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Monthly Archives: December 2017

December 27, 2017

25 Years and Counting

It’s the last week of the year; a time when I usually post a lighter blog entry. For this year, in celebration of the NASPP’s 25th anniversary, I have a smattering of headlines from early issues of the NASPP Advisor (10 pts if you remember what the Advisor was called back then; 20 pts if you actually have a copy of one of the early issues.)

Best Practices for Filing Paper Grant Agreements

There were two camps, one for ordering by grant date and the other in favor of alphabetical by optionee. I remember suggesting during seminars that separate copies should be maintained by HR and by stock plan administration—all that paper! Another hot topic was whether stock options could be exercised by fax.

IRS Asserts that FICA/FUTA Applies to ESPPs

Ten points if you remember when this question was finally put to rest. (Hint: It was in the same bill that brought us 409A.)

New FASB Bill Introduced into Congress

In 1994, the Coalition for American Equity Expansion (CAEE) had just been formed to fight the FASB’s plans to require option expensing and was successful in getting a number of bills aimed at preventing the FASB from adopting its standard introduced into Congress. The Accounting Standards Reform Act would have required the SEC to approve all accounting standards, effectively stripping the FASB of its authority. An earlier bill created a new type of “performance stock option” that would have been eligible for fixed accounting and qualified tax treatment. A subsequent bill eventually passed and was instrumental in FAS 123 being relegated to a footnote in the financial statements.

T+3 Becomes Effective

Remember when settlement in three days seemed like an impossible task? Me neither. Seems like the move to T+2 this year was barely a blip.

How to Set Up a Cashless Exercise Program

Early issues of the Advisor had numerous articles on option exercise procedures that are now old hat and practices that have fallen by the wayside. In addition to tips on setting up cashless exercise programs, there were articles about using attestation for stock-for-stock exercises and case studies on how to manage tax withholding. Did you know that, in instances of withholding failures, the IRS use to assess penalties against individuals who were responsible for administering tax withholding for their employers? I’m glad they’ve dropped that program (technically, they can still assess these penalties but they generally only apply them in extreme cases and usually only against employers and business owners).

Here’s to the Next 25!

Thanks for indulging me in a little stock plan nostalgia. The NASPP has come a long way and it’s been a great first 25 years! Here’s to the next 25 years!

– Barbara


December 21, 2017

Tax Withholding in 2018

On Wednesday, the final version of the tax reform bill was passed in both the House and Senate. There were a few small changes to the bill at the last minute, but none of them impact what I wrote about on Tuesday. Since the bill changes individual tax rates, some of you may be wondering if you need to update your withholding rates on January 1.

It’s Still Just a Bill, Sitting There on Capital Hill

Hold your horses, there, buckaroo.  If you are old enough to remember Schoolhouse Rock’s I’m Just a Bill, you know that the passage of a bill by Congress doesn’t make legislation a law (unless the bill has already been vetoed by the president and two-thirds of Congress votes for it). The legislation still has to be signed by the president. Although Trump’s signature seems like a formality with the tax bill, it still has to happen (rules are rules); moreover, there is speculation that the bill won’t be signed until January (“It’s Unclear When Trump Will Actually Sign the Tax Bill,”

Tax Withholding Rates for 2018

Most of the provisions in the bill, including the new individual tax rates, are effective as of January 1, 2018.  This does not mean that you have to rush to update tax withholding rates, however (especially if the bill hasn’t been signed into law as of January 1). The IRS has to issue guidance updating the tax rate tables and withholding procedures before you can withhold at the new rates. Of course, the IRS can’t issue any guidance until the bill becomes law (and if the looming government shutdown happens, this could impact how quickly the IRS can issue its guidance). The following announcement is posted to the IRS website:

The IRS is continuing to closely monitor the pending legislation in Congress, and we are taking the initial steps to prepare guidance on withholding for 2018. ‎We anticipate issuing the initial withholding guidance (Notice 1036) in January reflecting the new legislation, which would allow taxpayers to begin seeing the benefits of the change as early as February. The IRS will be working closely with the nation’s payroll and tax professional community during this process.

Your payroll provider should be a great resource when tax withholding rates change, since this will impact all compensation subject to withholding, not just stock compensation. An announcement on the ADP website notes that companies should continue to apply 2017 withholding rates until the IRS issues new guidance (“Federal Tax Reform Legislation May Be Imminent: Impact to 2018 Payroll Calculations May Be Delayed“)

Thanks to Marlene Zobayan for bring this concern to our attention.

Transactions on December 31, 2017

As a reminder, transactions that occur on December 31, 2017 are still occurring in the 2017 tax year, even if the FMV for these transactions isn’t known until market close on December 31 (market close does not mark the end of the tax year) and even if the transactions aren’t settled until 2018 or the shares acquired under the transactions aren’t issued until 2018. Most companies have to complete a special payroll run in the first week of 2018 to add late December transactions to Forms W-2.

With tax rates changing for 2018, it is especially important to include transactions in the correct tax year. Failure to do so could cause employees to underpay or overpay taxes due on the transaction and underpayments could be subject to penalties. (Remember that even though the withholding rate may not change until February, withholding is only an estimate of employees’ tax liability. Their actual liability will be based on the rate in effect at the time of their transaction; any excess withholding will be refunded to them when they file their tax return.)

This is a good reason to avoid scheduling vesting dates for December 31; see the November-December 2016 NASPP Advisor for nine more reasons to avoid December 31.

– Barbara

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December 19, 2017

Tax Reform: The Final Scorecard

The conference committee charged with aligning the Senate and House versions of the Tax Cuts and Jobs Act announced late last week that they have come to an agreement. The final bill is expected to be approved in both the House and Senate this week and then signed into law by the president.

Here’s where the bill ended up with respect to the provisions that impact stock compensation.

Individual Tax Rates: The final version of the bill released by the conference committee largely matches what was in the Senate version, except that the maximum individual tax rate is reduced to 37%. So we end up with seven individual tax rates: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The highest rate kicks in at $500,000 of income for single taxpayers but at only $600,000 for joint filers (instead of the $1 million threshold that was originally proposed). The individual tax rates sunset after 2025 and will revert back to the current rates at that time.

Supplemental Withholding Rate: For employees who have received supplemental payments of $1 million or less during the year, the supplemental rate is tied to the third lowest individual tax rate, which will be 22% under the aligned bill. For employees who have received supplemental payments of more than $1 million during the year, the rate is tied to the maximum individual tax rate, which will be 37%.

AMT (for Individuals): This is probably the closest we’ve come to a repeal of the AMT (at least in my memory) but still no cigar. The bill does increase the exemption amounts and phaseout thresholds, so fewer taxpayers will be subject to the AMT. These changes sunset after 2025.

Corporate Tax Rate: Reduced to 21% with no sunset.

Estate Tax: Increases the estate tax threshold to about $11 million; no repeal and no sunset.

Section 162(m):

  • The CFO is once again subject to 162(m).
  • Anyone serving as CEO or CFO during the year is also subject to 162(m) (instead of just the individuals serving in those roles at the end of the year).
  • Once a covered employee for a company, always a covered employee for that company.
  • Stock options and performance awards will no longer be exempt from the deduction limitation.
  • Includes an exemption for compensation paid pursuant to a written, binding contract (such as a stock option or award agreement) in effect as of November 2, 2017, if not modified after that date.

Qualified Equity Grants: The final bill includes a provision that would allow employees in privately held companies to elect to defer tax on stock options and RSUs until five years after the arrangements vest, provided certain conditions are met.

Stock Options and RSUs: No change to the current tax treatment of stock options, SARs, or RSUs. The provision that would have taxed these arrangements at vest was removed from both versions of the bill before it was passed by House and Senate.

Determination of Cost Basis: No change from current law.  The Senate version of the bill would have required identification of securities sold to be on a FIFO basis but this is not included in the final bill.

– Barbara

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December 15, 2017

Pay Ratio Silver Lining and Things to Watch in 2018

In recent weeks I’ve blogged about some of the communication aspects of the upcoming CEO Pay Ratio disclosure (see Part I and Part II). As we close out the year, I couldn’t help but post one more blog on the disclosure (hopefully the last one for a while on this topic) but this time to step away from communications and focus on a silver lining.

Peter Kimball from Institutional Shareholder Services’ (ISS’) Corporate Solutions reminded me (via presentation at our DC/VA/MD chapter meeting) that both ISS and Glass Lewis have effectively stated publicly that CEO Pay Ratio disclosure will not impact either firm’s voting recommendations for the 2018 proxy season. It appears that both firms will collect the pay ratio data (the ratio of the CEO’s pay to that of the median employee) from proxy statements, but won’t be using that data as a factor in evaluating proxy proposals. At least that’s one thing companies won’t have to worry about this proxy season, particularly those that will find out that their pay ratios out of whack compared to those of peer companies. In fact, it’s possible that the pay ratio disclosure won’t be a factor at all – even in subsequent years, as both firms have effectively said they really don’t care about the median employee pay relative to CEO pay for their purposes.

Things to Watch in 2018

Looking forward to things to keep an eye on in 2018 and beyond from a shareholder interest perspective are:

  • Gender pay gap disclosure: Shareholders are increasingly interested in understanding whether a gender pay gap exists at a company and if so, the details of the gap and action plan to bridge it. In the U.K. this is now a required disclosure for companies with more than 250 employees, and the disclosure does include stock compensation. Will the U.S. follow suit? ISS reports an increase in shareholder resolutions requesting such information, and Kimball suggests it is something to have on the radar.
  • Board Compensation: ISS is taking increased interest in board compensation for companies that have consistently been overcompensating board members with little or no transparent/justifiable explanation. This will be an area of interest in 2018 for the firm. It appears that their increased attention won’t affect most companies, but those who have unusual or large board packages relative to peer companies should take note and be prepared to explain their such practices.

It seems there’s always something on the horizon, and plenty to keep an eye on in 2018.


December 12, 2017

The SSA Got It Wrong, Not Me

I’m terrible at math. Really, really bad at it. Like the Justin Timberlake character in the movie Friends with Benefits bad.  So, for most of my career here at the NASPP, posting the alert about the yearly change to the maximum wages subject to Social Security has been a challenge, because it requires me to multiply the maximum wages by 6.2% to figure out the maximum withholding. Easy enough for most people, but in a lot of years I get it wrong.

So I’ve implemented some controls. Always copy the maximum wage base from the SSA press release; never type it. Instead of using a calculator (not as reliable as you might think, due to human error typing in the numbers or transcribing them), always do the math in Excel and always copy the result from Excel to the alert. And have someone else check my work, even though that person usually thinks I’m nuts for needing help with this. And then I check it a bunch more times myself (because it turns out that a lot of people are bad at math).

But this year, dammit, I got it right. I wrote a blog about it and posted the alert and no one emailed to tell me I had it wrong.

And then…

The SSA announced that they were changing the maximum. Yep, on November 27, the SSA issued a press release announcing that the maximum wage base for 2018 that they had originally reported ($128,700) is wrong and that the correct wage base for 2018 is $128,400. So the maximum Social Security withholding for 2018 is $7,960.80 (pretty sure, but feel free to check my math).

The SSA says the reason for the change is updated wage data:

This lower taxable maximum amount is due to corrected W2s provided to Social Security in late October 2017 by a national payroll service provider. Approximately 500,000 corrections for W2s from 2016 resulted in changes for three items based on the national average wage: the 2018 taxable maximum, primary insurance amount bend points–figures used in the computation of Social Security benefits–and family maximum bend points. No other items based on national average wages were affected.

But, I don’t know. Sure, it’s a believable story, but I think maybe the SSA is just as bad at math as I am. Just kidding. I really have no reason to doubt their explanation, although I am a little surprised that just half a million corrections can move the wage base by $300. With over 123 million employees in the United States in 2016 (and that doesn’t even count part-timers), that must have been quite an error.

– Barbara

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December 7, 2017

Participant Year End Planning – Avoiding Advice, Providing Resources

Many of us in stock compensation do our best (either formally or informally) to avoid deep dive conversations with stock plan participants around “year end” logistics. The logistics I refer to mostly center on the dreaded concept of tax and/or financial planning. Fearful of meandering into the realm of giving financial or tax “advice,” the policy among stock administrators is quite often to be silent or provide limited information on those topics. Not surprisingly, this can result in a communication gap between the participant and the issuer – creating a void. Looking for ways to bridge that gap without putting on an adviser hat? I have some ideas.

Pre-Approve Communications that Include Details

For a while now, I’ve really liked the idea of a pre-approved FAQ. This is an FAQ that anticipates the most common questions participants are likely to ask (think lots of tax questions) and provides an answer that is approved by the company’s counsel and advisers. Getting ahead of the questions and answers allows time to craft a response that is likely to include some details that you may have been wary to discuss without first passing the question to advisers – something that can be time consuming and cause delays in communication when a question is asked on the spot. An advance FAQ is as simple as drafting a list of questions and answers, sending them to advisers to review, edit and approve, and then determining how to distribute these answers to employees. I’ve seen the entire FAQ distributed, and I’ve seen the FAQ answers used as piecemeal responses when someone asks a question. This approach can work well with year end questions, but can also work with other communications as well (think merger, large vesting event, ESPP offering/purchase, new equity roll out or new terms).

Third Party Resources

Another option in bridging the gap in participant year-end communications is to send employees to 3rd party resources for information. This seems like it would reduce the possibility of the administrator playing the role of potential adviser, and gives the participant more of what they seek. One website I often use when looking for participant oriented communications is And, lucky for stock plan participants everywhere, they’ve recently updated their year-end planning information for 2017 (Top Ideas for Year-End Planning With Stock Compensation – Part 1). What I like about this resource is that it gives a detailed lay-of-the land about the current and prospective tax landscape, as relates to stock compensation. It takes that information and creates a series of considerations and recommendations around year end. Additionally, there are alerts, editor notes, and even a chart that shows how changes in income can push a participant to a different tax bracket. This article is free (other content on the site is premium).

Finally, your own advisers likely work with many clients who offer stock compensation. It’s also worth an inquiry to find out if these advisers have prepared any communications of their own that may be participant friendly in addressing year-end questions.

The year will be over soon, and some of your participants are already contemplating whether they need to take any action with stock compensation before year-end, and mulling over the tax considerations. It’s time to arm them with as much information as possible.







December 5, 2017

Tax Reform: Scorecard Update

The Senate passed its version of the Tax Cuts and Jobs Act late Friday night (well, technically, it was very early Saturday morning in DC).  Here’s a comparison of where the final Senate and House bills stand with respect to the provisions that directly or indirectly impact stock compensation:

Individual Tax Rates

  • The House version of the bill has four individual tax rates: 12%, 25%, 35%, and 39.6%
  • The Senate version of the bill has seven individual tax rates: 10%, 12%, 22%, 24%, 32%, 35%, and 38.5%. The rates sunset after 2025, at which time they revert back to the current rates.
  • In both bills, the highest rate kicks in at $500,000 of income for single taxpayers ($1 million for joint filers)

Supplemental Withholding Rate

  • For employees who have received supplemental payments of $1 million or less during the year: 35% under the House bill; 22% under the Senate bill.
  • For employees who have received supplemental payments of more than $1 million during the year: 39.6% under the House bill, 38.5% under the Senate bill.

AMT (for Individuals)

  • Repealed under the House bill.
  • The Senate bill doesn’t repeal the AMT, but it does increase the exemption amounts and phaseout thresholds.

Corporate Tax Rate

  • Both bills reduce the corporate tax rate to 20%. The reduction doesn’t take effect until 2019 in the Senate bill.

Estate Tax

  • Both bills increase the estate tax threshold to about $11 million.
  • The House bill repeals the estate tax altogether after 2024.
  • The Senate bill sunsets the increased threshold after 2025.

Section 162(m)

  • Both bills expand the employees subject to 162(m) to once again include the CFO and to include anyone serving as CEO during the year (rather than only the CEO at the end of the year).
  • Under both bills, once individuals are covered employees, they remain covered employees for as long as they receive compensation from the company.
  • Both bills also eliminate the exception for stock options and performance-based pay.
  • The Senate bill includes a transitional provision that would exempt compensation paid via a written binding contract that was in effect as of November 2, 2017. This is broader than the transitional provision that was originally proposed, which would have only exempted arrangements vested as of December 31, 2016. There is no transitional provision in the House bill, so all prior awards would be subject to the new rules under that bill.

Qualified Equity Grants

  • Both bills include a provision that would allow employees in privately held companies to elect to defer tax on stock options and RSUs until five years after the arrangements vest, provided certain conditions are met.

Stock Options and RSUs Taxed at Vest

  • This provision has been removed from both bills, so there is no change to the tax treatment of stock options, SARs, or RSUs.

Determination of Cost Basis

  • The Senate bill still includes the provision I blogged about last week that requires taxpayers to sell securities of the same type on a FIFO basis (when held in the same account). This provision is not in the House bill.

What’s Next?

As you can see, there are lots of areas where these two bills don’t agree (and this is just the tip of the iceberg—there is even more disagreement in areas of the bills the don’t relate to stock compensation). All of these differences have to be reconciled before the bill can become law, so the bill now goes to a conference committee comprised of members of both the Senate and House that will resolve the differences between the two bills.

– Barbara

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