The NASPP Blog

Monthly Archives: March 2011

March 31, 2011

Outsourcing vs. In-House Administration

How much of the stock plan administration process should your company outsource? It’s not a static question. It’s important to examine the issue periodically as both your company and your service provider offerings change. Although there are an infinite number of varying degrees of outsourcing stock plan administration, three basic avenues exist: full outsourcing, licensing software, and creating custom software. Here are some considerations for each:

Full Outsourcing

In a typical fully outsourced environment, the service provider houses the stock plan administration software and is responsible for the general administrative processes like transaction processing, valuations, and plan share reconciliation. The company maintains decision-making on and oversight of the management of its own stock plans.
This type of arrangement can be quite cost-effective for the company. The service provider is able to leverage a larger pool of personnel to manage the administration of the company’s stock plans as well as the technical aspect of maintaining the software and the data it houses. Although full outsourcing can be advantageous to companies of all sizes, it is ideal for medium to larger companies where the administrative burden is significant enough to really capitalize on the economy of full outsourcing. In addition, the service provider is intimately familiar with the capabilities of the stock plan administration software and can offer guidance on what can be managed within the database verses what might need to be an out-of-the-box solution.

When leveraging fully outsourced plan administration, a company must comply with the policies of the service provider, which may include issues like complying with specific procedures for transmitting data or restrictions on the timing or scope for modifying data without being subject to additional fees.

Licensing Software

Some companies house the stock plan administration software in-house and maintain responsibility for all or most of data and transactional management. The licensing includes a certain amount of technical support, but the company is responsible for creating and adhering to its own procedures to ensure the accuracy of the data housed in the software. The company has the advantage of flexibility regarding the timing and management of data–including customization of the software or report outputs–but with it comes the added burden of resolving technology issues, including coordinating any upgrades to the software that may be required.

Custom Software

Relatively few companies have the financial bandwidth to take on the process of creating and maintaining a custom software solution. The key advantage to this arrangement is the freedom of having software that conforms to the company’s specific needs in a way that no off-the-shelf software solution could. In addition, in-house custom software may include many automation features that can help ensure timely and accurate data flow or auditing functionality. However, the company takes on the cost of not only administering stock plans, but also maintenance and upgrades to the software. Instead of purchasing an upgrade package when new functionality is available or required, the company must budget for programming updates.

Making the Determination

There isn’t always a clear line between these three types of stock plan administration solutions. A company may employ pieces of each to accomplish the best fit for its stock plan management. For example, the company may license software to accommodate a specific aspect of plan management–like valuation or mobility tracking–and outsource the general administration to a service provider. It’s important to understand what the current advantages and hindrances are to the solution you’ve chosen as well as what issues may be resolved in the future and which may continue to require work-around processes. The company will need to balance accuracy, efficiency, and total cost (including the full cost of additional headcount).

The common theme among all solutions is the value in conducting a periodic review of your processes and your service providers. You can gauge how well your company evaluates service providers in this NASPP Compliance-‘O-Meter or view your peers’ results here. We also have a great whitepaper from Stock & Option Solutions in the NASPP Document Library. If you conclude that it’s time to change your service provider, you’ll want to check out the NASPP webcast, “Best Practices – Changing Service Providers Like a Pro“.


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March 29, 2011

Trends in Stock Compensation

I recently attended a San Francisco NASPP chapter meeting that featured a presentation by Yana Plotkin of Towers Watson on trends in equity compensation. Yana included some data from the Towers Watson “2010/2011 Report on Long-Term Incentives, Policies and Practices.” Here are a few highlights:

Portfolio Approach

More companies are granting at least two types of awards–73% of respondents indicated this practice, an increase of 10% from 2009. Larger companies are more likely to utilize three types of awards than smaller companies.

Pay for Performance

Towers Watson is seeing a strong trend towards performance awards, which are now the second most common type of long-term incentive offered by survey respondents, ahead of stock options. Full value shares (RS/RSUs) were the most common type of LTI offered. In the NASPP’s 2010 Stock Plan Design and Administration Survey (co-sponsored by Deloitte), we also saw a strong trend towards performance awards, although we did not see them outpace the usage of stock options.

Full Value Awards

Towers Watson reports that full value awards have outpaced stock options for grants to employees at the manager/individual contributor level. In the NASPP survey, we also saw an increase in full value awards and even performance awards to employees at these levels, but many respondents were still granting stock options.

Award Sizes

For employees earning under $200,000, award sizes (as a percentage of salary) remained flat from 2009 to 2010 in the Towers Watson survey. But for employees at higher salary levels, award sizes increased, although not quite to 2008 levels.

Award Design

In terms of performance award design, Yana mentioned that they are seeing interest in awards with shorter performance periods, e.g., two years, and some sort of trailing service requirement after the performance goals have been met. I am a proponent of this design; for executives, it helps facilitate compliance with ownership requirements and clawback provisions and, for everyone, it can simplify tax withholding procedures.

Interestingly, Towers Watson reports that 35% of respondents to their survey measure performance relative to peers or a market index. For the NASPP survey, this was about the same (41% of respondents). Both surveys also agree on how commonly TSR is used as a performance metric (25% of respondents in the Towers Watson survey, 29% of respondents in the NASPP Survey). Yana indicated that Towers Watson is seeing more companies use TSR than in the past and that certainly aligns with the buzz I am hearing from compensation consultants, etc.

Performance Awards Are the Future

The biggest takeaway I got from Yana’s presentation is that the Say-on-Pay, the disclosures required under the Dodd-Frank Act, and shareholder expectations are making performance awards the hottest thing going today in terms of equity compensation.  If you aren’t fully up to speed on them, don’t miss the pre-conference session, “Practical Guide to Performance-Based Awards,” to be held on November 1 in San Francisco, in advance of the NASPP Conference. Register by May 13 for the early-bird discount!

Online Fundamentals Starts in Two Weeks–Don’t Miss It!
The NASPP’s acclaimed online program, “Stock Plan Fundamentals,” begins on April 14. This multi-webcast course covers the regulatory framework and administrative best practices that apply to stock compensation; it’s a great program for anyone new to the industry or anyone preparing for the CEP exam. Register today.

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

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March 24, 2011

Mobility Updates

When it comes to compliance on your globally mobile employees, one of the most challenging aspects of achieving or maintaining compliance on tax withholding and reporting for your globally mobile employees is keeping pace with changes to applicable legislation and standards. Today, I highlight the top three recent changes that might impact your global mobility compliance.


Effective April 1, 2011, withholding on nonresident income from French-qualified awards will be required by employers. Fortunately, this is only applicable to the French-sourced portion of the income, but it is a change from the current withholding requirements. Like other tax withholding issues in France, there is always the thread of jail time or individual financial penalties for failure to comply. You can find more information about this legislation in the Pricewaterhouse Coopers article, Recent Legislative Updates.


As noted in this Ernst & Young alert, China will begin requiring employers to make of social security insurance contributions for all employees, including foreigners working in the PRC in July of 2011. Associated with this requirement is a host of administration concerns including actually enrolling nonresident employees with the appropriate social insurance agency, completing monthly contribution reporting, and issuing applicable termination certificates. To put some teeth in the requirement, there will also be a greater liability for noncompliance including fines of up to 300% of the missed payments.

United Kingdom

Thankfully, there is some relatively good news from the United Kingdom. Included in the new budget is the potential for some relief for mobile employees. Although not in the form of a tax break or even easier withholding processes, the UK Treasury has finally determined that it is time for a statutory definition of residence. Currently, residency in the UK is particularly ambiguous and based mostly on interpretations of case law and HMRC practice because the essential concepts of residence, ordinarily residence, and domicile are not clearly defined in UK tax law. As Deloitte highlighted in this alert from March of last year, the landmark case of Robert Ganes-Cooper created confusion for individuals and companies after it was determined that Mr. Ganes-Cooper was a tax resident. (You can also check out both Mr. Ganes-Cooper’s version of the facts and the HMRC’s statement on the case.) Although Mr. Ganes-Cooper satisfied the requirements outlined in the IR20 (The IR20 was replaced by HMRC6 in 2009), he didn’t actually leave the UK for tax purposes, which means he is still a resident and that the IR20 is not applicable.

This isn’t the first time that there has been a call for a clear definition regarding residency. In fact, both the IR20 and subsequent HRMC6 were intended to provide a clear test. The Treasury is hoping to create a new residency test in 2011 and will begin a consultation process on the subject in June of 2011. I am curious to see what ambiguity can be cleared up by the new test once it is available.


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March 22, 2011

Tax Accounting

Tax accounting is one of the most complicated areas of equity compensation. Just the name alone makes some of the most seasoned stock plan professionals I know uneasy. It’s also a subject that doesn’t get as much exposure as some of the other disciplines in this profession, which can make it more challenging to be proficient at. We recognize all of this and want to give you an opportunity to enhance your knowledge in this area–round out your resume so that it includes a place for “skilled at tax accounting.”

If this is an area you’ve neglected until now for the reasons I mention above, here is your chance to change this. The NASPP recently announced its newest online educational program, Financial Reporting for Equity Compensation, and two full hours of this course are devoted to understanding tax accounting–soup to nuts. That’s right, TWO full hours of tax accounting!

While I can’t divulge all the great information to be covered in this session, I’d like to give you a sneak peak of some of it. Here are three key topics that will be covered during this session:

1. The tax provision and equity compensation. A tax provision is a company’s current payable for the tax return and its deferred tax asset/deferred tax liability. The most important part of the tax provision is the effective tax rate; the company’s statutory tax rate. The types of awards you grant can affect the tax provision by way of the effective tax rate. How awards impact the tax provision depends on the type of arrangement. To help you understand this, speakers will walk through the fundamental principles of the tax provision as it relates to equity compensation so that you can anticipate the tax implications of the awards you grant.

2. Identifying tax differences. Do you know what permanent and temporary differences are and how they are accounted for? ISOs and ESPPs, for example, are considered permanent differences for tax purposes and are accounted for much differently than temporary differences. They can also adversely impact your financial statement. Learn why this is during this session.

3. Deferred tax assets and the income statement. Validating DTAs that appear on your income statement related to your stock plans is something all companies need to be doing. This proves to your auditors that you are recognizing tax benefits in your income statement for your stock plans in the right period. Speakers will offer two ways to help you prove out your stock related deferred tax assets and offer advice on how frequently you should be performing this audit. Before they do this, though, they will provide you with a complete tutorial on what is a deferred tax asset and more.

Intrigued? Want to know more? Tackle this topic head on now by registering for Financial Reporting for Equity Compensation. NASPP members that register by April 29 can save $250.


March 17, 2011

Expiring Options

How does your company approach the issue of in-the-money options that are nearing their expiration date? This has always been a potential issue for terminated employees whose vested shares are no longer exercisable for the full term of the option. We now also see more companies with options that are actually nearing full term, especially when the options have remained underwater for an extended period of time.


The first decision on expiring options is whether or not the company will endeavor to notify participants of the impending expiration. At face value, this appears to be a fantastic idea, but there are still issues to consider. Ideally, these communications would be automated to some degree to avoid the administrative burden of manual distribution.
Identifying the grants and employees who should receive a notice regarding expiring in-the-money options may not be easy. Even if your stock plan administration software has a report that generates a list, you could be faced with a daily verification depending on the vesting schedules for your employee options. Most brokers have the ability to alert employees of upcoming option expirations through the employee accounts and some may even be able to send out automated email notification.

Another important consideration is how to ensure that the communication is universal. It is reasonable to exclude specific groups of employees (e.g., employees holding underwater options), but it is important that the exclusion is consistent to avoid even the appearance of discrimination. When considering the timing of communications, keep your termination parameters and typical administrative delays in processing terminations in mind. As with any communication, you run the risk of an employee relying on the notification, not receiving it due to an administrative anomaly, and find yourself in the middle of a lawsuit.

Automatic Exercise

More brokers are now willing and able to support a company’s policy to have expiring in-the-money options automatically exercised on the day before they expire. Automatic exercise has existed for many years for publicly traded options, so it’s not a stretch to apply the same logic to an employee plan. However, there are more considerations for employee stock options.

Exercise Type

When instituting an automatic exercise policy, careful consideration should be given to how the employee will pay the exercise price and tax withholding associated with the transaction. It is possible to initiate a same-day sale on an expiring option on behalf of the employee providing you have the appropriate permissions to do so and your broker is willing to execute the transaction. However, my opinion is that the best fit for an automatic exercise is some form on net share settlement. The key advantage is that employees would simply receive the net shares in their account, which could be held or sold at their discretion. You won’t have to ensure that brokerage accounts are open and unrestricted and you don’t have to worry about coordinating a market transaction. Regardless of the exercise type you choose, there should be a way for employees to opt out of the automatic exercise.

How Much is Enough?

Another consideration for automatic exercise is just how in the money options need to be for an exercise, especially if you are doing a net share settlement. Even with a sell-to-cover transaction, it is better if the employee receives more than a fraction of a share in value for the transaction. For non-qualified stock options, you have to account for not only the exercise price, but also the tax withholding, which could dramatically reduce the value returned to the employee. Although in general some value is better than nothing, there are many situations where the exercise of an option that is barely in the money could actually do more harm than good. If you set a minimum value, be sure that it can be consistently administered and is clearly communicated to employees.


If you are instituting a new automatic exercise policy, confirm with your legal team on how to handle both existing options and new grants. Does your plan accommodate and will your company feel comfortable simply making it a policy and notifying employees, or will you need to have some kind of agreement from employees. For future grants, will you need to include specific language for an automatic exercise in the grant agreement?

Early Bird Special for the 19th Annual NASPP Conference

Speaking of expiring options, don’t miss out on your option to register for the 19th Annual NASPP Conference at a reduced price! Now through May 13th, NASPP members will receive a special discount on Conference registrations. Register today!


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March 15, 2011

Corporation on Form 3922

As the deadline for filing Forms 3921 and 3922 draws near, I have finally heard from the IRS on a nagging question (see Topic #6810 in the NASPP Discussion Forum): if a company offers an ESPP in which employees purchase another corporation’s stock–for example, a subsidiary that sponsors an ESPP in which employees purchase the parent company’s stock–which company should be listed on Form 3922?

Which Corporation Should Be Listed on Form 3922?
For ISO exercises (reported on Form 3921), this matter is easily resolved because the form includes space to list both corporate entities. The corporation that transferred the stock to the employee (presumably the plan sponsor–in my example, the subsidiary) is indicated in the “Transferor” box and the corporation whose stock was transferred (in my example, the parent company) is indicated in box 6.

Form 3922, however, only has space for one corporation. §1.6039-1(b)(1)(ii) of the final regulations states that the return for the transfer of ESPP shares is required to include “The name, address and employer identification number of the corporation whose stock is being transferred.” Based on that, the company whose stock is purchased (in my example, the parent company) should be the corporation indicated on Form 3922.

Why the Confusion?

Some companies would prefer to include the plan sponsor on Form 3922, rather than the company whose stock was purchased under the plan. For example, in the case of subsidiary sponsoring an ESPP in which employees purchase stock of a foreign parent company, there is concern that including the foreign parent as the corporation on Form 3922 could cause the IRS to think that the foreign parent has employees or a permanent establishment in the United States, which could trigger other tax-related issues.

Even where the company whose stock is purchased is not a foreign company, there is concern that listing this company, instead of the actual plan sponsor, on Form 3922 could cause the IRS to think that the individuals for which Form 3922 is filed are employees of the company indicated, causing confusion with regards to other tax matters (e.g., would the IRS then be looking for a Form W-2 from this company for the individuals).

What Do the Form Instructions Say?

The instructions to Form 3922 are not as specific as the final regulations with regard to what corporation must be listed. Per the instructions, the term “corporation” could include (but is not even limited to) the corporation issuing the stock, a related corporation of the corporation, and any party in control of the payment of remuneration for employment to the employee. The box itself on the form is labeled “Corporation,” not “Transferor,” as on Form 3921. These instructions seem to allow some leeway for companies to make their own determination as to which corporate entity should be indicated on the form.

What Does the IRS Say?

Given the confusion on this matter, I contacted the IRS for guidance. Just yesterday, I received an informal response from the IRS Chief Counsel’s office that the corporation listed on Form 3922 must be the corporation whose stock was purchased/transferred. The Chief Counsel recognizes that this could cause some problems with foreign corporations, but is nevertheless sticking to what the final regs say.

What Do You Say?

I’m curious to know what our members think about this and how much of a concern it is for you. It has been suggested to me that if we approached the IRS reasonably about this, we might get some additional relief. If you send me your carefully considered and professionally presented concerns, including the reasons why you would like to have the employer corporation listed on Form 3922 instead of the corporation whose stock was purchased/transferred, I will present those comments to the IRS. You can send your comments to me at

I wouldn’t count on getting any relief by the end of March, however.  So, for this year filings, I would include the corporation whose stock was transferred on Form 3922.

Register Now for Early-Bird Savings on the NASPP Conference
I’m excited to announce that the 19th Annual NASPP Conference will be held in San Francisco from November 1-4, 2011.   Register by May 13 to receive the special early-bird rate!

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

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March 10, 2011

Plays Well With Others

When I was in elementary school, I received a grade for how well I played with others. My conduct in class and on the playground was presented to my parents as poor, needs improvement, satisfactory, or excellent. As a professional, your ability to partner with your peers may not come to you in a report card, but it absolutely does influence the quality and efficiency of your work.

The stock plan management team must partner with many different groups or individuals, each having their own priorities, annoyances, and standards. These are my top three questions you should ask anyone who uses data that originates from the stock plan management team or software:

How do you make use of the files reports from the stock plan administration database?

This may sound like a general question, but once you start digging, you might be surprised by what you find out. It’s important to know what pieces of data are essential to your partners, not just what reports and files your procedures dictate must be delivered to them. Internally, you may be sending reports or automated files to several different departments including legal, HR, payroll, and finance. Externally, you are coordinating data as well with your broker(s), transfer agent, and advisors or other third-party vendors. If you know what the intended outcome is for the data you supply, you may be able to simplify your own processes. For example, you may be providing two separate reports when all the required data can actually be included on a single report. This is particularly important as a review item if either your or the other party’s database or software has recently been updated.

What manual adjustments do you make to data you receive from the stock plan management team?

Automation is a key element of stock plan management. As you start to understand exactly how data from your stock plan administration database is being used, the next logical piece of intelligence to gather from your partners is if you are a source of annoyance for them. A fantastic follow-up question in this conversation is, “How can I deliver this data in a way that no longer requires manual adjustments?” If your partners have to take your data and rearrange it, combine it, or otherwise manipulate it before they can even start to use it, then you should be looking for a way to combat that. Even if you can’t provide the data in a different way immediately, you can be looking for solutions to the manual processes that your data has created. Plus, just knowing that you care enough to look for a solution can ease the burden of manual processes for your partners–at least temporarily–and even create a more cooperative environment.

When entering data from the stock plan management team into your database, what happens if there is rejected data or the data results in an error within your system?

This question is most applicable to files that are directly imported into a software or database, but it can also be important for data that must be entered manually. For example, if your file containing tax withholding amounts from stock plan transactions includes a social security withholding amount that puts an employee over the annual maximum, you want to know how the payroll software will account for that issue. Incongruous data can also be discovered during manual reconciliation processes. The most important piece of information that you want to know about these glitches is if there is a standard or automated adjustment to the original data, such as allocating excess Social Security to income tax withholding or rounding up when a number contains more decimal places that the system can accommodate.

Starting these conversations with your partners is useful above creating efficiencies and reducing risk of error. It also helps to create solidarity between your team the departments and outside contributors you partner with. By taking time to understand the needs and limitations of the groups and individuals using data that originates in your stock plan administration database you open the door for you to solicit help in resolving issues that originate outside your department as well. Also, although you don’t bring home a report card to let you know how well you “play” with others, successful coordination with other departments and service providers absolutely does influence your standing in your annual review. So, once you’ve taken the time to ask these questions, be sure to share your knowledge and the results of your efforts!


March 8, 2011

Withholding for Outside Directors?

A few weeks ago, a paragraph caught my eye in a McGuireWoods alert about President Obama’s revenue proposals for 2012. Under the proposals, independent contractors that receive more than $600 per year from a company would be able to require the company to withhold federal income tax on their payments. Contractors would not only be able to require the withholding but would also be permitted to determine the withholding rate.

I know, I know–you can’t imagine that any contractors would actually want taxes withheld and some of you are also thinking that your company doesn’t grant awards to contractors so this doesn’t apply to you. But, you might want to think again. As far as I know, the tax code doesn’t distinguish between different types of non-employees. You either are an employee or you aren’t. So while the proposal uses the term “independent contractor,” it’s possible that, when implemented, this would also allow outside directors to request that taxes be withheld from their compensation.

Which is interesting because a number of stock plan administrators have told me their outside directors want taxes withheld on their stock awards. Usually the directors want to use some of the stock in their awards to cover the taxes, either through share withholding or a sale of the award shares. In some cases, they also just don’t want to hassle with estimated tax payments.

Thus, I think there’s a reasonable possibility that some outside directors would avail themselves of the opportunity to have the company withhold taxes. Of course, share withholding would still be a problem–since the withholding is voluntary, any taxes that are withheld would be in excess of minimum statutory withholding rates, triggering liability treatment under ASC 718 in the event of share withholding. (If the directors sell their award shares on the open market to cover the taxes, liability treatment won’t be a problem. Likewise, of course, if the directors pay the taxes in cash–but that’s no fun.) While companies would be forced to accommodate the withholding request, they presumably would not have to allow the directors to utilize share withholding, even if they allow share withholding for employees.

It has also occurred to me that this might be a way for non-employees to flaunt the estimated tax payment system. Non-employees holding stock options might skip making any estimated payments throughout the year and, at year-end, exercise an option and have the company withhold enough of their proceeds to cover the tax payments they should have made earlier. We’ve seen this type of behavior before–see my Dec 9, 2008 blog, “Excess Tax Withholding – Part 2.”

No Need to Panic Yet

We are a long way from this being a reality–at this point, it’s just a proposal; who knows if it will ever come to pass. And there are many questions that will have to be addressed before it can be implemented, such as whether or not the proposal applies to all non-employees including outside directors or whether the IRS will somehow limit it to “independent contractors.” No need to start changing your procedures yet–this is just something to keep an eye on.

They’re Here
It’s always a little unnerving to get mail from the IRS, but this time proved to be nothing to worry about. My copies of Forms 3921 and 3922 have arrived. I was out of town for the past week, so I’m not sure exactly when they arrived. But, for those of you filing on paper (presumably you all requested a 30-day extension of the filing deadline), the forms are now available, in plenty of time to file by March 30. You can order your copies via the IRS website and you should receive them within 7 to 15 days.

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

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March 3, 2011

Don’t Panic

Government Shutdown

We’ve gotten a two-week reprieve from the risk of a U.S. government shutdown, leaving everyone to worry over what a shutdown would mean exactly. First, it certainly doesn’t mean that everyone working for the government just stays home and that the machine of the U.S. governmental infrastructure comes to a screeching halt. Only non-essential functions would be suspended. In the world of stock plan administration, we are most interested in whether or not the SEC and the IRS will still function normally. Most importantly, will we be able to file required forms through the SEC’s EDGAR and the IRS’s FIRE system? I’m sure our partners in the Payroll department are also wondering if they will still be able to submit payroll withholding through EFTPS (or, more likely, that the service provider they are using will be able to), but don’t worry, I’m sure that the government will consider functions that bring tax money in are essential.

The truth is that nobody really knows, but we can all speculate. There hasn’t been a government shutdown since 1995 and the rules for determining which government positions are considered nonessential haven’t been updated since the 80’s. One section that is already covered is that all “activities essential to the preservation of the essential elements of the money and banking system of the United States, including borrowing and tax collection activities of the Treasury” are included in the list of essential government functions. This could potentially cover the personnel required to run both the electronic filings for the IRS, including the forms 3921 and 3922 if you haven’t taken care of that already. What probably won’t be deemed “essential” are personnel to help answer any questions you might have. According to this article, the SEC is already working on a contingency plan that would include stopping all audit processes, but I assume would keep EDGAR up and running. So, we are in a “wait and see” mode right now, both on whether or not a shutdown will take place and what exactly that would mean for stock plan managers.

On a related note, one of the fears expressed in this article is the threat posed by a lack of cyber-security in the event of a government shutdown; the list of critical-need computer security employees hasn’t been updated since 1995. With how much we rely on electronic filing in the world of equity compensation, that also has me a little concerned.

Electrifying Section 6039

Speaking of electronic filing, many companies that had originally planned on submitting paper returns the IRS have either requested an extension or decided to go ahead and file electronically. If you either missed the February 28th deadline to file for an extension or have decided to brave the electronic filing, you’re now faced with the problem of actually creating the file to submit through the IRS’s FIRE system.

Unfortunately, if you weren’t expecting to file electronically, then I suspect you didn’t send a test file to the IRS while the test files were still being accepted. This means that you have two choices: 1) engage a service provider to create and/or submit file on your behalf or 2) create the file yourself and hope you get it right. The first choice is, of course, the easiest. To make it even easier, the NASPP has a great matrix of service providers who are prepared to help you through this from our November 18th webcast. If you decide to go it alone without a test file, we can still help. Stock & Option Solutions recently provided NASPP members with an example of what the files for forms 3921 and 3922 should look like. Whatever your decision, the NASPP has got you covered!


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March 1, 2011

Misinformation About ESPPs

I’ve mentioned before that you shouldn’t believe everything you read on the internet about stock compensation. This can be true even if the information comes from a source that might be expected to be reliable. Rajal Mankad of Garmin pointed out some misinformation on the Turbo Tax website about qualifying dispositions of ESPP shares.

The Turbo Tax article includes an example of a qualifying disposition in which the FMV on the purchase date ($25) is less than the FMV on the grant date ($30). The purchase price is 85% of the lesser of these two FMVs ($21.25); the FMV of the shares when they are sold is $50. According to the article, the compensation income for the qualifying disposition is $3.75 per share (the purchase date FMV of $25 less the purchase price of $21.25). But, as I’m sure my readers are aware, this is not correct. Where the purchase price is not fixed at grant, the compensation income recognized upon a qualifying disposition of ESPP shares is the lesser of:

  1. The discount as computed based on the FMV at grant (this can be calculated by subtracting the amount in box 8 of Form 3922 from the amount in box 3–in fact, this calculation is the reason why the amount in box 8 was added to the form in the final Section 6039 regs).
  2. The difference between the FMV at the time of sale and the price paid for the shares.

Thus, in the example in the article, the compensation income for the qualifying disposition should be $4.50 per share ($30 FMV at grant multiplied by 15%). 

The Turbo Tax article also suggests that the brokerage and other transaction fees can be used to reduce amount #2 above. I don’t believe this is correct. The final ISO regs were clear that the compensation income recognized upon disposition should not be reduced by the transaction fees; while those regulations are specific to ISOs, I think they serve to illustrate the IRS’s position on transaction fees. Moreover, in the case of a qualifying disposition ESPP, amount #2 above is specifically defined as the difference between the FMV of the shares at the time of sale and the purchase price. I think it is reasonable to treat the sale price as the FMV of the shares, but I don’t think the IRS would view it as reasonable to reduce the FMV by the transaction fees for the sale. Those fees are the amount necessary to facilitate the trade; they aren’t part of the price a willing buyer would pay a willing seller for the shares (which is the definition of “FMV”).

Congratulations Are in Order
Congratulations to Mike Melbinger of Winston & Strawn for being selected as one of the BTI Client Service All-Stars 2011–a considerable achievement. Catch Mike’s blog on compensation at

John Olson of Gibson Dunn, a frequent speaker at NASPP Conferences, is also a BTI Client Service All-Star for 2011.

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

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