There's a lot to keep track of in stock compensation, and one of the challenges in working in this industry is figuring out how to stay abreast of new developments. Today I'll help with that by covering 3 things you should have on your radar as we get ready to close out 2014.
1. CEO Pay-Ratio Rules could (maybe, possibly) be adopted by the SEC before the end of the year. According to CompensationStandards.com's Broc Romanek, SEC Chair White recently said that it was her "hope and expectation" that the rules would be adopted by the end of the year. Will it happen or not? We don't know. It's certainly something that will kick into high gear once it happens. For fun, CompensationStandards.com also has a poll where visitors can weigh in and predict the timing.
2. FASB's Proposed Amendments to ASC 718. Yep, you read that right. Earlier this month the FASB announced several projects to explore alternatives to some of the more challenging areas of administering ASC 718. I'm going to keep you in suspense for the moment - next week's Blog will cover this in detail, and we also plan to have additional content on our website to help you figure out the potential impact to your organization. Stay tuned, and plan some time to get up to speed next week. For a sneak peek at the issue, read our new alert on the topic.
3. Cost-basis reporting communication nightmares are near. Beginning with shares acquired on or after January 1, 2014, brokers are no longer allowed to include the compensatory income recognized in connection with shares acquired under an option or ESPP in the cost basis reported on Form 1099-B. Instead, brokers are now required to report only the purchase price as the basis and employees will have to report an adjustment on Form 8949 to correct the gain or loss they report on their tax return. This means, in many cases, that the amount recorded on the 1099-B will be wrong. Since many brokers voluntarily reported the correct cost basis prior to 2014, and since the changes to that approach became mandatory for shares acquired on/after January 1, 2014, this means we are coming up to the first tax reporting period where the likelihood of inaccurate cost-basis on the 1099-B will be widespread. Many experts I've spoken to on this topic seem to agree that this is adding up to a participant communication nightmare. Companies need to get ahead of the curve on this one - if you've got option and/or ESPP transactions related to shares acquired in 2014, then you need to contemplate a robust communication effort to explain these changes to employees - pronto.
A note to companies who collect cash par value payments on restricted stock units and awards (there are not many of you, but some state laws do require companies to collect par value, and some companies do choose to do this in cash): There is a minute detail in the wording of the cost-basis regulations that may require you to seek input from your advisers as to whether or not cost-basis reporting is required for restricted stock unit/awards for which cash is the means of payment for par value (if you are using "services" to the company to satisfy par value, this does not apply to you). In essence, the cost-basis regulations say that "covered" securities are subject to the cost basis reporting. A "covered" security has been defined as:
"A share of stock in an entity organized as, or treated for Federal tax purposes as, a corporation, either foreign or domestic acquired for cash in an account on or after January 1, 2011."
Now, this has largely been interpreted to mean that shares not acquired using "cash" as the payment method are excluded from the cost-basis reporting requirements (thus referred to as "not covered" in most memos and educational materials I've seen). The "not covered" category would typically include restricted stock and restricted stock units, since, in many cases, there is no cash payment for the shares. However, since "cash" is a defining word in determining the applicability of cost-basis reporting requirements, it would seem that where a company is collecting a cash par value payment for restricted stock units/awards, then technically those awards would be considered covered securities and subject to cost basis reporting.
I have not heard anyone talking about how cash par value payments affect the "covered" vs. "non covered" status of these securities. The vast majority of respondents in the NASPP/Deloitte 2013 Stock Plan Design Survey reported using means other than cash to satisfy par value requirements. However, 5% of respondents did report collecting cash payments to satisfy par value. I don't have answers - this is likely a tiny nuance not yet explored by many advisers, since there are only a few companies who are collecting a cash par value payment. Nevertheless, I'm putting it out there that if your company is one of those that collect cash for par value, it's time to ask your advisers to come up with an answer on this one - well before the tax reporting process begins. We want everyone to smooth sail through this season of tax reporting!
For additional information on cost-basis reporting, see our Cost Basis portal.
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