The NASPP Blog

Monthly Archives: July 2009

July 30, 2009

Enhance Your Career

Are you looking for ways to enhance your career? If so, first you’ll want to listen to the audio archive of our latest webcast, “How to Succeed in Equity Compensation Without Really Trying!” It is chalk full of tips on how to be successful in your jobs without really trying. Second, find yourself a mentor! A mentor can take you under their wing and cultivate your career goals (think Yoda to Luke Skywalker in the Star Wars series).

How to find a mentor and what to look for in one?

Identify a professional you admire, respect and have a good chemistry with. You might also want to narrow your search to someone who is working in the same profession as you and is in a position that you’d eventually like to be in. This person might be a colleague at your company or someone you know through a professional organization, such as the NASPP or the CEP Institute. Formal mentoring programs do exist, but the best mentor/mentee relationships are often formed naturally over the course of time without the involvement of a third-party.

The key is to connect with someone you feel is going to make a long-term commitment to your professional development, celebrate your successes, listen to you, is easy to communicate with, introduce you to key players in the industry and has no ulterior motives.

Cultivating your relationship

There is no reason to formally invite your mentor to be a trusted advisor. Most often, all that is needed to develop a relationship with this person is to express your gratitude for their insight and ask if it would be okay to continue to learn from them. Also, be sure that when you connect, it is in a way that is natural, informal and easy. For example, if you both enjoy physical fitness, offer to chat over a jog.

How can a mentor help you?

Mentors can be as important to those just beginning their careers as they are to seasoned professionals. Who doesn’t need a second opinion or sounding board for ideas? Your mentor can share lessons learned with you–mistakes and successes–with the hope that you will learn from these. Mentors can provide a fresh perspective on issues, help you develop a long-term career plan, expand your social network by introducing you to key players in the industry and simply help you develop some of the skills necessary for the job you are working towards.

Express your gratitude

Mentors aren’t compensated for their time; they gain satisfaction in their relationship with you by sharing information, insight and work-related experiences. Regardless, don’t underestimate the power of a thank you. Explaining how this person has positively impacted your professional career is a sure way to continue your relationship for years to come.

Go ahead and find yourself a mentor today–you have nothing to lose and everything to gain by doing so!


July 28, 2009

Senator Levin Is At It Again

Last week, Senators Carl Levin (D-MI) and John McCain (R-AZ) introduced the “Ending Excessive Corporate Deductions for Stock Options Act.” S.1491 would limit the tax deduction companies can take for stock compensation to the amount of expense recognized for that compensation in their P&L.

Play It Again, Carl
By my count, this is the fourth time that Levin has introduced a bill of this nature, always with a clever title: in 2007 it was the “Ending Corporate Tax Favors for Stock Options Act” and in 2003 it was the “Ending the Double Standards for Stock Options Act” (he reused this title several times). Before he was sponsoring bills on tax deductions for stock compensation, Levin sponsored bills to require companies to expense stock options as early as 1991–before even the original FAS 123 was issued. McCain has been a co-sponsor on a number of these bills.

Not Such a Bad Thing?

From the perspective of granting corporations, I’m not sure Levin’s bill would really have the impact he intends–which is to discourage the use of stock options. Sure, back in the halcyon days of APB 25, when companies could realize tax deductions without recognizing expense for stock options, this legislation would have been a real buzz-kill. But now, promising companies that they get a tax deduction for any expense recognized in their income statement might be a welcome relief, given the number of companies recognizing expense for underwater stock options and not seeing any tax savings for the expense.

And accounting for tax benefits would be far simpler under Levin’s bill. There would be no excess deductions or shortfalls and no APIC pool to keep track of (at least not for stock options, you’d still have to worry about all this for your ESPP and full value awards).

Lost Tax Revenue?

But, from the perspective of the broader societal good, Levin’s bill could seriously impact tax revenue. Currently, companies receive a tax deduction only when employees recognize income on stock plan transactions. The lost tax revenue from the corporate deduction is at least partly offset by the additional taxes paid by the individual. Not so under Levin’s bill. I suspect that Levin is thinking that the expense recognized (and thus the corporate tax deduction available under his bill) pales in comparison to the enormous gains recognized by executives upon exercise of their options, but I’m not sure this is the case. In January, I heard estimates that close to 100% of CEOs at Fortune 500 companies held underwater options. I bet that those companies would be thrilled to get a tax deduction equal to the expense recognized for those options.

But Wait, There’s More to Come

Tune in next week, when I’ll discuss the impact of Levin’s bill on ISOs and restricted stock and even look at whether a couple of companies would have realized greater tax deductions under the current tax code or Levin’s bill.

NASPP Conference Workshop of the Week
This week’s session is “Wagging the Dog: Stock Plan Administrator Meets Compensation Consultant.” Compensation consultants are tasked with designing stock plans tailored to meet the unique and divergent needs of their clients, while plan administration providers have a goal of delivering products and services with one-size-fits-all functionality. In-house administrators are caught in the middle, often left to oversee plans that aren’t supported by existing administrative solutions. This panel will address how to proactively marry plan design with plan administration, offering tips to help both third-party administrators and consultants reach an acceptable compromise. The panel will also discuss what to do when it’s too late–how to administer a plan for which there are no readily available administrative solutions.

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

– Barbara 

July 23, 2009

Treasury Drafts Say on Pay and Compensation Committee Independence Legislation

The Obama Administration’s regulatory reform agenda has been moving forward. Recently, the SEC proposed changes to proxy disclosure and solicitation requirements and the Treasury issued its Interim Final Rule consolidating restrictions for TARP fund recipients. Last week I mentioned that all companies should be keeping an eye on the TARP fund recipient requirements, as the government is likely to push at least part of these requirements to all companies.

Well, last Thursday, the Treasury issued proposed legislation, the Investor Protection Act of 2009, which requires a non-binding shareholder vote on executive compensation as well as provides for truly independent compensation committees.

Say on Pay

Separate Vote on Executive Compensation

For proxies or shareholder meetings on or after December 15, 2009, the proposed legislation requires that a separate, non-binding shareholder vote be cast to approve the executive compensation as it is disclosed in the proxy statement.

Shareholder Approval of Golden Parachute Payments

The Treasury’s proposal also includes a requirement that any proxy or solicitation material on corporate transactions (acquisitions, mergers, etc.) include in tabular format any executive compensation relating to the corporate transaction, including the aggregate total of that compensation. Additionally, it calls for a separate, non-binding shareholder vote on executive compensation relating to the corporate transaction.

Independence of Compensation Committees

Criteria and Consequences

Under the proposal, compensation committee members must remain truly independent, other than their involvement in the company as non-employee directors (with potential exemptions for smaller reporting issuers). To be considered independent, members of the compensation committee may not accept any fees from the company for any activity other than their involvement in the board of directors, compensation committee, or other board committee. The SEC will direct national securities exchanges to include these enhanced independence criteria in listing requirements and may direct exchanges to prohibit the listing of the securities of companies found to not be in compliance.

Compensation Consultants and Independent Legal Counsel

The Treasury feels that the involvement of compensation consultants puts compensation committees at a disadvantage, encouraging them to approve excessive compensation for CEOs and other executives. To help level the playing field, the proposed legislation requires that compensation committees be permitted (and provided funding) by the companies to retain their own compensation consultants. These independent consultants would report only to the compensation committee rather than to the company.

Additionally, compensation committees must be permitted (and provided funding) by companies to retain independent legal counsel or other advisors at the discretion of the compensation committees.


In the spirit of greater transparency, the proposed regulations will require companies to disclose whether or not their compensation committees retained a compensation consultant. If a compensation committee chooses not to retain the services of a compensation consultant, the justification for that decision must be disclosed.

17th Annual NASPP Conference Resources

Don’t forget that registration for this year’s NASPP Conference includes the 6th Annual Executive Compensation Conference at no additional cost. If you are looking for more guidance on how these pieces of legislation will impact the next proxy season, then don’t miss the the 4th Annual Proxy Disclosure Conference!

This proposal will almost certainly mean that stock plan administrators will find themselves working more closely with compensation consultants. Don’t miss our Conference session “Wagging the Dog: Stock Plan Administrator Meets Compensation Consultant” for ideas on how to be proactive on your involvement in compensation decisions!


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July 21, 2009

Accounting for Modifications of Equity Awards

One outcome of the depressed stock market is that award modifications have become much more common, shining a light on the guidance relating to these transactions in 123(R). Repricings, cash-outs, extensions of option terms, options tendered for no consideration, and acceleration of vesting on underwater options–we’ve seen it all over the past year and now we know a lot more about how to account for it.

A few random things I’ve learned about accounting for award modifications:

  • Calculating the fair value of new options granted in an option exchange program may require a Monte Carlo simulation or other more sophisticated pricing model.
  • Expense for the original options cancelled in an exchange is recognized if the original vesting conditions are achieved, even if the new awards have new vesting requirements and those requirements are not met (but the incremental expense for the exchange would not be recognized if the new awards are forfeited).
  • It’s very hard to achieve a true value-for-value exchange.
  • Acceleration of vesting of underwater options may not have any impact at all on the expense recognized for them, or may even extend the period over which that expense is recognized (rather than accelerating it). This is another area where a Monte Carlo simulation may be necessary.
  • Cashing out an award is akin to acceleration of vesting–all remaining unamortized expense is recognized immediately.
  • Allowing executives to tender underwater options for no consideration doesn’t change the amount of expense the company recognizes for the options.

Learn More with a Free Webcast

For more information on the accounting treatment of award modifications, check out the webcast we recently posted on FAS 123R & SAB 107: Understanding Stock-Based Compensation Accounting. The webcast features Shan Nemeth of Deloitte & Touche and Alison Spivey of Ernst & Young giving an update on recent developments relating to 123(R). They cover accounting for modifications, valuation considerations, and performance-based awards. They also cover two recent FASB pronouncements applicable to stock compensation: FSP EITF 03-6-1, which relates to the presentation of EPS if you pay dividends on awards, and FASB Statement No. 141(R) on business combinations (skip to the end for this discussion). I am also a panelist in the webcast; I ramble on about trends in plan design in the aftermath of 123(R) but my part is boring, you can skip it. Registration for the webcast would normally cost $299, but because I participated in the panel, we’re able to allow NASPP members to listen to the webcast archive at no cost.

Submit Your Questions for Our “Ask the Experts” Summer Edition Webcast

If, after listening to the above webcast, you have additional questions on accounting for award modifications, send them to and we’ll answer them in our August 27 “Ask the Experts” webcast on award modifications.

NASPP Conference Workshop of the Week
This week’s featured workshop is “Option Valuations in Light of Economic Instability.” From expected life calculations, to increased volatility, to forfeiture expectations, the current period of economic instability is likely to have a lasting impact on your option valuation process. This panel will address the challenges that underwater options, wildly fluctuating stock prices, reductions-in-force, and stagnant dividend yields present for option valuations–and will suggest creative solutions to overcome these obstacles.

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

– Barbara

July 16, 2009

TARP Standards – Will They Impact You?


Recipients of Troubled Assets Relief Program (TARP) funds may be finding it hard to keep up with the restrictions associated with their participation. The TARP was introduced as a part of the Emergency Economic Stabilization Act of 2008 (EESA), which I blogged about in November. The EESA offers several ways for financial institutions, large and small, to gain access to funds. Access to funds comes with initial restrictions attached, many of which impact the stock plan administration of those companies. These restrictions include limits on senior executive severance benefits & 162(m) tax deductions as well as the requirements for certain claw-back provisions and to have a board Compensation Committee to oversee compensation strategies that should include measures to curb inappropriate risk-taking.

Companies that participate in the TARP are also now subject to additional restrictions through new Treasury statements in 2009 and the American Recovery and Reinvestment Act of 2009 (ARRA), which I blogged about in April of this year. This legislation focuses on executive compensation, moving to provide greater transparency and control to shareholders through certification requirements, executive compensation disclosure, say on pay, and limited bans on parachute payments and luxury expenditures. The ARRA also makes an important distinction between regular participants in the TARP, and those who receive exceptional assistance. It also provides a way for participating companies to release themselves from these restrictions by repaying TARP funds, which some companies have already done – see Ten Major Banks Repay $68 Billion in TARP Funds (CNBC June 17, 2009).

Interim Final Rule

The various regulations governing TARP recipients were consolidated by the Treasury on June 10, 2009 when it issued the Interim Final Rule (IFR). TARP recipients are subject to different levels of restrictions based on which program they are participating in and the size of the assistance they receive. Fortunately, the Interim Final Rule appoints a Special Master to help companies determine the applicable regulations and review executive compensation for participating companies. As it stands now, participating companies may be subject to the certain restrictions for senior executive officers (SEOs) or the next most highly compensated employees (HCEs). The IFR:


  • “golden parachute” payments to SEOs and the next five HCEs
  • bonus payments to SEOs and certain other HCEs, with the exception of certain restricted stock awards that meet the qualifications for the exception or other qualifying bonus payments that were legally binding through a contract on or before February 11, 2009
  • compensation plans that encourage “unnecessary and excessive risk” by SEOs
  • tax gross-ups to SEOs and the next 20 HCEs, except for payments under tax equalization agreements


  • clawback provisions for bonuses paid to SEOs and the next 20 HCEs that are found to have been based on materially inaccurate performance criteria
  • “say on pay” non-binding shareholder vote applicable to proxy statements filed with the SEC after February 17, 2009
  • implementation of a corporate policy on excessive or luxury expenses;
  • disclosure of the use of any compensation consultant including the specific services provided and methods employed by the compensation consultant
  • disclosure of any perquisite with a total value exceeding $25,000;
  • certification by the CEO and CFO that the company is in compliance with all compensation and corporate governance requirements

Additional Ramifications
In addition to the IFR, the Treasury also expressed support for the SEC in its pursuit to impose similar executive compensation and corporate governance reforms for all companies, not just for TARP recipients.

On July 1, 2009, the SEC voted to move forward (see the SEC Press Release) with plans to improve corporate executive compensation disclosures (as outlined in the June 10th Press Release), in addition to modifying proxy disclosure to be in line with the IFR requirements for TARP recipients.

I think that all companies should be paying attention to the requirements made on TARP recipients. Congress and the current Administration appear to be moving towards implementing reforms for all companies to guide corporate governance and align executive compensation with company performance. Now is the time to review your company’s compensation philosophy and equity compensation programs and begin implementing changes that keep personal performance goals in line with company performance. Additionally, it is time to take a look at “say on pay” to determine if it’s right for your company now.

We have some great workshops at our upcoming 17th Annual NASPP Conference in November, including “The Economy and Your Stock Plans: New Approaches to Granting and Paying Out Equity Awards” and “Coming Regulatory Reform: Impact of Risk Assessment on Pay (and Other Repercussions)”. The upcoming changes could impact you; don’t miss out on these great opportunities to see how your company can be ahead of the game. Also, keep abreast of the TARP standards in our Economic Stimulus Legislation Portal.


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July 14, 2009

Electronic Filing of Section 6039 Returns

We are one step closer to filing Section 6039 returns with the IRS. Internal Revenue Bulletin 2009-27 (July 6, 2009) includes Rev. Proc. 2009-30, which updates the instructions for electronic filing of certain returns (Forms 1099, 1098, W-2G, etc.) with the IRS for 2009. Included in the updates are instructions for electronically submitting Forms 3921 and 3922, the new returns required under Section 6039 for ISOs and ESPPs (see the NASPP alert “IRS Proposes Regs for ISO and ESPP Information Returns” for more information about the new returns).

The instructions include the specifications for the files that must be submitted electronically. Files are submitted in ASCII format (i.e., one long text file), so this is a description of what data goes where in the text string. While we still don’t know what the paper forms will look like or have final regs for the returns, we now have the information necessary to create the electronic submissions. As indicated in the instructions released earlier (see my Feb 17 blog entry, “General Instructions for Section 6039 Returns“), any company with 250 or more returns per form must submit the returns electronically. Companies with less than 250 returns per form are encouraged, but not required, to submit them electronically.

Filing Deadlines

The instructions provide that transactions subject to Section 6039 must be reported by the following dates in the subsequent calendar year:

  • Information statements to employees: By January 31 (no news here, we’ve been providing these statements for years now)
  • Returns filed with the IRS on paper: By February 28
  • Returns filed with the IRS electronically: By March 31

These deadlines conflict with the proposed regs that were issued last summer, which require the returns to be filed with the IRS by January 31 (the same date by which the information statements must be provided to employees). We assume that this is an oversight that will be corrected in the final regulations. Since the deadlines stated above are the same for most, if not all, other returns the company files with the IRS (Forms W-2, Forms 1099, etc.), it makes sense that they would also apply to the Section 6039 returns.

Vendors for Electronic Filing

If you are looking for a vendor to assist you with filing these returns, the instructions mention that IRS Publication 1582 includes a list of vendors that provide electronic filing services or software for information returns. The list doesn’t specify which vendors are planning to include Forms 3921 and 3922 in their services (and the list hasn’t been updated since July 2008, so none of the vendor listings mention these forms), but it is at least a starting point for your research.

Document Retention

The instructions require companies to retain copies of electronic filings (or be able to reconstruct them) for three years from the filing due date. Just something to add to your document retention policy.

Panic and Extensions

My last blog posting on this topic emphasized that there was no need to panic yet, but, now that we are just six months or so away from the deadline, it’s definitely time to start thinking about this, if not panicking.

Incidentally, companies can request a 30-day filing extension using Form 8809. There’s even a fill-in version of the form available on the IRS’s electronic filing website, (I can’t link to the form because I don’t have a logon for this website, but it’s likely that someone at your company, perhaps in your payroll group, has a logon). If you use the fill-in form to submit the request electronically, the 30-day extension is automatic–you don’t even have to give a reason for needing it.

You can request additional extensions, but those aren’t automatic, must be submitted in paper format, and require you to explain why you need the extension. I wonder if the absence of final regulations and paper forms 3921 and 3922 would be an adequate reason for an extension…

Thanks to Stephan Gerdes at Computershare for bringing this Internal Revenue Bulletin to my attention.

Quick Survey on Employee Communication Practices
While we’re on the topic of Section 6039, find out how many companies distribute information statements to employees electronically (spoiler: not very many) and trends in a whole host of other communication practices–from grant agreements to deferral elections–by taking our quick survey on employee communication practices. It’s only ten easy questions–I predict you can complete the whole thing in less than five minutes.

NASPP Conference Workshop of the Week
This week’s workshop is “The IRS and Treasury Speak: Hot Tax Topics and Updates.” Always one of the most popular sessions at the NASPP Conference, this panel includes representatives from the IRS and Treasury, along with former Treasury staffers, to bring you the latest news on all the past year’s tax developments.  It’s a great opportunity to hear about projects the IRS is currently working on–such as the Section 6039 returns–and to voice your own opinions on those projects.

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

– Barbara

July 9, 2009

Tax Changes in India, Australia, and Belgium


When the Finance Bill 2007 extended India’s Fringe Benefit Tax (FBT) to include equity compensation, companies scrambled to respond. The Finance Bill uprooted tax-favorable plans, changed the valuation method, and required employers to pay the tax. Companies had to determine how to accommodate the new tax (many passed the tax through to employees) and make the estimated tax payments.

Now, all that may be turned upside down. India’s Finance Minister has proposed to abolish the FBT beginning retroactively as of April 1, 2009; and not just for equity compensation, but for all FBT items.

What we do know this means is:

  1. Equity compensation will be treated as perquisite income, valued at exercise for options, purchase for ESPP, and at vest for restricted stock.
  2. Employers will be required to withhold income tax on equity transactions, but social insurance contributions most likely will not be required.
  3. The further sale of shares will be subject to capital gains tax.

The questions this leaves unanswered are:

  1. What valuation method will be acceptable; will companies still be required to use a merchant bank valuation?
  2. Will there be any tax-favorable plans like those that existed prior to FBT on equity compensation?
  3. Since the abolition of FBT is retroactive to April 1, 2009, how should transactions that have taken place since then be handled?

What also remains to be seen is whether or this will ultimately be easier or more difficult to administer than FBT. Employers who have already accommodated the FBT will once more need to confirm that grant agreements are adequate and make tax payments to the government. Employers who were not passing the FBT through to employees will now need to implement tax withholding on equity compensation. However, if the proposal eliminates the need to use merchant bank valuations, streamlining valuations to be more consistent with other country methodology, it would certainly make things easier! Stay tuned for more updates as clarifications become available.


The abolition of FBT in India may be a welcomed change, but the proposed updates to taxation of equity compensation in Australia have been met with overwhelming opposition. This upset proposal in the 2009/2010 Australian Federal Budget was to tax options at grant. Recently, we have heard that the proposal has been modified to allow a deferral of taxes until there is no longer a risk of forfeiture and there are no longer disposal restrictions attached to the shares. This, like the FBT change, will be a retroactive change to taxation of equity grants.


Belgium, in an effort to provide some relief in these difficult economic times, has proposed an opportunity for companies to extend the term of underwater options for up to five years without incurring additional individual income taxes due for the option-holder. Outside of this opportunity, extending the term of an option would constitute the grant of a new option; options are taxable at grant in Belgium. Options eligible for this treatment must have a grant date from January 1, 2003 through August 31, 2009. U.S. companies willing to take the expense hit for such an extension should keep an eye out for the final version of the Belgian Economic Recovery Act.

Stay Current

If any of these changes come as a surprise to you, then you are not taking advantage of our country-specific alerts! Our alerts are contributed by members of the NASPP Global Stock Plans Portal Task Force, which includes the industry’s top consultants, attorneys, accountant and other practitioners. Subscribe today to make sure you are notified of future developments in India, Australia (and up to 59 other countries). This service is free to NASPP members!

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July 7, 2009

SEC Proposes Changes to Disclosure of Grants in SCT

Last week, the SEC announced proposed changes to its proxy disclosure and solicitation requirements. Included in the announcement is a proposal to change the way that options and awards are disclosed in the Summary Compensation Table.

Options and Awards in the SCT

Currently, companies disclose the fair value of options and awards granted to named executive officers over the grants’ service periods–the idea behind this requirement is to bring the compensation disclosures into alignment with 123(R). Essentially, as expense is recognized for the grants, that expense is disclosed as compensation paid to the NEOs in the Summary Compensation Table.

Of course, in practice, nothing we do is ever quite that simple. The requirement raised numerous questions relating to how the grant values should actually be reported in the SCT. Forfeitures, in particular, proved to be a challenge–sometimes resulting in very unintuitive disclosures of negative amounts of compensation.  This has especially been a problem this proxy season, with so many performance plans no longer expected to pay out. 

The current requirements were implemented in a surprise ruling issued by the SEC back in 2006–read the numerous memos we posted on it in our Executive Compensation Disclosure Portal (scroll down to the memos published around December 2006). Expect to see new memos on the SEC’s proposed changes posted to the portal as we receive them.

Back to the Future

Under the SEC’s proposal, the grant date fair value of options and awards to NEOs will be disclosed in the SCT in the period that grants are issued, which is how options and awards were reported in the SCT prior to the 2006 rule change. The SEC has not yet issued the proposing release, so we don’t yet know all the details, but it sounds like this could significantly simplify these disclosures and resolve a number of concerns with the existing requirements, including:

  • Double-Reporting: Since grants that vest over several years are expensed over that same period, the same grants show up again and again in the SCT. This is confusing for investors, who don’t necessarily understand all the nuances of 123(R).
  • Forfeiture Confusion: It should also resolve the negative numbers and other confusion that results from forfeitures of options and awards.
  • More Intuitive: The proposed disclosure requirements should be significantly easier for investors to understand.

Directors, Too

The same changes are proposed for the Directors’ Compensation Table.

And More…

The SEC also proposed new or modified disclosures relating to compensation and risk, compensation consultants, and corporate governance matters. For more information on the SEC’s proposal, check out Mark Borges’s July 1 blog “SEC Proposes Changes to Disclosure Rules” on

NASPP Conference Workshop of the Week
This week’s session is Code Red–Tricky Tax Rules in Troubled Times and Down Markets. Declining stock prices can result in a host of tax traps for your employees, including the wash sale rule, unexpected income on ESPP dispositions, and valuation of awards for FICA purposes. This workshop will highlight just how punishing the tax rules can be and offer design techniques to soften the blow.

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

– Barbara

July 2, 2009

When an Employee Becomes a Consultant

Employee equity compensation income is reported on a W-2, and non-employee equity compensation income is reported on a 1099-MISC. But, what happens when a person has been both during the vesting period of the grant?

Fully Vested Grants

When an employee terminates his or her employment relationship with the company, but continues to be a service provider, the income reporting and tax withholding requirements change. If the individual does holds only fully vested grants at the point of the status change, then the income reporting and tax withholding is straightforward. Any income from exercises on grants that vested while the individual was an employee is reported on a W-2 and subject to income tax and FICA withholding, even if the exercise is executed when the individual is a non-employee. Likewise, any income from grants that vest after the employment relationship terminated is reported on a 1099-MISC and is not subject to income tax or FICA withholding.

Partially Vested Grants

If that same employee held unvested grants that continue vest after he or she has become a non-employee, then the income should be allocated pro-rata between employee and non-employee income. Any income from shares that are attributable to the period of time when the individual was an employee should be treated as employee wages, while shares that vest after the individual became a non-employee service provider will be treated as non-employee compensation.

Let’s take the example of an employee who becomes a consultant for the company after 600 shares of an option for 1,000 shares have vested, and the option continues to vest while the individual is a consultant. If the individual exercises all 1,000 shares after the option is fully vested, then income from 600 shares is reported as wages on a W-2 and income from the remaining 400 shares is reported as income on a 1099-MISC. If the individual instead exercised only 800 shares, then the company could use the “first-in, first-out” (FIFO) method to attribute the income, allocating 600 shares as earned under the employee relationship and 200 as earned under the consultant relationship.

For information on this or other income-related issues, visit our Tax Withholding and Reporting Portal or review our 2nd Annual Webcast on Tax Reporting.


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