations or other administrative guidance.

So that seems pretty clear. Sounds like someone was annoyed about the exception included in the 409A regs for at-the-money options.

Performance Conditions Don’t Count

An oddity in the proposed legislation is that vesting tied to performance conditions doesn’t count as a substantial risk for forfeiture. For public companies, I think most performance awards are tied to both a service and a performance condition, so this might not be a significant concern (although it probably will be necessary to make sure the service condition extends through the date that the comp committee certifies performance, otherwise the awards would be taxable before performance has been certified). But it’s going to be a significant problem for private companies that want to make vesting in awards contingent on an IPO or CIC.

Retirement Provisions Will be a Problem

The requirement to tax NQSOs and RSUs upon vest will also put a wrinkle in retirement provisions. As you all know, when grants provide for accelerated or continued vesting upon retirement, there’s no longer a substantial risk of forfeiture once an employee is eligible to retire. Thus, under the tax bill, both NQSOs and RSUs that provide for payment upon retirement would be fully taxable for both FIT and FICA purposes when employees are eligible to retire (and restricted stock paid out at retirement is already fully taxable upon retirement eligibility).

Relief for Private Companies

The bill has been amended to include a provision that would allow employees in private companies to make an election upon exercise of stock options or vesting of RSUs that would defer taxation for five years (in the case of stock options, it’s not entirely clear when the five-year period would start). This is nice, but I’m not sure it’s enough. How many private companies are on a five-year trajectory to IPO or can accurately predict when they are five years out from IPO?

– Barbara