We all know that life happens, and not in the way we always have planned. Certainly our current times are full of uncertainty. When it comes to stock compensation, things don't always transpire like they are supposed to either. That's why our stock plans have provisions that cover scenarios such as death, disability, and sometimes even divorce. We know these events might occur in our scope of working as stock administration professionals; yet, are we ready to put our best foot forward if and when the time comes? In today's blog I'll highlight some best practices in administering some of these live event scenarios.
It's not a pleasant topic, but, as one person put it: "nobody leaves this world alive." So what does happen when a stock plan participant dies? Here are a few practices to minimize the pain of dispersing the stock plan grants/awards to the employee's estate:
- Consider NOT Using Beneficiary Forms: There are pitfalls in using beneficiary forms. One main one is that employees often forget they exist, and don't alter them to reflect their true intentions. In some cases, these forms were filled out years and decades before they were needed, and by then marriages, children and divorces had occurred, altering how the employee preferred to handle his or her estate. Beneficiary forms can override next of kin estate laws, so if you are going to use these forms, be sure to come up with a mechanism to remind employees they exist.
- Ensure Proper Time Frame to Exercise Stock Options: Navigating estate management can be time consuming and tricky. The last thing you want to have happen is a stock option expire unexercised because the estate couldn't establish itself and execute the exercise in time. If your plan allows less than 6 months to exercise vested stock options post death, this is more than likely too short of a time frame. Consider offering at least 6 months (12 months is even better) in order to ensure enough time for the estate to exercise.
An employee goes out on disability leave - now what? Many companies take the approach of trying to stop vesting awards during long disability periods. While it may sound reasonable on paper, in reality it's tough to administer. First of all, how do you determine which type of disability results in paused vesting, and which does not? There are many types of short and long term disabilities. Second, how do you track the changes to vesting? Remember, when an employee goes out on leave, most often you do not know the exact return date, and many times it changes. Having to stay on top of open leaves, tracking end dates and adjusting vesting can become a nightmare. Many companies are now moving away from adjusting vesting for leaves of absences, including those related to disability.
One area I suspect many companies struggle with is tax withholding. Here are a few areas to inspect to ensure compliance with tax withholding requirements relative to divorce:
- FICA Withholding Takes into Account Employee's YTD: Did you know that when a non-employee ex-spouse exercises stock options, the amount of FICA to be withheld (yes, you need to withhold FICA) is calculated based on the employee spouse's wages and YTD FICA withholding? Even though the employee spouse may have had nothing to do with the exercise, the FICA calculation still is based on their wages/withholding. That means if the non-employee spouse would have owed $2,350 in FICA, but the employee had already paid $2,000 year-to-date in FICA withholding, then the non-employee spouse would only have $350 withheld on their transaction. In addition, the FICA needs to be reported on the employee spouse's Form W-2.
- Medicare: Medicare is withheld from the non-employee spouse, but is also reported on the employee spouse's W-2.
- Form 1099-MISC: The company needs to issue a 1099-MISC to the non-employee spouse, reflecting the transaction and income taxes withheld.
Final Words (no pun intended)
Lastly, while some events are more uncommon than others (death), other events will occur over and over again during your stock plan reign (divorce). If you lack a formal policy on these events, it's best to sit down with your internal business partners and develop a guidelines that will dictate how you will proceed. Particularly in divorce situations, where a variety of creative ways may be explored to divide up stock compensation, you'll want to have a consistent approach. You'll also want to know up front what the company can and can't do to support these scenarios. I highly recommend a divorce checklist that outlines company policy; it can be made available to employees so that they will know in advance how to approach the division of their stock plan benefits.
Whatever the scenario, it's best to put some parameters in place up front. This will save hours of heartache and headaches for all involved.
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