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Monthly Archives: December 2009

December 28, 2009

Last-Minute ESPP Audits

The end of December is the end of a purchase period for many companies. If December 31 is a purchase date for you, then you are in the last stages of preparation for the big day. Here’s hoping you have a smooth and stress-free purchase day; and to help you with that, these are my top five last-minute ESPP audit items. Don’t let these be the “gotcha” that gets ya! If it’s already too late, and you find yourself on the correction end of an ESPP blooper, you may want to check your 2008 Conference materials for the “Oops! Fixing ESPP Problems” session.

Plan Parameters

Before running your purchase, confirm that the plan parameters are set correctly in your stock plan administration software. This is especially important if either your software or your plan parameters have changed. If your company has added, or will be adding, an individual purchase limit to the plan in response to the final ESPP Regulations, pay special attention to this setting. One of the most important points to verify is that the purchase price is being calculated correctly. A great way to confirm that the plan parameters are correct is to run a “practice” purchase prior to the actual purchase date, giving you the opportunity to confirm that the purchase price is being calculated correctly as well as the chance to verify all the important data points in your purchase like contribution amounts and limits. Treat the practice purchase as if it is the actual final purchase by performing all the same audits and verifications.

Residual Contribution Amounts

At the end of each purchase, there will be excess contributions associated with each participant. These could be just the ‘fractional share’ amount (an amount too small to purchase one whole share), or an excess resulting from a plan limit. Although most companies carry forward the fractional share amount to the next purchase, if you refund this excess amount back to the participant, then confirm that there are no residual contribution amounts in your stock plan administration software. If you carry the excess forward and apply it to the next purchase, then verify that the residual contribution amount associated with each participant is equal to the excess contribution amount recorded after the previous purchase. Additionally, check that anyone who has withdrawn from the plan after the previous purchase has had their excess contribution amount refunded to them (and that it no longer reflects in the stock plan administration software). This audit helps to prevent you from purchasing an extra share for participants or, if the purchase price for the current purchase is less than the prior period purchase price, one share for an employee who is no longer participating in the purchase at all.

Actual Contributions

As you collect the contribution amounts recorded by each of your payroll groups, you will be confirming that the contribution amounts are correct. One reconciling item you should included, but may have overlooked, is reconciling the total contribution amounts recorded by payroll against the contribution amounts deposited into the clearing account where actual contributions are held. If you have a plan in a country that requires contributions to be held in a separate account, this may mean that you need to reconcile against more than one account. This verification will help insure that the contributions used to calculate purchased shares are correct. If there is a discrepancy between the payroll record and the clearing account, it may indicate that there is an error in a contribution amount, which you can address prior to the purchase.


Qualified ESPPs must provide equal rights and privileges to all eligible employees. One particularly obvious violation of this requirement is when an employee enrolls in the plan, but is prevented from participating in the purchase due to an administrative error. This could be because the enrollment record did not get communicated correctly to payroll, because contributions were not withheld, because the contribution amounts were not communicated to the stock plan management team, or any number of other administrative issues. There are two really great ways to proactively minimize the likelihood of excluding an eligible participant from your purchase. First, send out a communication to all eligible employees confirming whether or not each is currently enrolled (and the contribution level for those enrolled in the purchase). By including employees who are not contributing in this communications, you give them the opportunity to notify you if their enrollment is not reflecting in your system. Second, check your enrollment records against your payroll contribution records prior to the purchase to confirm that each individual who enrolled in the purchase period also has contributions. Uncovering any participants that may have been incorrectly excluded prior to the purchase will give you the opportunity to take corrective action.

Terminations and Withdrawals

As part of your final purchase audit, take a close look at participants who enrolled at the beginning of the period, but who have withdrawn from the plan either as an active withdrawal or because of a termination. You will want to pay special attention to problem situations like mobility, when contribution records may not be transferred over to the new payroll location, or changes in status, when contributions may be inadvertently discontinued or the employee record may be incorrectly treated as a termination. In this audit, your objective will be to match either a termination record or withdrawal record to any employee who has an enrollment record, but is not on the final contribution list that you recieve from payroll. Be sure that you understand exactly how employees transferring from one location to another will reflect in your HRIS database so that you can confirm all termination records are legitimate. This will help you to identify any employees that were marked as withdrawn from the plan when they moved from one payroll location to another. If you allow employees to reduce their contribution amount to zero without withdrawing, then add this to the possible scenarios as you confirm the termination and withdrawal records for your purchase.

Bonus for International Plans: Exchange Rates

Whether you receive contribution amounts from your international payroll teams already converted to U.S. dollars, or you must apply an exchange rate to the contribution amounts directly, take a moment to verify that the correct exchange rate is used. Don’t forget to check for silly, but costly, mistakes like an inaccurate decimal point or a formula that is pointing to the wrong field in your spreadsheet.

As you know, the final regulations for Section 423 ESPPs are out. Although the actual tax code can be a pretty dry read, the regulations are pretty straightforward and the examples provided are really good. Don’t be intimidated by them; take the time to review them yourself and then join us on January 20th for our webcast, Final Regulations on Sections 6039 and 423: Implications and Action Items.

Happy New Year to you all! We wish you the very best and look forward to a spectacular year in 2010!


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December 22, 2009

Cost Basis Reporting

The Case of the Missing Cost Basis

Legislation included in the Economic Stabilization Act of 2008 requires brokers, banks, and other financial services firms to report cost-basis information for different types of securities to shareholders and to the IRS. As a result, these firms will soon need to provide cost-basis data to their clients.

This is going to involve the implementation of various new interfaces and tracking systems, and the review and clean-up of massive amounts of historical information, all of which could involve quite a lot of investigative work for anyone involved in the project, particularly around the task of locating missing cost-basis information for historical transactions. Imagine having to locate accurate cost-basis information for a countless number of corporate events that have occurred (and this assumes all prior corporate events have occurred with the same firm)…let the detective work begin!

The facts, please!

Now that I’ve got your attention, the historical clean-up I mention above might not impact every firm and may not be quite as dire as I describe. The legislation only requires cost-basis reporting for securities acquired after a certain date. The requirement is phased in over three years, with different effective dates for different types of securities. Equity stock (such as common or preferred stock purchased on the open market or acquired through an employee stock plan) is up first, in 2011.

Each financial services firm will need to decide how they are going to approach the reporting–it boils down to what level of service a firm wants to provide to its clients (which include participants in employee stock plans)–report cost-basis data only for sales on a go-forward basis or, now that Form 1099-B (a draft of the new form is located here) can include this data, make tax reporting easier for clients by reporting it for all sales, even securities acquired before the effective dates.

Making the decision not to track cost-basis information for securities acquired before the effective dates could result in an equal amount of work, however. A firm’s records will still have to reflect whether securities are eligible for cost-basis reporting and identify the different securities that fall under the legislation on the various effective dates.


Cost-basis reporting will undoubtedly improve the overall customer service experience for many shareholders, but not without a significant price tag to financial services firms beyond the costs involved in implementing new systems to support the regulations. The additional resources/staff to support the increased volume of questions from clients once the regulations become effective is going to result in quite a bit of extra money spent in training and education to both staff and clients.

Beyond financial services firms, there may be costs to companies that offer stock compensation, since they will likely have to provide cost-basis data for stock plan transactions to the brokers that service their plans.

Firms have very little time to prepare for these new regulations–just 12 months! Now is the time to make this a priority. Read our recently issued practice alert for additional key information about these proposed regulations and don’t miss our upcoming webcast, “Current Developments Impacting Brokers & Transfer Agents (And What They Mean to You).” Be sure to renew your membership now so you don’t miss this important webcast! If you’re not already an NASPP member, join today.


December 17, 2009

What Does the Blogosphere Have for You?

Although voting ends at 5 p.m. CT on December 31st, our friends at have taken an astounding lead in the 2009 ABA Journal Blawg 100! Not only are they blowing away the competition in their own Practice Specific category, they’ve received the most votes of any other blog in the Blawg 100.

Now, not all of the ABA Journal’s picks have the same appeal to stock plan managers as the blog. Here are my top picks of blogs that you may want to follow (besides our own illustrious NASPP blog, of course!).

  1. Blog

    Broc Romanek and Dave Lynn put together a fun and witty blog that covers the latest news on corporate governance issues (if you’ve never followed them, you may not think that “fun” or “witty” belong in the same sentence as “corporate governance”, so you’ll just have to go see for yourself). The two most recent entries cover Canadian securities regulators’ decision not to overhaul the corporate governance regime (to stay more in line with the U.S. regime) and the extension of the proxy access proposal comment period. Canada’s decision is particularly interesting because although the original proposal would have moved away from mandatory requirements.

  2. Risk & Governance Blog

    This blog by RiskMetrics Group will not only keep you notified on legislation relating to corporate governance, but will also give you the jump on RMG opinions, which could be key to getting through your proxy season. The most recent entry is on the SEC’s new disclosure rules, which includes the requirement to disclose grant date fair value of equity, rather than the current accounting value.

  3. FEI’s Financial Reporting Blog

    Author Edith Orenstein provides details and observations on financial reporting news. Her entries are quite detailed and her observations point out issues that might not otherwise come to your attention. A recent entry discusses the Wall Street Reform and Consumer Protection Act. One observation she makes is whether some vague language in the bill regarding assessing international developments has been inserted as part of the future move to IFRS accounting standards.

  4. The Corporate Library

    A whole team of authors contribute to this blog to bring you the latest news about corporate governance and sustainable investing. Many entries cover issues surrounding executive compensation. A recent blog entry outlines the risks inherent in high CEO pay differentials (and even gives a not to our own Jesse Brill). The two greatest risks highlighted in this entry are the obvious issue of poor morale both in the executive team and among the rank and file as well as issues with succession planning (“If the CEO is paid 10 times more than anyone else, who could possibly take his or her place?”)

  5. The IR Web Report

    The IR Web Report blog covers a really wide range of investor relations issues including regulatory initiatives, hot topics on the minds of investor relations specialists, and even the latest uses of technology in the world of IR. The most recent entry covers how Regulation D relates to new media like blogs and social networks. Author Dominic Jones points out that executives or IROs participating in public forums like Seeking Alpha is “much less risky than the common IR practice of meeting pushy professional investors in private.”

The end of the year is coming fast; I hope you’ve prepared well and will be able to enjoy some time off! Want to see how your year-end preparations measure up? Take our Preparing for Year-End Compliance-O-Meter. Also, no year-end prep is complete without ensuring continued access to the amazing resources available on the website. Don’t forget to renew your membership! If you’re not already an NASPP member, join today.


December 15, 2009

Update to RiskMetrics 2010 Policy Updates

When I blogged about RiskMetrics 2010 Policy Updates, I mixed up the change in their volatility estimate. Last year, RiskMetrics switched from a 200-day volatility calculation to a 400-day volatility calculation. This year, they’ve switched back to the 200-day calculation. I’ve updated my original blog entry so it’s correct now.

Now this really is my last blog of the year–at least I hope there aren’t any more errors I need to correct. I mean it. No more blogs this year. I hope…

– Barbara

December 15, 2009

RiskMetrics 2010 Policy Updates

This is my last blog of the year, so I thought I’d end on a upbeat note by discussing the RiskMetrics Corporate Governance Policy Updates for 2010.

RiskMetrics 2010 Policy Updates
The RiskMetrics Corporate Governance Policy for 2010 doesn’t really have much that is earth-shattering in terms of stock compensation, but I came up with a few tidbits to discuss here (you try to come up with blog topics every week–it’s harder than you think). Read more about the policy update in our alert “RiskMetrics 2010 Corporate Governance Policy Updates.”

Burn Rates

One policy that RiskMetrics changes every year is the acceptable burn rates for stock plans. There are a couple of exceptions, but, in general, if a company’s burn rate exceeds the greater of the acceptable burn rate for its industry or 2% of weighted common shares outstanding, RiskMetrics recommends that shareholders vote against the company’s stock plan.

This year’s acceptable burn rates are down in almost all industries. This was surprising to me, given what happened with the market last year. As far as I can tell, RiskMetrics’ acceptable burn rates are based on actual burn rates for each industry–the acceptable rate is the mean for the industry plus one standard deviation. We posted numerous alerts–too many to mention them all here, but they are posted in our Plan Design Portal–on how lower stock prices made it difficult for companies to maintain burn rates during this past year.  I guess companies were able to control their burn rates–maybe too well–because the rates are lower for next year.

If you weren’t worried about your burn rate before, you might well be now. Luckily we offered a great workshop on managing burn rates and share reserves at this years’ NASPP Conference–What To Do When the Well Runs Dry: Grant Guidelines in a Volatile Market.  Members can purchase the audio for just $65 and listen to it today.


Readers will recall from last year’s alert that in 2009 RiskMetrics switched from a 200-day volatility calculation to a 400-day calculation, due to high market volatility. They have now switched back to the 200-day volatility, which is used in their burn rate and Shareholder Value Transfer analysis of stock plans.


Public companies will be able to include fewer underwater options in exchange programs under the updated policy. In an FAQ issued with the policy updates, RiskMetrics says that, as a general rule, the exercise price of options eligible for exchange should be higher than the greater of:

  1. the 52-week high, or
  2. 1.5 times the current stock price (this is the new part of the policy, previously it was just the 52-week high).

They did indicate that a company’s specific circumstances–such as the timing of the exchange program and a sustained price decline beyond management’s control–are taken into consideration in their evaluation of exchange programs.

Underwater Options Voluntarily Surrendered by Execs

I’m not sure if this is new this year, but the FAQ also says that RiskMetrics might consider allowing executives to voluntarily surrender their underwater options as a “problematic pay practice” if the surrendered shares return to the plan. We blogged about this practice earlier this year–see “Newsworthy: 10b5-1 Plans and Getting Shareholder Approval.” The problem, as RiskMetrics sees it, is that those shares could later be granted to the same execs at a lower price, essentially “repricing” the options without shareholder approval (in RiskMetrics’ opinion–voluntary surrender of underwater options generally wouldn’t be viewed as a repricing for accounting, tax, or legal purposes unless there is an actual agreement to grant new awards in exchange for the cancellation).

I don’t think it would be sufficient to add the shares back to the plan with a promise that the shares won’t be regranted to execs. Unless the plan were just about out of shares altogether, using the influx of new shares for the rank-and-file just frees up the rest of the share reserve to be used for execs–not exactly what RiskMetrics is looking for with this policy.

“Problematic pay practices” can cause RiskMetrics to recommend that shareholders vote against management’s say-on-pay proposals, compensation committee members, or stock plans.

Happy Holidays
As I mentioned, this is my last blog until the new year. But don’t worry, you won’t have to go without your NASPP blog fix–Rachel Murillo and Robyn Shutak will be blogging through the holiday season, although they will only post one blog per week to encourage our readers to spend time with their family and friends. I’ve enjoyed writing the blog and I hope you enjoy reading it. Happy holidays and see in you 2010!

NASPP “To Do” List
One last To-Do List before we head into the new year: 

– Barbara

December 10, 2009

Keep it Flexible

Companies, regulators, and even employees are changing the way they look at equity compensation. We’ve seen new equity vehicles, changes to taxation of equity compensation, a more global and more mobile participant population, and more rigid attention being paid to compliance when it comes to tax withholding and reporting. Companies are finding that they need to consider a broader scope of implications when granting and managing stock plans. In the spirit of casting a broader net on managing equity compensation, here are two ways to protect your company by building flexibility into your grant agreements.

Global Grant Agreement

At industry events over the past few years, I have heard more advisors and companies recommending the use of a global grant document. The way this works is to create a general grant document with appendices that cover the country-specific language. The most important reason to use a global grant document is that it helps cover the issue of mobile employees. If an employee is granted in one country and moves to another country with country-specific requirements, then you have the protection of having provided those limitations, definitions, or tax withholding requirements already laid out in the original grant agreement. This can afford the company some protection to maintain compliance and also give the employee the opportunity to better understand the impact the move will have on his or her grant. As an added bonus, having a global grant agreement can reduce the administrative burden of designating the appropriate grant package to participants. If you would like to see what this kind of grant document might look like, check out this example posted to our NASPP Document Library.

Exercise and/or Tax Payment Methods

Giving employees the ability to choose which exercise price and tax withholding method will be applied to their transactions isn’t as attractive as it may sound at first. This flexibility can be confusing to employees and may create a large administrative burden. However, your plan and grant agreements both include language that affords the company the flexibility to apply as many payment methods as possible. You can incorporate language that permits all available payment methods in the documents and use policy to clarify which will be actually be available to employees. This helps to permit the company to respond to new regulations, restrictions, or other unforeseen circumstances. Include the flexibility to withhold tax even for jurisdictions in which you do not currently need to withhold in case the company’s obligation to withhold taxes changes later.

Ask the Experts: Tax Reporting for Stock Compensation

Don’t miss our webcast today on tax reporting for stock compensation. Today’s session is one of our popular “Ask the Experts” series. Our panel of experts will cover everything you need to know to fulfill U. S. tax reporting requirements for all forms of stock compensation and address specific questions submitted by NASPP members. Don’t miss out! Join in at 4: 00 p.m. Eastern.


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December 8, 2009

Are Your Performance Awards Ready for 2010?

One More Year-End Action Item
It’s been over a year since Revenue Ruling 2008-13 went into effect, but because of the ruling’s generous transition provisions, calendar-year companies may not have amended their performance awards to comply with it. Time is running out to take care of this, so put it on your list of things to review with your comp committee now.

What the heck is Revenue Ruling 2008-13?
For compensation to be exempt from the limit on the corporate tax deduction imposed by Section 162(m), the compensation must be performance based. This is easy with stock options, which are considered inherently performance-based, so long as they aren’t granted at a discount. But awards of stock (not too mention cash compensation), are only performance based if they are payable solely upon achievement of performance goals.

Termination provisions in awards that allow for payout when the performance goals haven’t been met can be a problem, since the awards are potentially payable in the event of non-performance. IRS regs allow plans to permit payment in the event of death, disability, and a change-in-control. Actual payment upon the occurrence of one of these events would disqualify the payment in question from the performance-based exception under 162(m), but other awards under the plan would not be tainted.

Although the regs don’t address other types of terminations, private letter rulings had extended this treatment to involuntary terminations without cause and terminations for “good reason.” But a PLR released in early 2008 changed all this. The ruling stated that allowing payout upon termination without cause or for “good reason” would disqualify all awards (and other compensation) subject to this provision from being considered performance-based compensation under 162(m).

The ruling was particularly troublesome for stock award programs, which often include special provisions allowing full or partial payout for terminations without cause, terminations for “good reason,” and retirement, which ended up being included in the revenue ruling (see below).

The PLR immediately generated significant controversy–not too mention a whole slew of legal memos; see our alert “Surprise 162(m) Ruling from the IRS.” In response, the IRS codified the PLR in Revenue Ruling 2008-13, which also includes retirement among the terminations where payout cannot be allowed, and, more importantly, includes transitional provisions.

Why Now?
The ruling applies to performance periods that start after January 1, 2009. Most calendar year companies have performance periods that correspond with their fiscal year. Consequently, the performance period for this year’s awards would have started on January 1, 2009, grandfathering it under the ruling.

But next year’s awards will be subject to the ruling. So if you work for a calendar-year company that hasn’t addressed this issue (non-calendar year companies have probably already issued awards that are subject to the ruling), it’s time to get moving on it.  See our alert “Section 162(m) Year-End Action Items” for more information.

Vote for Broc and Dave!
Broc Romanek and David Lynn’s blog on was selected by the ABA Journal as one of the Top 100 Legal Blawgs. Readers can vote on their favorite blogs and we want Broc and Dave to win in the “Practice Specific” category, so we’re asking our readers to vote.  I know you all would vote for the NASPP Blog if you could, but we don’t count as a legal blog, so this is as close as you’ll come to voting for us. Come on, don’t make me beg!

Anyone can vote, you don’t have to be a member of the ABA, you just need to complete the free registration on the ABA Journal website. If you read and enjoy Broc and Dave’s blog–or even if you don’t–I hope you’ll vote for it.  BTW–if you have multiple email addresses, you can register and vote under each one. 

If you’ve never checked out the blog; it’s definitely worth a read. Unlike the lazy folks here at NASPP Blog, Broc and Dave manage to post an entry every day. And it’s free to anyone, whether you subscribe to or not. At a minimum, someone in your legal department should be reading it.

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

December 3, 2009

409A Corrections Program Deadline Approaching

We are just weeks away from the last chance for companies to rely on the transitional relief provided under IRS Notice 2008-113. I hope that your company has already taken action to complete a thorough review of compensation arrangements to identify and correct any arrangements that do not comply with Section 409A. Although it might be too late administratively to make major changes to correct errors under the transition relief, it is still a good idea for stock plan managers to do a final review and confirm that corrective action has been taken, especially when it comes to discounted options or SARS.


Section 409A provides for significant adverse tax consequences to individuals whose compensation arrangements are considered to be a non-qualified deferral of income. Such non-compliant arrangements include certain RSU deferrals, change-in-control or retirement arrangements, and exercises of options or SARS with an exercise price that is less than the FMV at grant. For more information on the types of plans and agreements that are considered non-qualified deferred compensation, go to our Section 409A Portal. Although the tax penalties (and interest if the correction is not made after two years) are imposed on the individual rather than the company, employers must now withhold and report appropriately.

Corrections Program

IRS Notice 2008-113 details corrections programs for plans or arrangements that unintentionally fail to comply operationally with Section 409A, including options or SARs that are unintentionally granted at a discount price. For more information on IRS Notice 2008-113, see our alert, 409A Corrections Program for Discounted Stock Options.

These corrections programs are available for operational errors on an ongoing basis; the special deadline that we are approaching now is the for the transitional relief provided by the Notice. This transitional relief allows errors for arrangements pertaining to non-insiders that occurred between 2005 and 2007 to qualify for the corrections program in section VII of the Notice. Under this method, if the correction is made by the end of the tax year immediately following the year in which the error occurred, then the individual will not be subject to the tax and interest penalties associated with the 409A violation.

In addition to the transitional relief deadline, December 31, 2009 is also the deadline for companies to make correction to errors for arrangements pertaining to non-insiders that occurred in 2008 and for arrangements pertaining to insiders that occurred in 2009.
For more information on the 2009 deadline, see our 409A Corrections Must Be Completed By Year-End alert.

Vote for Broc and Dave!

Broc Romanek and David Lynn’s blog on was selected by the ABA Journal as one of the Top 100 Legal Blawgs (I don’t know why they can’t spell “blog”; it must be a lawyer thing). This is quite an honor, but we’re hoping for even more. Readers can vote on their favorite blogs and we want Broc and Dave to win in the “Practice Specific” category. Broc has a lifelong goal of winning a beauty contest and I guess he figures this is as close as he’ll get.

Anyone can vote, you don’t have to be a member of the ABA, you just need to complete the free registration on the ABA Journal website. If you read and enjoy Broc and Dave’s blog–or even if you don’t–I hope you’ll vote for it and help Broc achieve one of his life goals!

If you’ve never checked out the blog; it’s definitely worth a read. Unlike the lazy folks here at NASPP Blog, Broc and Dave manage to post an entry every day. And it’s free to anyone, whether you subscribe to or not. At a minimum, someone in your legal department should be reading it.


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December 1, 2009

You’ve Been Warned

As I mentioned in my blog on November 17, the IRS and Treasury recently issued final regs for Section 423 plans. In today’s blog, I focus on what I think could be the biggest “gotcha” under the regulations: determining the grant date for shares purchased under an ESPP.

Grant Date under Section 423
The grant date is important under Section 423 for four reasons:

  1. Key to establishing the minimum required purchase price;
  2. Determines the value of the shares for purposes of the $25,000 limitation;
  3. Starts the statutory holding period for qualifying dispositions; and
  4. Compensation income on a qualifying disposition is based on the discount as of this date.

What Do the Regs Say About Grant Date?

Under the final regs, for the beginning of the offering to be considered the grant date, the maximum number of shares that employees can purchase must be specified at the start of the offering. The $25,000 limit and the aggregate number of shares available for grant under the plan are insufficient for this purpose; the plan must include a separate, per-person, per-offering limit. If the plan doesn’t include such a limit, then the purchase date is also considered the grant date.

How Low Can You Go?

Of the above four purposes, #1 is my biggest concern. According to the NASPP’s 2007 Domestic Stock Plan Design and Administration Survey (co-sponsored by Deloitte), 68% of respondents’ §423-qualified ESPPs have a lookback (i.e., base the purchase price on the FMV at the offering beginning, or on the lower of the beginning or ending FMV). If your plan has a lookback, it’s critical that the grant date is the beginning of the offering.

Why? Because under Section 423, the purchase price can’t be less than 85% of the FMV at grant or purchase (whichever is lower). Thus, if your plan includes a lookback, you’d better be sure that the beginning of the offering is the grant date, because it sure isn’t the purchase date.

If you have a lookback and the beginning of the offering isn’t considered the grant date, then the plan can’t qualify for Section 423 treatment. This means the spread at purchase is ordinary income for employees and subject to withholding. But, hey, the good news is that you won’t have to track dispositions.

The Other 29%

According to the NASPP’s 2007 survey, 29% of the respondents don’t have a lookback and instead base their purchase price on the FMV at the end of the offering only. (3% of respondents used some “other” calculation; I don’t know what that would be so I’m ignoring those respondents. 100% – (68% + 3%) = 29%. Hmmm, probably I shouldn’t use section headings that I have to explain.)

If your plan bases the purchase price on the ending FMV only, then you probably don’t care much whether the beginning of the offering is the grant date. It might even be better for the purchase date to be the grant date:

  • Applying the $25,000 limit would be easier. If the FMV declined during the period, the number of shares employees could purchase under this limit would increase. The $25,000 limit could be easily enforced by limiting employee contributions to a percentage of $25,000 that is commensurate with the discount offered under the plan (e.g., if the plan offered a 15% discount, employee contributions would need to be limited to $21,250–85% of $25,000).
  • Assuming employees don’t sell at less than the FMV at purchase, it eliminates any advantages associated with qualifying dispositions. Ordinary income on a disqualifying disposition is the spread at purchase; on a qualifying disposition, it’s the spread at grant. If both dates are one and the same, there’s no advantage to a qualifying disposition. Unless, of course, the price declines. Then the ordinary income on a qualifying disposition is the actual gain, if any, on the sale but on a disqualifying disposition it would still be the spread at purchase.

Consider Yourself Warned; Now Warn All Your Friends

If you have a plan with a lookback, now would be a good time to make sure it includes a per-person, per-offering share limit. Hopefully, your §423 ESPP was drafted to include the necessary share limit (this has actually been an informal IRS position for decades–there are letter rulings on it going back to 1968) or, if it wasn’t, you saw the writing on the wall (or in the NASPP blog) when the proposed regs came out and took care of it.

I’ve seen a number of plans that don’t include a specified limit, but give the board or plan administrator authority to establish a limit. If that’s your plan, and your board, et. al., hasn’t been establishing a limit at the start of each offering, now would be a good time to have them start doing this.

If your plan doesn’t have a limit or even provide discretionary authority to establish one, then you had better get cracking because the final regulations are effective as of January 1, 2010. You’ve been warned, now warn all your friends (you can send them a link to this blog–it’s free even for non-members). I don’t want anyone to come crying to me next year that their ESPP has been disqualified because they didn’t know about this.

Online Surveys & Market Research

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