The NASPP Blog

Monthly Archives: November 2008

November 26, 2008

Option Expiration Communication

I recently read that Kohl’s is granting a make-up stock option to the Chairman of the Board because the company “failed to notify him” that his options were expiring–back in 2004! See the story here. Now, instead of $5 million in options that expired in 2004, he is being given around 130% of value of stock options (which is more than twice as many shares) that expire in 2015. Sounds to me like in this case ignorance is not only bliss, it is highly profitable!

It got me to thinking, as a stock plan administrator how much communication do you need to provide, and what will you do if you haven’t provided it or the participant didn’t act on the information provided? I’ve certainly answered the phone on situations like this; where someone has let a large amount of money (admittedly, not the $5 million that the Kohl’s chairman apparently lost out on in 2004) slip away because they had not read their grant agreement and did not understand that the option to purchase stock didn’t last forever, or that it was cancelled when they left the company. They aren’t fun calls, either for the person who is realizing that they missed out or for the administrator who most likely can’t do anything for them. Also, there is a definite difference in how management feels about the situation if the person is still an active, valued contributor to the company vs. an employee who terminated years ago.

The fact is that most grant recipients do not read their grant document or will not understand what they are reading without additional education. To be fair, I can’t confirm that the grant document correctly showed the expiration date in the Kohl’s case or that there wasn’t some other communication that indicated the grant would still be exercisable in 2008. However, the situation does highlight how important it is to maintain consistency through all participant communications as well as implement a solid education program to keep participants informed. Remind the participants as often as you can that they absolutely need to read their grant agreement and that they will be responsible for understanding the terms and conditions! In addition, companies should be sure to have a policy in place on how it will handle situations where the grant recipient has, through their own inaction, gotten into a situation where they have lost the opportunity to exercise or vest in their shares.

Stock plan administrators should be in the loop on all employee communications policies that have anything to do with equity compensation. It’s a good idea to have a sit-down meeting or conference call with your recruiting, HR, compensation, and legal teams to make sure that everyone understands the importance of consistent communications. If offer letters in the U.S. include an equity compensation piece, they should always also include a disclaimer that the grant is subject to approval and that the terms and conditions of the grant will be included in the grant agreement, which will supersede anything on the offer letter. In other countries, you will most likely not want to include the equity piece at all in an offer letter to avoid entitlement issues (a simple disclaimer may not be enough). Make sure that recruiters are being educated not to say anything that may be considered a verbal contract regarding equity compensation and that your HR team has good talking points to answer employee questions and actively participate in employee education. Also, many brokers now notify account-holders when an option is set to expire. Take time to understand your broker(s) policy, but be careful when educating participants to avoid making any guarantees that the broker will notify them of expiring options.

For more tips and tricks on employee communications, read the “Communicating Stock Compensation: Approaching the Process Strategically” article in our Document Library. If you are looking to see how other companies are handling this sticky situation, check out our Option Expiration Quick Survey or the 2007 Stock Plan Design and Administration Survey.

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November 25, 2008

Post-Dated Terminations–The Real World

Last week I blogged about a common problem that arises in the administration of stock plans: terminations that are reported late.  Sometimes the late notification allows the former employee to receive shares that he or she is not entitled to, for example, if a former employee’s restricted stock award or option vests between his or or last day and when notice of the termination is received by stock plan administration or if the notice is received after the conclusion of the post-termination exercise period.

I recently spoke with a few stock plan administrators about how they handle these “worst case” scenarios. (And I emphasize “few”; this was by no means scientific research).  Everyone I spoke with said that they generally address these matters on a case-by-case basis and frequently require the transaction to be unwound. 

If the shares haven’t been sold yet, unwinding the transaction is relatively straightforward; the company simply requires the employee to surrender the shares. If the shares have already been sold, it gets a little more troublesome.  In this case, the broker would be instructed to “bust” the trade.  What this means is that the broker buys the shares back on behalf of the employee so that they can be surrendered to the company and the employee is required to return the sale proceeds.

In a busted trade situation, it would be highly unusual for the broker to be able to repurchase the shares at the exact price the employee sold them for.  If the broker has to pay more for the shares, then the broker is going to look to the company to make up the shortfall.  Some companies charged the shortfall to the employee, but at least one stock plan administrator I spoke with said that they charged the shortfall to the payroll group that had neglected to report the termination on a timely basis.  This policy was apparently very successful in encouraging timely reports in the future.

One stock plan administrator I spoke said that they view it as the employees’ responsibility to read and understand the terms of their grants; they require employees to indicate that they have done so by signing their grant agreements. Moreover, they specifically include language regarding the treatment of grants upon termination in their FAQs, to provide the company with further leverage for enforcement when a situation such as this occurs.

Most of the plan administrators also indicated that there were sometimes situations where general counsel (or whoever would typically make this type of decision at their company) allowed the transaction to stand. In some cases, the amounts involved were de minimus (a few shares) and it didn’t seem worth pursuing.  In other cases, there may have been mitigating factors or unwinding the transaction may have just been too much of a challenge (e.g., perhaps due to the amount of time that had elapsed).  In the pre-SOX era, companies may have just let the transaction go without further action, but now, in the days of SOX compliance and the post-backdating scandal, most of the stock plan administrators that I spoke with were referring the matter up to the compensation committee if a decision was made to not to pursue cancelling the transaction and accounting for the decision as a modification of the grant. 

While practices in the past may have been looser, based on my conversations with the administrators I spoke with, looking the other way on these transactions just doesn’t fly in today’s enviroment.  These transactions are easily auditable and one of the administrators said that the audit team specifically looked for them.

Reason #3 to Renew Your NASPP Membership

The country guides available in our new Global Stock Plans Portal are easily worth the cost of NASPP membership. I’m not kidding–these guides used to be published in a book that cost at least as much, if not more, than NASPP membership.  Each guide provides an in-depth discussion of stock compensation in a different country. These are very hefty documents–the guide for just the UK is close to 40 pages!  Whatever you need to know about operating a stock plan in these countries, from ESPPs in Hong Kong to qualified plans in France, our country guides have it covered.    

2nd Annual NASPP Webcast on Tax Reporting

On December 9, Robyn Shutak, the NASPP’s Education Director, and I will present our annual webcast on tax reporting, where we answer the tax-related questions you’ve been asking all year long in the NASPP discussion forum.  Former employees, consultants, outside directors, death, divorce…we’re going to cover it all, complete with sample Forms W-2 and 1099.  If you have any questions you’d like to make sure we cover, feel free to email them to me.   

NASPP “To Do” List

We have so much going on here at the NASPP, it can be hard to keep track of it all, so I’m going to keep an ongoing “to do” list for you here in my blogs. 

Happy Thanksgiving!

– Barbara 

November 21, 2008

Global Stock Plan Design, Time to Review Your Plans!

Anecdotal evidence suggests that most stock plan administrators have been handed their international equity compensation programs and asked to find a way to administer them. However, the increasing complexity in the international regulatory environment and increased scrutiny over international stock plans is providing a platform for stock plan administrators to be active participants in the redesign of international programs, if not in their initial implementation. If you have not already, you should put a review of your international plans in as part of your year-end processes.

Here are the top five areas to review:

  1. Scope      How broad-based were your international plans intended to be? Are you still focusing on the same audience, and does that still make sense for your employee population in that area? Take some time to review your grant processes for your international employees to confirm that the programs you are using still fit the current population.
  2. Exchange Controls      Exchange controls are a government’s regulation on the flow of money and securities in and out of the country. You will want to confirm that your plans do (or still do) conform to the exchange controls of the countries in which you are offering equity compensation. One exchange control update that has been the source of attention, concerns, and updates is China’s SAFE requirements detailed in Circular 78.
  3. Securities Laws      Securities laws are regulations pertaining to the public sale of securities. Offering shares of stock to employees through equity compensation programs may require filings with the country in which the programs are administered. The most common international filing exemption is for offerings involving a limited number of employees. If you were relying on this exemption, pay special attention to the scope of your plans to make sure that if you are aware of when you exceed the maximum number.
  4. Labor Laws      Labor laws are established to protect employees; they may be federal or local. One of the most sensitive issues under labor laws is the idea of entitlement. In reviewing your current programs, you will want to confirm that your HR policies (as they relate to equity compensation) comply with each country’s labor laws (e.g.; change in employee status, annual grant practices, etc.). Also, you will want to confirm any risk for the company if you are considering a change in your equity programs.
  5. Taxation      Employer and employee taxes may change each year. It’s important to note that not all countries follow a January – December tax year. You will want to do a year-end review of taxation for each country; adjusting the review period for the appropriate year-end timeframe for each country. Also, don’t forget about corporate taxes! You will want to review your corporate structure with regard to your local subsidiaries and confirm that your deductions and/or reimbursements are compliant.

In addition to regular alerts, articles, and quarterly updates available on the Global Stock Plans Portal, here are some important materials you may have missed:

  1. Introductory Materials to the Country Guides: There are currently 27 individual Country Guides available (stay tuned for more in January 2009!). The Introductory Materials from Jones Day will help guide you on what issues to consider as well as show you how to take full advantage of the guides.
  2. Global Employee Stock Plan Compliance Matrix: This matrix by Baker & McKenzie highlights selected international tax and legal consequences associated with stock plans in 36 countries including the top five issues above as well as data privacy.
  3. Plan Design Issues by Country: This concise matrix by GlobalSharePlans provides alerts for plan design considerations in 37 countries including specials risks, unusual requirements, and translation considerations. Keep an eye out for a special interactive tool that GlobalSharePlans will be sharing with NASPP members in early 2009!
  4. Global Desk Reference for Stock Options, Restricted Stock and RSUs, Stock Purchase Plans, and Data Privacy: DLA Piper provides this Global Desk Reference set. Each one offers a snapshot of top issues in up to 49 countries including my top five issues, data protection, and communications issues.
  5. Countries at a Glance for Stock Options, Restricted Stock and RSUs, Stock Purchase Plans, and Data Privacy: These country overviews by White & Case detail the employment, regulatory, and tax issues for 43 countries.

If you aren’t already, don’t forget to subscribe to the country alerts so that you can receive any breaking news on the countries relevant to your company’s stock plans.

Also, if you want to see what international plan design looked like in 2006, you can review our 2006 International Stock Plan Design Survey. We have just launched our new International Design and Administration Survey, co-sponsored again by Deloitte. It is the most comprehensive survey on all aspects of stock plan administration in the industry. Don’t miss out on your chance to participate in the survey and keep an eye out for the results in 2009!


November 18, 2008

Post-Dated Terminations

In today’s blog, I take a look at an issue that plagues most stock plan administration departments: late notification of terminations.  It’s a fairly common scenario that can cause numerous problems:

  • Additional shares may have vested after the employee terminated but before you were notified of the termination and the shares may have already been exercised or released to the now former employee.
  • The notification may be so late that you don’t receive it until after the post-termination exercise period should have ended, again allowing the former employee to exercise shares he or she wasn’t entitled to.
  • The notification may be delayed past the end of fiscal period, making the stock plan activity and expense reported for that period incorrect.  Once the termination is entered into your database, with the correct termination date, it creates discrepancies between your beginning and ending balances for the fiscal periods the notification spanned.

Now that you’ve received the late report, what should you do about it?  If the former employee hasn’t received shares that he or she wasn’t entitled to, the solution is generally to enter it into the database just as you would have if you had received the notice on time, making a note of it in your records so you can account for any discrepancies the cancellation subseqently causes in reports. 

Where the former employee has received shares that he or she wasn’t entitled to, either through an option exercise or release of award shares, the ideal solution is to rescind the transaction and recover the shares from the employee. This is easier to do if the shares haven’t been sold yet, but even if they have been sold, it may be possible to break the trade.  If there is a loss on the broken trade, you’ll need to decide whether to absorb it or try to collect reimbursement from the former employee for it (unless you can convince your broker to absorb it). 

It may be tempting to just let it go–what’s a few shares, after all?  But chances are, this won’t be an isolated occurence; in my experience, even the most well-run stock plan administration departments have to address this issue occasionally.  How you handle one termination can set a dangerous precedent.  And in the current environment, it might not be the sort of thing you want to have come to light later on down the road–does the word “backdating” ring a bell? 

More significantly, you, your manager, or even the company’s general counsel, may not have the authority to let it go.  Allowing the former employee to keep the shares he or she wasn’t entitled to is tantamount to modifying the award.  Generally, modifications of vesting provisions have to be approved by the compensation committee, the board of directors, or at least a member of the board.  Even under Delaware law, where authority to approve option grants can be delegated to an officer who is not a board member, I don’t believe the same flexibility applies to vesting provisions; those still have to be approved by a board member. 

Where the decision to allow the former employee to keep the shares is duly approved, it should be accounted for as a modification.  It is essentially an acceleration of vesting, so the company will recognize incremental cost equal to the current fair value of the additional shares the employee received (the company would still reverse any previously recognized expense associated with the unvested portion of the award as it existed before the modification).

For a few missed terminations here or there, the accounting consequences most likely aren’t material.  But if this is a regular pattern, the expenses could start to add up.  In addition to addressing the situation at hand, it’s smart to determine the cause of the late notification and take steps to prevent it from happening in the future.  If you have a specific payroll group that is an ongoing transgressor, schedule a meeting to discuss the problem and come up with a resolution that works for everyone.

Now that I’ve talked from a thereotical perspective about about how these situations “should” be handled, next week I’ll blog about what I learned when I talked to actual stock plan administrators in the real world about their companies’ procedures for late notifications of terminations. 

New Date for Section 16 Webcast

Just announced, our popular annual Section 16 Q&A webcast with Alan Dye has been rescheduled for February 3.  Mark your calendars now and make sure you renew your NASPP membership before then, so you don’t miss it.

Reason #2 to Renew Your NASPP Membership: New Search Function Powered by Google

Since I joined the NASPP back in 2004, members have told me how hard it is to find articles on the NASPP website.  We’re taking steps to fix that, including adding the portals you now see on the home page, which serve as an index to the site.  This summer we updated our search function to use Google technology and I think it works much better than our old search function.  Just last week I was looking for the Rev. Proc. that exempts brokers from issuing a Form 1099-B for certain stock option exercise and sale transactions.  I couldn’t remember the Rev. Proc. number or when it was issued, but I knew it was somewhere in the vast NASPP Document Library.  So I typed “1099-B” into the search box at the top of the page, hit the Go button, and there it was, sixth article listed in the search results (followed immediately by an alert we posted on the same topic)–I didn’t even have to scroll to find it. 

If you haven’t tried our new search function, check it out today.  I’d love to hear from you as to whether or not it finds the articles you are looking for.

NASPP “To Do” List

We have so much going on here at the NASPP, it can be hard to keep track of it all, so I’m going to keep an ongoing “to do” list for you here in my blogs. 

– Barbara


November 13, 2008

The ‘bailout’ – Emergency Economic Stabilization Act of 2008

The recently passed Emergency Economic Stabilization Act of 2008 (EESA) includes several programs that will change executive compensation and taxation for participating companies as well as changes to offshore non-qualified deferred compensation, and AMT on ISO exercises.

Troubled Asset Relief Program (TARP)

This program allows financial institutions to sell “troubled assets” to the Treasury by either direct purchase or by auction. The direct purchase program is called Capital Purchase Program (CPP), which includes $250 billion of the bailout fund, and the auction process is called Trouble Asset Auction Program (TAAP). Companies who participate in any of the TARP programs will be subject to certain pre-conditions once the company exceeds $300 million received through one or both (cumulatively) of the programs.

Capital Purchase Program (CPP)

Companies who sell troubled assets to the Treasury directly through the CPP will be subject to the following restrictions as a condition of participation:

•IRC 280G(e): Senior executives’ severance benefits must be limited to less than three times the executive’s trailing five-year average annual taxable compensation.

•162(m): Participating companies must limit the federal income tax deduction for annual compensation paid to each of its senior executives to $500,000 and may not claim an exemption for performance-based compensation during the covered period (as long as the Treasury holds equity or debt in the participating company).

•Incentive compensation: Participating companies must adopt measures to avoid incentive compensation that might encourage senior executives to take risks that could negatively impact the value of the company.

•Clawback: Participating companies must include clawback provisions for any bonus or incentive compensation paid out on the basis of financial statements or performance metrics later determined to be materially inaccurate during the covered period.

Troubled Asset Auction Program (TAAP)

Companies participating in the TAAP will be subject to the CCP provisions plus:

•Severance benefits: New arrangements with senior executives will also be limited to less than three times the executive’s trailing five-year average annual taxable compensation. If an existing arrangement allows the executive to receive more than this amount, any amount that is in excess of the executive’s average annual income will be non-deductible by the company and subject to a 20% excise tax payable by the executive.

IRC 457A: Taxation of Offshore Deferred Compensation

In addition to the pre-conditions for companies participating in the TARP, the EESA adds section 457A to the IRC. Section 457A applies to non-qualified deferred compensation plans for any foreign corporation that has little or no taxable income in the United States and it not subject to a comprehensive foreign income tax as well as any partnership where less than “substantially all” of its income goes to persons not subject to U.S. income tax nor a comprehensive foreign income tax. Under 547A, non-qualified deferred compensation will be taxable when it vests (or when the income amount can be determined) rather than when it is paid. So, this change may impact only a small number of companies and compensation structures, but will certainly complicate taxation for situations that are covered.

Alternative Minimum Tax (AMT):

There has been an effort to help alleviate the burden of AMT for many taxpayers (see the NASPP Legislative update “IRS to Suspend Collection Action for AMT on ISO Exercises). Well, the EESA slipped in a little light at the end of the tunnel for individuals struggling with AMT consequences, as Barbara brought to our attention in Tuesday’s blog entry. Division C of the EESA does the following for AMT:

•Allowable AMT exemption increased to $46,200 for individuals and to $69,950 for married individuals filing jointly.

•Personal credits can be credited against AMT Income for the 2008 tax year. •Accelerates (reduces) the AMT tax credit recovery period depending on the individual’s particular situation

•Eliminates the phase-out provision of AMT, which reduced the amount of the taxpayer’s AMT refundable credit by a percentage commiserate with the individual’s excess adjusted gross income.

•Abates any underpayment of tax outstanding as of 10/3/2008 related to AMT from ISO exercises, including interest and penalties.

For full details, see our newly created Economic Stimulus Legislation portal where you can find the actual legislation, memos detailing the impact of the EESA, and sample documents for companies participating in the TARP Capital Purchase Program.

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November 11, 2008

AMT Relief

Today I discuss a recent development related to ISOs and the alternative minimum tax.  I know it seems like all I can talk about these days are tax-qualified plans, but I promise that I have other topics in mind for this blog. Next week we’ll definitely talk about something else.

The AMT Relief You Didn’t Notice

The Emergency Economic Stabilization Act of 2008, recently enacted by Congress, quietly included some relief for taxpayers that paid large amounts of AMT.  You’ll recall that this was a problem back in 2000-2001 for many employees that exercised and held ISOs (see “Sad Tax Stories” in “Across Our Desk” in the March-April 2001 issue of The Stock Plan Advisor).  Some of these employees had recognized gains of hundreds of thousands of dollars on their ISO exercises. If the employees didn’t sell the stock before the end of the calendar year, these gains were not income for regular tax purposes but were income for AMT purposes.  And with several hundred of thousands of dollars of extra income for AMT purposes, you can bet the employees ended up being subject to AMT. 

In this situation, the employees then were entitled to a credit equal to the difference between their AMT liability and their regular tax liability, which could be applied against their tax return in any future year that they weren’t subject to AMT.  This would have all worked out fine if the stock had increased in value; when employees eventually sold the stock, the extra income from the sales would have enabled employees to use their AMT credit.  But many employees saw the stock decrease dramatically, in some cases to less than what they had paid for it.  When this happens, employees have this big AMT credit saved up but not enough income to apply it to (under the AMT system, as it existed then, the credit could not be used to reduce a taxpayer’s tax liability to $0, just to the taxpayer’s AMT level for that year).  This meant employees would have to use their AMT credits in dribs and drabs, possibly over the rest of their life.

In 2006, Congress amended the AMT system to allow taxpayers to use up to 20% of any AMT credits that were more than three years old and made these credits refundable (which means that taxpayers could apply the full 20% of their credit, even if it exceeded their taxable income for the year).  Now, under the EESA, Congress has increased this limit to 50% of any remaining credit over two years.  So, for example, let’s say that an employee had exercised an ISO in 2000 that resulted in her being subject to AMT and accruing a large AMT credit. Heading into 2008, the employee has $200,000 left in unused AMT credit.  She can use $100,000 of the credit in 2008 and the remaining $100,000 in 2009. 

Of course, this is just a quick summary, suitable for posting in a blog.  As with most things related to equity compensation, it’s a lot more complicated.  The legislation also eliminated complicated phase-out rules that applied to taxpayers with high income levels, includes provisions to help taxpayers that owed significant amounts of AMT and didn’t pay it, and the refundable credit is only available until 2012.  So make sure you read the articles from Fairkmark Press and, posted in our alert “AMT Relief Included in Bailout Package,” before you go spouting off about it.    

International Stock Plan Design and Administration Survey

We launched the 2008 International Stock Plan Design and Administration Survey (co-sponsored by Deloitte Tax) today.  You have until Dec 5 to complete it–don’t make me come after you about it!

Restricted Stock Essentials–Online

If you are wondering about best practices for restricted stock and units, then I have the program for you!  We have just updated our Restricted Stock Essentials online program.  The course includes four pre-recorded presentations (so you can listen at your convenience) on everything you need to know about restricted stock and units.  We cover regulatory considerations, plan design, and day-to-day administrative practices.  All of the presentations are newly recorded, the extensive online resource materials have been updated, and all of the course quizzes are new.  If you register for the course by Dec 5, you can save $100 off the registration fee.

Survey on Underwater Options

Equity Methods is conducting a survey on what companies are doing about their underwater options.  If you have underwater options, then Equity Methods wants to hear from you, even if you aren’t planning to do anything about them. 

Reason #1 to Renew Your NASPP Membership:  Stock Plan Administrator’s Compensation Survey and Report

With all NASPP memberships expiring on December 31, now seems like a good time to remind you of the many valuable resources the NASPP offers.  So in my blogs for the next few months, I’ll be counting them up and we’ll see how many I come up with.  My first reason to renew your membership is the Stock Plan Administrator’s Compensation Survey and Report (co-sponsored by the NASPP and We aren’t planning to publish it until 2009, but if you renew now, you can receive an advance copy if it–just in time for year-end merit reviews and raises.

– Barbara 

November 6, 2008

Rule 144


The Securities Act of 1933 (1933 Act) is a piece of federal legislation that was enacted to prevent securities fraud by regulating the sale of securities in interstate commerce through registration of offers and sales. The basic filings used by companies are the Form S-1, S-3, and S-8. There are exemptions to the filing requirements outlined in the 1933 Act; Rule 701, Regulation D, and Rule 144. Rule 144 provides an exemption from securities registration through a safe harbor on the resale of restricted and/or control securities. To take advantage of the safe harbor provided by Rule 144, sales must comply with restrictions on the information publicly available on the company, holding period for restricted securities, sale amount limitations, the manner of the sale, and notification requirements.

Restricted and Control Securities

With restricted stock units and award grants growing in popularity, it’s easy for new stock professionals to hear “restricted securities” and think that it refers to a restricted stock grant. Restricted securities, as they apply to the Rule 144 safe harbor, refer to shares that were acquired in an unregistered offering. Restricted securities are restricted from resale until or unless they are registered or sold pursuant to an exemption. The most common example of restricted securities is shares that are acquired by employees of a private equity company, often in anticipation of an initial public offering. Restricted securities become restricted because of the manner in which they are acquired. Control securities are shares that are owned by affiliates of the company or persons who are in a control position in the company (such as your Section 16 officers and directors). Control securities may also be restricted securities (when they are acquired in an unregistered offering), but they are control securities because of the holder’s relationship to the company.

Affiliate Status All directors, policy making executive officers, and 10% shareholders should be considered control persons (affiliates). In addition, any relative or spouse living in the same household, trust or estate in which the affiliate or relative/spouse is a trustee, or any corporation in which the seller or family is a 10% owner fall under the same umbrella and will be considered affiliates of the company for the purposes of determining control securities. There may be other situations that give rise to control securities; stock plan administrators should work closely with their legal team to ensure that these people and/or entities are properly identified.

Safe Harbor Requirements

Restricted securities will need to either be registered, or sold pursuant to Rule 144, including the holding requirements. Restricted securities of a public company must be held for six months prior any sale, and restricted securities of a private company must be held for one year prior to any sale.

Control securities are a more common issue for public companies because they arise due to the holder’s relationship to the company. Even if the shares are acquired by the affiliate through an open market purchase, they become control securities subject to Rule 144 because they are held by the affiliate. In order for affiliates to sell control securities, the company’s publicly available information must be current. Control securities are subject to the same holding requirements as restricted securities, that is one year for private companies, and six months for public companies. However, Rule 144(d)(3)(x) does provide an exception for sales associated with cashless exercise transactions. In addition, the sales must be an amount that is less than one percent of the outstanding securities of the class being sold or the average weekly trading volume during the four weeks preceding the transaction and must be sold through an unsolicited broker transaction, directly to a market maker, or in a “riskless principal transaction”. Finally, the sale must be reported to eh SEC on a Form 144 if the shares sold during a three-month period exceed 5,000 shares or have a value in excess of $50,000.

Stock Plan Management Team

The stock plan administrator will most likely not participate directly with a significant portion of the implications of Rule 144. The stock plan management team should work closely with the legal team to ensure that all affiliates are flagged in the stock plan administration system and that all affiliates are educated regarding their status, including how their status may impact their families, trusts, etc. Once affiliates are identified, the stock plan administrator will want to work with any brokers who are known to sell shares for the affiliates (e.g., the captive broker or a broker whit whom the affiliate has a 10b5-1 trading plan) to confirm that the broker knows the affiliate status of the individual and is prepared to help with the Form 144 filing. The most important action a stock plan administrator can take, however, is to ensure that the company’s public filings are up to date. This is the one portion of Rule 144 that is out of the control of the affiliate themselves and is the direct responsibility of the company.

For more information on Rule 144, visit our Rule 144 portal. Rule 144 is also extensively covered in our Fundamentals of Stock Plan Administration course, which is designed to bring professionals who are new to the field up to date will all regulatory requirements as well as administrative best practices. Finally, if you were in New Orleans for our 16th Annual Conference, be sure to review your conference material from the session “New Rule 144: Updates and Issues”. If you weren’t able to attend in person (or you were there but didn’t get to all the sessions you were interested in), it’s not too late. The full conference audio is now available on CD. Order today to listen to the above sessions and all 40+ panels, including sessions addressing performance plans, hold-til-retirement, termination provisions, global stock plans, and much more.

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November 4, 2008

Excluding Employees from a Section 423 ESPP

Today I conclude my coverage of the proposed regulations on Section 423 ESPPs by discussing the groups of employees that the regulations would allow to be excluded from participation in an ESPP.

Allowable Exclusions Under the Proposed ESPP Regs

Section 423 requires that all employees of the company be allowed to participate in the ESPP, except that the company can exclude (i) employees that have completed less than two years of service to the company, (ii) employees that work less than 20 hours per week or less than five months per year, or (iii) highly compensated employees as defined in Section 414(q).

Some But Not All: The proposed regulations would clarify that it is permissible for the company to exclude employees that have completed less service or work less hours or months than the time periods specified in Section 423, provided the exclusion is applied equally to all of the company’s employees.  For example, the company could exclude only those employees that have completed less than six months (rather than two years) of service or only employees that work less than 10 hours per week (rather than 20 hours). 

Highly Compensated Employees:  The proposed regulations would expand the definition of highly compensated employees to also allow Section 16 insiders to be excluded either in addition to, or instead of, employees that meet the definition of “highly compensated” under Section 414(q). The regs would also allow companies to exclude only a subset of employees that earn above a specified level of compensation, provided that the employees excluded are considered highly compensated under Section 414(q) and the exclusion is applied equally to all employees in all entities that are permitted to participate in the plan. Thus, the company would not have to exclude all highly compensated employees under Section 414(q) in order to exclude Section 16 insiders or those above a certain compensation level. For example, although, for 2009, Section 414(q) defines highly compensated employees as those earning above $110,000, a company could choose to exclude only those highly compensated employees that earn above a higher threshold, say, $300,000.

Non-U.S. Employees:  The proposed regulations would also allow companies to exclude non-U.S. employees if local law prohibits their participation in the plan or if they would have to be allowed to participate in a manner that would cause the plan to violate the requirements of Section 423. [This is primarily a concern where non-U.S. employees are employed by the U.S. company, rather than by a foreign subsidiary. Companies can exclude employees in foreign subsidiaries simply by choosing not to designate the subsidiary as one of the corporate entities participating in the plan. While all employees of the sponsoring entity must be allowed to participate, it is not necessary to allow employees of the entity’s subsidiaries to participate in the plan. Of course, if a subsidiary is allowed to participate, then all employees of the subsidiary must be permitted to participate on an equal basis with the employees in the sponsoring/parent entity.]

Likewise, the proposed regulations would allow companies to permit non-U.S. employees to participate in the plan on a less favorable basis than U.S. employees, if so required under local law. The reverse is not true, however; if local law requires additional benefits under the plan to be extended to non-U.S. employees, those benefits must also be extended to U.S. employees if the non-U.S. employees participate in the plan.

For more on the proposed regs, see “IRS Proposes New Regulations for Section 423 ESPPs.”

Social Security Taxable Wage Base Maximum Announced for 2009

If you missed it, on October 16, the Social Security Administration announced that the maximum wage base for Social Security tax purposes will increase to $106,800 in 2009 (up from $102,000 in 2008). The withholding rate remains the same at 6.2%, resulting in a maximum amount of Social Security withholding of $6,621.60 in 2009 (up from $6,324 in 2008).

See the NASPP Alert “Social Security Wage Base Increases for 2009.”   

Stock Plan Administrators’ Salary Survey

I’m excited to announce that in early 2009 we will publish a new edition of the Stock Plan Administrators’ Salary Survey, co-sponsored by  We last published this survey in 2003 and we’ve received many requests from our members to update it.  Now, with the help of, we can!  Look for the survey in late January–or, if you can’t wait that long, renew your NASPP membership today to receive an advance copy.

That Time of Year Again 

No, not Christmas–that’s still two months off, but it is once again time to renew your NASPP membership. We have lots of great programs in store for 2009, starting with Alan Dye’s annual webcast on Section 16 on January 29.  We’re also planning webcasts on IFRS 2 and evaluating service providers.  Renew your membership today to ensure that you don’t miss out on any of the NASPP’s critical resources (and get an advance copy of the Stock Plan Administrators’ Salary Survey). For our service provider members, now is a great time to explore our newly available discounted rates on group memberships; contact our Programs Director, Danyle Anderson, at for more information.

– Barbara