The Details of "Administrative Convenience"

It's that time of the year when attention begins to focus on year-end tax reporting. Sometimes when it comes to tax reporting, the devil is in the details - there are many nuances that need to be monitored and addressed to ensure proper compliance with the tax code. One of those is the IRS's rule of administrative convenience, which allows companies to delay the collection of FICA taxes on certain transactions until a future date, on or before 12/31. In today's blog, I'm going to dive into the inner-workings of this rule.

What is the Rule of Administrative Convenience?

The rule of administrative convenience allows FICA withholding for certain transactions to occur by 12/31 of the year of the triggering event. This means that companies can delay the mechanics of actually withholding FICA until the end of the year, when many employees may have already met their annual FICA limit. In this case, no additional FICA withholding for the original transaction would be necessary and the company is off the hook in terms of having to figure out how to collect FICA on the shares. However, if the employee hasn’t met their FICA limit as year end approaches, then an appropriate amount of FICA will still need to be withheld. This is the time of year when the stock plan administrator should evaluate the deferral of any FICA taxes under the Rule, and work with Payroll to ensure any necessary withholding occurs on or before 12/31. I should note that while the focus of most examples of this rule centers around the last possible date - 12/31 - to comply, companies can withhold the deferred FICA on any prior date as well. It's just that for practical purposes, the "date" slated for collection is often near year-end, since that is a logical point in time when most employees who are going to max on on their FICA withholding for the year would be at that threshold, eliminating the need for any additional FICA withholding for the deferred event.

To What Types of Stock Compensation Does the Rule Apply?

The short answer is that the rule applies only to withholding of FICA on restricted stock units (RSUs). The long answer is below.

Both restricted stock units (RSAs) and restricted stock awards (RSUs) are subject to FICA taxes once the risk of forfeiture no longer exists (this usually occurs at vesting, but could occur be at the time of retirement eligibility - even if unvested). If the shares are not released to the employee at that time (let’s say that vesting will occur in the future, after the retirement eligible date, even though the risk of forfeiture no longer exists), then selling or withholding shares to pay for the FICA withholding is not an option. In these situations, the company must figure out how to withhold FICA (and other) taxes.

RSUs are considered to be a form of non-qualified deferred compensation and, therefore are taxed under a different section of the tax code than restricted stock and non-qualified stock options. This makes them eligible to rely on the Rule of Administrative Convenience.

RSAs are subject to tax under Section 83 of the tax code. As a result, both income taxes and FICA are due when the award is no longer subject to a substantial risk of forfeiture. This also means that the rule of administrative convenience is not available for this type of award.

ESPP and incentive stock option transactions are not subject to withholding or to FICA taxes, so the rule of administrative convenience also does not apply to shares acquired under these instruments.

Using the Rule, What FMV is Used to Calculate FICA?

I see this question come up regularly, usually as we creep towards year-end. This was answered in a recent NASPP webcast "Ask the Experts, Retirement and Retirement Eligibility":

"The rule of administrative convenience permits an employer to use any date, on or after the award vests (becomes nonforfeitable) but prior to the end of the year, to take the value of the award into account for FICA purposes. This rule of administrative convenience, for example, would allow an employer until December 31st as the date for all employees who vest during the course of the year. Bear in mind that the “taken into account” date will have the benefit, or detriment, of earnings/losses on the award that has become, effectively, deferred compensation. This is because under the nonduplication rule of FICA taxation, once compensation is taken into wages for FICA, further earnings/gains are not treated as FICA wages."