The NASPP Blog

Monthly Archives: January 2014

January 30, 2014

The SEC on a Roll

It’s been a while since we’ve had major regulatory updates that impact stock compensation. Knowing that, I sometimes find myself scanning the horizon, looking for the next “thing” that’s going to have us examining our practices, changing procedures or implementing something new. This week my radar went into action when I heard that SEC Chair Mary Jo White had laid out quite a list of upcoming initiatives in a recent address.

Technology on the Brain

In spite of some significant cutbacks in technology dollars available to the SEC for long term initiatives, the SEC seems to still have advancement in this area on the brain. Chair White announced that the SEC has deployed a new analytical tool called “NEAT” (National Exam Analytics Tool) to help identify possible insider trading or other misconduct. This tool can identify red flags in a fraction of the time it took to do so in the past. I’m guessing this means that the wave of insider trading investigations and scrutiny is not over.

In the spring of 2013, the SEC issued guidance permitting issuers to use social media sites to communicate company announcements (see the NASPP Blog, May 16, 2013). White has now indicated that the SEC is broadly rethinking disclosure requirements for public companies and the role of technology in sharing information with investors. Last month the SEC recommended to Congress in a report (which was mandated by the JOBS Act) that the disclosure rules undergo comprehensive reexamination and reform. White shared some insight into the SEC’s thinking: “I believe we should rethink not only the type of information we ask companies to disclose, but also how that information is presented, where and how that information is disclosed, and how we can take advantage of technology to facilitate investors’ access to information and make it more meaningful to them.” Saying it and issuing a report doesn’t mean new rules are imminent, but it is perhaps a hint of things to come. It seems within the realm of possibility that this type of reform may be fairly significant if and when it happens.

New Investigation Focus

White says that as the SEC wraps up investigations stemming from the financial crisis, attention is now shifting to other areas of enforcement – namely financial reporting fraud and accounting irregularities amongst others. This is a good time to make sure our controls, checks and balances are operating full force. While we can’t control other areas of financial reporting beyond stock administration, we can ensure that the areas under our realm can stand up to the possibility of an intense audit or investigation. This seems particularly wise, since Chair White also said that “The coming year promises to be an incredibly active year in enforcement, as we continue to vigorously pursue wrongdoers and bring enforcement actions across the entire industry spectrum.”

It looks like the SEC continues on their roll of assertive enforcement actions and attempt to progress into more modern times. Let’s see what the horizon holds in that regard.


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January 29, 2014

NASPP To Do List

Tip #3 for Submitting a Winning Speaking Proposal
My third tip for submitting a winning speaking proposal is to submit your proposal on time. I’ll be honest; we look at this as a test. If you can’t submit your speaking proposal on time, it indicates to us that you probably aren’t going to meet any of the other speaker deadlines on time either.  We have close to 200 speakers at the Conference, so it’s critical that our speakers be responsible about meeting their deadlines with minimal prompting from us.  Don’t bother asking for an extension; if you can’t get your speaking proposal in on time, this probably isn’t the year for you to speak.

Submit a speaking proposal today.

NASPP To Do List
Here is your NASPP to do list for this week:

– Barbara

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January 28, 2014

Tax Questions, Answered

As is often the case at this time of the year, a lot of tax related questions have been popping up in the NASPP Q&A Discussion Forum lately.  For today’s blog entry, I try to quickly answer some of the questions I’ve seen the most frequently.

Former Employees
You have to withhold taxes on option exercises by and award payouts to former employees and report the income for these stock plan transactions on a Form W-2, no matter how long it has been since they were employed by the company.  The only exceptions are:

  • ISOs exercised within three months of termination (12 months for termination due to disability). 
  • RSAs paid out on or after retirement (because these awards will have already been taxed for both income tax and FICA purposes when the award holders became eligible to retire). Likewise, RSUs paid out on or after retirement that have already been subject to FICA are subject to income tax only.

If the former employees did not receive regular wages from the company in the current year or the prior calendar year, US tax regs require you to withhold at their W-4 rate, not the supplemental rate. In my experience, however, few companies are aware of this and most withhold at the supplemental rate because the W-4 rate is too hard to figure out.

Changes in Employment Status
Where an individual changes status from employee to non-employee (or vice versa) and holds options or awards that continue to vest after the change in status, when the option/award is exercised/paid out, you can apportion the income for the transaction based on years of service under each status.  Withhold taxes on the income attributable to service as an employee (and report this income on Form W-2).  No withholding is necessary for the income attributable to service as a non-employee (and this income is reported on Form 1099-MISC). 

Any reasonable method of allocating the income is acceptable, so long as you are consistent about it.

Excess Withholding
I know it’s hard to believe, but if you are withholding at the flat supplemental rate, the IRS doesn’t want you to withhold at a higher rate at the request of the employee. They care about this so much, they issued an information letter on it (see my blog entry “Supplemental Withholding,” January 8, 2013).  If employees want you to withhold at a higher rate, you have to withhold at their W-4 rate and they have to submit a new W-4 that specifies the amount of additional withholding they want.

Also, withholding shares to cover excess tax withholding triggers liability treatment for accounting purposes (on the grant in question, at a minimum, and possibly for the entire plan).  Selling shares on the open market to cover excess tax withholding does not have any accounting consequence, however.

ISOs and Form 3921
Same-day sales of ISOs have to be reported on Form 3921 even though this is a disqualifying disposition.  It’s still an exercise of an ISO and the tax code says that all ISO exercises have to be reported.

On the other hand, if an ISO is exercised more than three months after termination of employment (12 months for termination due to disability), it’s no longer an ISO, it’s an NQSO.  The good news is that because it’s an NQSO, you don’t have to report the exercise on Form 3921. The bad news is that you have to withhold taxes on it and report it on a Form W-2 (and, depending on how much time has elapsed, it might have been easier to report the exercise on Form 3921). 

The articles “Figuring Out Section 6039 Filings” and “6039 Gotchas!” in the NASPP’s Section 6039 Portal are great resources as you get ready to file Forms 3921 and 3922.

FICA, RSUs, and Retirement Eligible Employees
This topic could easily be a blog entry in and of itself, but it doesn’t have to be because we published an in-depth article on it in the Jan-Feb 2014 issue of The NASPP Advisor (“Administrators’ Corner: FICA, RSUs, and Retirement“).  All your questions about what rules you can rely on to delay collecting FICA for retirement eligible employees, what FMV to use to calculate the FICA income, and strategies for collecting the taxes are covered in this article. 

– Barbara

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January 27, 2014

NASPP Chapter Meetings

Here’s what’s happening at your local NASPP chapter this week:

Seattle: Iveth Durbin of Perkins Coie and Carolyn Harper of Towers Watson present “Preparing for the 2014 Proxy Season: Executive Compensation Highlights.” (Monday, January 27, 11:30 AM)

Houston: Emily Cervino and Jeremy Boraks of Fidelity Investments present “What’s Happening: Hot Topics in Equity Compensation.” (Thursday, January 30, 12:00 noon)

Portland: Danielle Benderly of Perkins Coie and Tracy Bean of Mercer present “Hot Topics for 2014 Proxy Season for Stock Plan Professionals!” (Thursday, January 30, 12:00 noon)


January 23, 2014

Keeping Above the Section 6039 Radar

Many companies have settled into a routine when it comes to furnishing information statements and filing the IRS returns required under Section 6039 of the Internal Revenue Code. Whether you have a solid routine, or this is the first time you’re facing Section 6039 compliance, there are a few areas where companies should verify that they are fully satisfying 6039 requirements as they near the deadlines for 2013 tax year reporting.

Review Non-U.S. Employees

Non-resident aliens who do not receive a W-2 are not subject to Section 6039 reporting. If a non-resident alien does receive a W-2, then 6039 statements would also need to be furnished.

U.S. citizens who are working abroad are subject to Section 6039 reporting, so companies should not rely on address filters alone to determine whether or not an employee should receive an information statement.

Implement a New ESPP?

Did your company implement a new ESPP recently? It’s important to note that the trigger for filing Form 3922 (for ESPP shares) is the first transfer of legal title for the shares, not the purchase or exercise of the shares. The moment of first legal transfer includes the deposit of shares to a brokerage account in the employee’s name upon purchase, like many companies do via a captive broker. If you had ESPP purchases in 2013 and deposited purchased shares immediately into a brokerage account for the employee, then you’ll need to report the transaction(s) this season. Note that issuances into book entry at a transfer agent or in certificate form do not constitute a legal transfer of title. Those shares would be reported once deposited to a brokerage account, gifted, or sold. Of course, this doesn’t only apply to new ESPPs, but most companies with existing ESPPs are already aware of this requirement. It’s possible that those implementing a new ESPP may overlook this “first legal transfer of title” requirement if not looking at the nuances carefully.

More Transactions this Year?

The IRS doesn’t require companies to file 6039 returns electronically unless there are 250 or more of them. The 250 number is per form type, so if you have 251 Form 3921 returns and 249 Form 3922 returns, only the Form 3921 returns need to be filed electronically. For quantities less than 250 per form type, companies may elect to file electronically or via paper. Even if you didn’t have to file electronically in the past, you’ll want to look at each year’s quantities anew to make sure you’ve assessed the threshold correctly. The deadline for paper filings is February 28, 2014. The deadline for electronic filings is March 31, 2014.

No Chump Change for Failures and Mistakes

Failing to furnish information information statements is no laughing matter. The IRS penalty for not furnishing an information statement, or, for providing an incomplete or incorrect statement to a participant is up to $100 per statement. In addition, a separate penalty is assessed for issues with 6039 returns that should be filed with the IRS – up to $100 per return for those not filed or incomplete/incorrect returns. As a result, you’ll want to make sure you are really auditing the entire process – even if it’s outsourced, to ensure there are no failures. There is a cap of $1.5 million on each penalty type, but that’s high enough to want make doubly sure that the proper reporting is done accurately and timely.

For more information, the NASPP has an excellent Section 6039 portal, available on our web site.


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January 22, 2014

Another Grab Bag

I have another grab bag of topics for you this week.

2013 Say-on-Pay Results
Just in time for the 2014 proxy season, Steven Hall & Partners has published a quick summary of the Say-on-Pay vote results for last year’s proxy season.  Here are a few facts of interest.

73 companies failed (out of a total of 3,363 companies that held votes.  This seems to be up from 2012.  Oddly, even with a Google search, I could not find an apples-to-apples comparison, but it seems like just over 60 companies had failing votes in 2012.  It’s possible the increase is partly due to more companies having held Say-on-Pay votes.

In the category of “Not Getting the Message,” 15 of the companies with failing votes had failures in prior years. 

At one company, Looksmart, 100% of the votes on their Say-on-Pay proposal were against it (which makes them look not so smart). That’s right, even the board voted against their own Say-on-Pay proposal.  Apparently there was a complete board turnover, all the executives were fired, and the new execs didn’t own any stock.

New HSR Act Filing Thresholds
New HSR Act filing thresholds have been announced for 2014. Under the new thresholds, executives can own up to $75.9 million of stock before potentially having to make the HSR filings.  See this memo from Morrison & Foerster for more information. If you have no idea what the HSR Act is, see the NASPP’s excellent HSR Act Portal.

NASDAQ Amends Rules on Compensation Committee Independence
NASDAQ has amended its rules on compensation committee independence to provide that compensatory fees (consulting, advisory, et. al.) paid by the company to board members should be considered when evaluating eligibility to serve on this committee, rather than prohibiting these fees outright.  The NYSE has always imposed the more lenient standard and apparently NASDAQ received feedback that their more stringent standard might make them less popular.  This alert from Cooley has more information.

– Barbara

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January 21, 2014

NASPP To Do List

Tip #2 for Submitting a Winning Speaking Proposal
My second tip related to speaking proposals is for issuers. Speaking at the NASPP Conference is a great way to attend and get complimentary registration.  It’s also great for your career because you will establish yourself as a leader in the industry. 

But wait, you ask: “How will my speaking proposal ever get accepted if firms that participate in the Proposal Assistance Program get extra advice and preference (see tip #1)? As an issuer, my company isn’t going to exhibit at the Conference.” Well, you know what they say: “If you can’t beat ’em, join ’em.”

Issuers can leverage the Proposal Assistance Program by partnering up with the firms that are participating in it. You most certainly have a variety of providers that you work with to manage your stock compensation program.  I’m talking about your attorneys, accountants, compensation consultants, broker, administrator, etc. Think about which of these firms exhibited at last year’s Conference and are eligible to participate in the Proposal Assistance Program.  These firms have an edge in the proposal selection process and their proposals will have even more of an edge if they include a client.  Contact them to see if they need clients for any of their proposals. Many exhibitors tells us that finding clients to serve on their panels is the hardest part of submitting a proposal. Don’t wait to be asked–the squeaky wheel gets the oil, so contact your providers proactively about joining them on a proposal.

Or, even better, offer to submit a joint proposal.  Each firm can submit only three proposals. But a joint proposal you submit on their behalf doesn’t count as one of their three.  The more proposals a firm is on, the more speaking slots they’ll get, so I expect your providers will be appreciative of the offer. And proposals that include Proposal Assistance Program participants receive preference in the proposal selection process, so having one of these firms on your panel gives it an edge.

Submit a speaking proposal today.

NASPP To Do List
Here is your NASPP to do list for this week:

– Barbara

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January 20, 2014

NASPP Chapter Meetings

Here’s what’s happening at your local NASPP chapter this week:

San Fernando Valley: June Anne Burke and Sinead Kelly of Baker & McKenzie highlight recent changes to keep your company’s stock plan in compliance in 2014. (Thursday, January 23, 11:30 AM)

San Francisco: Wendy Davis of Jones Day, Susan Garvin of Stock & Option Solutions, and Lydia Terrill of TIBCO Software present “Proxy Wars: How to Prepare Your Equity Disclosure Tables Without Shedding Any Blood.” (Thursday, January 23, 11:30 AM)

I’ll be at the San Francisco chapter meeting; I hope to see you there!

– Barbara


January 16, 2014

Expiring Options? The Case for Auto Exercise

Companies that grant stock options know that there are a few core challenges that have maintained their existence throughout the life span of these types of equity arrangements. Among them: how to handle the impending expiration of an in-the-money, unexercised grant.

Does it Really Happen?

Stock plan education site,, cites the issue of expiring options as one of the “top mishaps with stock options that can cost you money”. This issue of lost dollars creates a conundrum for many companies – if the option expires, there is risk for a disgruntled employee who may decide to litigate. Even if litigation doesn’t happen, many employees who find themselves in that situation often beg for reinstatement of the option, which is not without cost to the company (in the form of additional compensation expense that would need to be incurred for the reinstated option, which would be treated like a new grant in-the-money grant for accounting purposes). These scenarios usually motivate employers to prevent the options from expiring.

Preventing Expiration

While the issue of expiring options remains relatively unchanged – as long as there are stock options, there will be concern around the impending expiration of in-the-money grants – the approaches to handling this situation continue to evolve. The most common practices include outreach programs to remind optionees that their grant is about to expire. This communication can be performed by the company, or, via a third party service provider. Although these programs seem to reduce the number of expired grants, there are no guarantees that a grant will be exercised – the action still falls squarely upon the participant.

New Ideas

In recent years, a new approach has emerged as a practical solution to this age old problem: the auto-exercise. The essence of the auto-exercise is that an in-the-money, otherwise unexercised stock option will automatically be exercised at or shortly before the close of the market on the date of expiration. The “type” of exercise that will be executed is usually determined by the company in conjunction with the service provider who will perform the exercise, in compliance with the company’s plan terms. I don’t have any formal survey data on which auto exercise types are most popular, but I’d say net issuance and sell-to-cover are on my radar as the most logical methods, with an edge to net issuance.

This is not a new concept – auto exercise has been used for publicly traded options for years. However, in adopting this approach for internal stock plans, there are considerations – some of which were recently highlighted in a Fidelity memo titled “Safeguarding Your Employees’ Stock Option Grants“, available on the NASPP web site. This particular article heavily advocates the use of net issuance in these situations; I’ll recap some of the concepts (with my own flavor added) from that angle:

  • Cash Flow: Companies need to carefully consider their cash flow when determining which auto exercise method to use. Withholding of shares (net exercise) to cover the exercise costs means that the company will need to remit the tax payment, from its own coffers, to the IRS.
  • Plan Provisions: Again, regardless of which exact method is chosen, it’s important to ensure the chosen method is permissible under the plan terms. If there is no provision, it may be necessary to secure a plan amendment.
  • Treatment of Existing Options: When implementing an auto exercise program, a determination must be made as to whether this applies to all grants (existing and new) or only on a forward basis (new grants). Addition of this type of feature to an existing grant is considered a Type 1 modification for accounting purposes, but would be no incremental expense.
  • Threshold for Automatic Exercise: A determination needs to be made as to how far the options need to be “in-the-money” in order for the auto exercise to execute. Usually a threshold to net one share would be the minimum amount, since most plans and service providers wouldn’t permit a fractional share issuance in these scenarios.

What if the Employee Doesn’t Want Auto-Exercise?

Lastly, there’s the scenario of an employee who actually didn’t want to exercise their in-the-money options and complains that the company has now created a taxable event on their behalf. While that is a consideration, Fidelity points out that “the result of exercising in-the-money options still provides a net financial benefit to the employees, even after accounting for taxes. Moreover, companies routinely create taxable events by paying out full-value stock awards to employees, so a case can be made that the automatic exercise of in-the-money options should be treated no differently.”

Do YOU Have Auto-Exercise?

I do think this solution is slowly gaining traction. Let’s test that thought – take the quick poll below. I think it’s definitely worth consideration, especially for companies that seem to have a significant number of in-the-money options expire.



Does your company have an auto-exercise program for expiring stock options?

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January 15, 2014

NASPP To Do List

Submitting a Winning Speaking Proposal
We will begin accepting speaking proposals for the 22nd Annual NASPP Conference next Monday, January 20.  Each Wednesday until the submission period closes, I’ll offer a new tip for submitting a successful proposal. 

My first tip is to participate in the Proposal Assistance Program. This program is open to any firm that exhibited at last year’s Conference and any firm that secures their booth for this year’s Conference before the submission period closes.  So if you didn’t exhibit last year, don’t wait any longer to secure your booth for this year.

During the Proposal Assistance Program, we review all of your proposal ideas before you put any time into developing them.  We tell you which ideas we like and offer suggestions to make them more compelling. We also give you suggestions for people we’d like to see on the panel. This way you can focus your efforts on the topics that are most likely to land you a speaking slot. 

In addition, proposals submitted by participants in the program receive automatic preference over proposals submitted by non-participants.  Exhibitors that participate in this program and follow our advice virtually always have at least one proposal accepted.

NASPP To Do List
Here is your NASPP to do list for this week:

– Barbara

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