Last week I participated in the Elizabeth and Barbara tour of the Northwest United States; Elizabeth Dodge and I were in Seattle for a conference and while we were there, we spoke at the NASPP Portland and Seattle chapters. For something a little lighter this week, I feature pictures of the chapter meetings (click on the thumbnails to enlarge the pictures).
The Portland chapter meeting room before and after the meeting started. We had a great turnout, with people attending via teleconference as well.
Danielle Benderly or Perkins Coie, president of the Portland chapter. Kudos to Danielle and the Portland chapter board for arranging a great meeting!
Ryan Nisle of Miller Nash, Darcy Norville of Tonkon Torp, and Erin Davis or FEI enjoy lunch before the Portland chapter meeting begins. Darcy is a director for the Portland chapter.
Scott Sander of Amazon.com with Elizabeth Dodge of Stock & Option Solutions. Scott is president of the Seattle chapter–kudos to him and the Seattle chapter board for hosting a great meeting.
Tim Oakes and Mike White of Curtis Consulting with Lisa Dilek of F5 at the Seattle chapter meeting. Lisa is secretary of the Seattle chapter and we thank her for helping with the arrangements for the meeting.
Attendees at the Seattle chapter meeting mingle after the presentation. We had a great turnout in Seattle as well–many more people than you see here, these are just the folks that stuck around afterwards.
See all of the pictures from the chapter meetings on the NASPP’s Facebook page. Elizabeth and I thank both chapters for being willing to accomodate our travel schedule.
Silicon Valley: Veena Bhatia of Gilead Sciences, Jon Doyle of International Law Partners, and Matt Krause of Audience present “Effective Communication of Global Equity Plans.” (Wednesday, May 1, 11:30 AM)
In today’s blog I’m going to deviate a bit from our normal format and invite you to take a little quiz. Don’t worry, nobody’s keeping score except for you, so this is just for fun. Why a quiz, you ask? Have you ever wondered where to find something in the massive IRS Tax Code? Many of us have memorized the names and basics about various tax code sections that apply to stock compensation (e.g. Sections 421, 422, 423, 424, 83, 162 and so on). Or, you’ve heard of some pending regulations, but aren’t really sure whether there’s a pending regulation that covers your area of interest? I personally found it fairly straightforward to memorize the basics about all the major tax code sections, but what I find more challenging is keeping on top of all the subsequent revenue rulings and other guidance that emerges from the IRS. If you’re having the same challenge, you’ll want to be sure to visit our new Tax Code portal. It’s simple and concise – there’s a list and description of the various tax code sections, as well as related rulings and other interpretive guidance that apply to stock compensation. Call it a tax code crib sheet, if you may. Wait! Before you check it out, pause for a moment, in that spirit, to take the Tax Code Challenge!
Tax Code Challenge:
1. Where would you find information about the procedures to revoke an 83(b) election?
a. In Code Section 83(b)(2)
b. The IRS had not provided guidance on any specific procedures
c. Section 83 of the Code is clear that an 83(b) election may never be revoked for any reason
d. In Revenue Proc. 2006-31, which became effective June 13, 2006
2. Which revenue ruling provides guidance on the treatment of dividends and dividend equivalents on restricted stock and restricted stock units for 162(m) purposes?
a. There is no revenue ruling that covers dividends/dividend equivalents
b. Revenue Rul. 2012-19
c. Revenue Rul. 98-34
d. There is no revenue ruling, but there are proposed regulations pending on this topic
3. Which of the following reflect pending regulations?
a. Rules relating to the additional medicare tax
b. Rules related to valuing employee stock options that have been gifted for estate planning purposes
c. Rules regarding new information disclosures for Section 6039 related information returns
d. There are no pending revenue rulings that would affect stock compensation
The answers are listed below. If you knew all of the answers – great! You’re a tax guru. For the rest of us that may have been stumped by one or more questions, a visit to the Tax Code portal may help gain clarity in this area.
Today’s blog entry is about CHIPs. Not the Erik Estrada and John Wilcox variety, but Certain Health Insurance Providers. The IRS has proposed regulations implementing the $500,000 deduction limit that applies to CHIPs under the President Obama’s health care package.
Why Do You Care?
If you aren’t a health insurance provider, you probably are wondering why you should care about this. And, right now, you probably don’t. But the placing further restrictions on the limit on corporate tax deductions under Section 162(m) for all companies is something that is currently on the table in DC. I think it’s likely that any additional restrictions would mimic, at least in part, the restrictions that apply to health insurance providers. Thus, even if you aren’t CHIP, I think it’s worth five minutes of your time to read today’s blog entry so you have an idea of what might be coming down the pike.
The following table provides a quick illustration of how the limit for CHIPs differs from the standard limitation we are all familiar with under Section 162(m). As you can see, it’s about more than just $500,000.
Limit for CHIPs
Standard 162(m) Limit
Public and private companies
Public companies only
All employees + directors + most consultants
Why You Should be Worried
The new limit that applies to CHIPs has some significant implications for stock compensation. First, because performance compensation isn’t exempted, stock options and performance awards are subject to the limit (which does have a silver lining in that CHIPs don’t have to worry about meeting 162(m) requirements when implementing these plans–say hello to our long-lost friend, discretionary payouts).
Second, because the limit applies when compensation is earned, not when it is paid, to figure out whether the company can claim its deduction for stock awards, the deduction has to be allocated on a daily pro rata basis over the period the awards was earned. You would expect this to be the vesting period, but it isn’t. For options, the period is measured from grant to exercise; for restricted stock, it’s grant to vest; and for RSUs, it’s grant to payout. So let’s say an option is exercised just prior to the end of its ten-year contractual term–that’s 11 tax years that the deduction would be allocated over.
That’s complicated enough, but things get really complicated when you think about the impact on your DTA accruals for tax accounting purposes and the tax benefit assumed for diluted EPS purposes. Makes you glad your company isn’t a CHIP (unless you are a CHIP, in which case, good luck with all that).
Here’s what’s happening at your local NASPP chapter this week:
San Diego: The chapter hosts a progressive round table event on accounting best practices, educating employees, and lessons learned from the current proxy season. (Tuesday, April 23, 11:30 AM)
Ohio: Emily Cervino of Fideltiy presents “Hot Topics in Equity Compensation” and Jim Sillery of Buck Consultants presents “CEO Pay: Practices and Trends in Mid-Cap Companies.” (Wednesday, April 24, 10:30 AM)
Portland: Elizabeth Dodge of Stock & Option Solutions and I present “Gray Matters: Between the Black and White in Equity Compensation.” (Wednesday, April 24, 12:00 PM)
Kansas/Missouri: The chapter presents “Hot Topics Roundtable: Best Practices for Tracking and Reporting ESPP Dispositions.” (Thursday, April 25, 11:00 AM)
Los Angeles: Grant Thornton presents “Pitfalls and Pratfalls of Performance-Based Incentive Plans: How to Improve Shareholder Alignment.” (Thursday, April 25, 11:30 AM, joint meeting with the San Fernando Valley Chapter)
San Fernando Valley: Grant Thornton presents “Pitfalls and Pratfalls of Performance-Based Incentive Plans: How to Improve Shareholder Alignment.” (Thursday, April 25, 11:30 AM, joint meeting with the Los Angeles Chapter)
Seattle: Elizabeth Dodge of Stock & Option Solutions and I present “How to Succeed in Equity Compensation Without Really Trying.” (Thursday, April 25, 7:30 AM)
A few weeks ago I blogged about a potential insider trading loophole relative to 10b5-1 plans. While I don’t have any updates on that front today, I do have word of other insider trading related buzz. This time, it relates to our branches of government. Last week Congress quietly passed a modification to the STOCK Act, effectively eliminating trading disclosure requirements for most high-ranking government staffers that were previously covered under the Act. On Monday, April 15th, President Obama followed suit by signing the modification into law.
I’m Not Sure I’ve Even Heard of the STOCK Act
First things first – what’s the STOCK Act? The STOCK Act (aka the Stop Trading on Congressional Knowledge Act) was passed a year ago in April 2012. It explicitly states that the members of Congress and their staffs are not exempt from the same insider trading prohibitions that apply to everyone else. The law basically mandates that Congress and several thousand high ranking government staffers disclose certain financial information, including stock trades, to an online searchable database. Prior to the Act, such disclosures were not easily accessed by the public – it usually required an in person request to obtain this information.
Sounds Reasonable – What’s the Uproar About?
The changes to the Act preserved the conclusion that insider trading is still prohibited for the same people (Congress, etc.). Some ruffling of feathers comes from what has changed, and that is the disclosure elements of the Act. The original version of the Act requires all affected people to make disclosures to a searchable online database – the idea being more publicly accessible disclosures. The modification to the Act now only requires those online searchable disclosures to be made by the President, Vice-President, Congress and candidates for Congress, and some other other Presidential and Senate-appointed positions. Absent from this disclosure requirement are the thousands of staffers who were previously covered. Activists are calling this an “epic failure” of the original intent of the STOCK Act, which was to make trading by those positions accessible to the public, and allow watchdog agencies policing ability over potential insider trading. Supporters of the modification say that putting financial information for thousands of government employees online, where it can be so easily accessed by the public, is not in our national security best interests.
Why Do I Care?
Regardless of which side of the fence you stand on this issue, sometimes we can find the impact in an overall message or theme. It’s been weeks and weeks of consistency in my Google Alerts – insider trading feels like a topic that’s warming up. The SEC has been in an aggressive mode of cracking down on insider trading, and, as discussed a few weeks ago, there is potential for new types of insider trading investigations – like that into 10b5-1 trading plans. It’s just my opinion, but I somehow think that all of these events keep putting the spotlight onto insider trading, which could mean a new era of scrutiny. While the government keeps refining their own policies around insider trading, we have the opportunity to do the same. If an investigation ever comes your way, you’ll want to be certain that you’ve followed your pre-clearance procedures and disclosure requirements to the “T”.
I’d venture to say the trigger for an insider trading investigation almost never originates in the stock plan group. However, if trades in your company’s stock are ever the subject of an SEC investigation, you can bet there’s going to be a microscope on the company to determine the policies and practices around prevention. I would recommend adding an audit and policy/procedure evaluation of your insider trading prevention practices to your list of 2013 objectives, if you haven’t done so already. It’s always better to be ahead of the curve when it comes to areas of compliance. Our Insider portal offers an overview of the various regulations, as well as sample documents.
Last Chance to Participate in the 2013 Domestic Stock Plan Design Survey
This is your last chance to participate in the NASPP’s 2013 Domestic Stock Plan Design Survey (co-sponsored by Deloitte). This is the most comprehensive survey on stock plan design–compensation consultants charge more than $1,000 for surveys that include less data and fewer respondents. You’re going to want this data, but you’d better get cracking. Issuers have to participate to have access to the full survey results and you must complete the survey by this Friday, April 19. We’ve already extended this deadline once, we can’t extend it again!
The topic du jour for my Google alerts for the past several days has been that companies are going to be enhancing their ESPPs in the next few years. A recent survey by Fidelity found that 51% of companies that offer an ESPP are planning on modifying their plan in the next two to three years, and 31% of those companies are planning on increasing the discount.
ESPPs: Better than Sliced Bread
For those of us that are strong proponents of ESPPs, this is welcome news. I think ESPPs are the best thing since sliced bread (and I say this as true carb lover) for a number of reasons:
Financial: ESPP expense is usually insignificant compared to stock option and full value award plans; on a per-share basis, even the most generous ESPP is usually cheaper than both an option or full value award; and ESPPs are never underwater, ensuring that a benefit is delivered to employees in exchange for the expense recognized by the company.
Shareholder Optics: The plans are minimally dilutive and rarely encounter shareholder opposition. And employees tend to hold shares acquired under the ESPP.
Employees: Right now, with interest rates at laughably low levels, ESPP make a great investment vehicle for employees. There is no other vehicle with the same low risk where you can earn a 17.6% return in, say, six months.
This is a win-win-win for everyone: employees, shareholders, and the company. The preferential tax treatment is nice too.
Decline in Benefits
But, despite these benefits, we have seen an erosion in ESPPs since ASC 718 went into effect. In the NASPP’s 2011 Stock Plan Administration Survey (co-sponsored by Deloitte):
The percentage of respondents offering ESPPs was 52%, down from 64% in 2004 (the last survey before ASC 718 went into effect).
Of those respondents with an ESPP, the percentage offering a 15% discount was 71%, down from 87% in 2004.
Lookbacks fared even worse: only 62% of respondents in 2011 offer a lookback, down from 82% in 2004.
And offering periods got shorter: in 2004, 43% of respondents offered a 12 or 24 month offering period. In 2011, that percentage dropped to 20%.
Where Do You Stand?
So I’m very excited to see Fidelity’s press release stating that companies are reinvigorating their ESPPs. I look forward to a day when all NASPP members proudly offer the most generous ESPP. For now, I’m curious–where does your company stand: