Risky ESPP Business: Avoiding and Mitigating Risk in 423-ESPPs

Transcription

1 Risky ESPP Business: Avoiding and Mitigating Risk in 423-ESPPs Carrie Kovac, CEP, Director, Finance, Symantec (US) Sarah Roberts, CEP, Equity Compensation Consultant, Stock & Option Solutions, Inc. (US) Alison Wright, Partner, Baker & McKenzie LLP (US)

2 Disclaimer The following discussion and examples do not necessarily represent the official views of Stock & Option Solutions, Inc., Baker & McKenzie LLP, or Symantec, Corp., with respect to any of the issues addressed. Moreover, this presentation and the views expressed by the individual presenters should not be relied on as legal, accounting, auditing, or tax advice. The outcome of any individual situation depends on the specific facts and circumstances in which the issue arises and on the interpretation of the relevant literature in effect at the time. Anyone viewing this presentation should not act upon this information without seeking professional counsel and/or input from their advisors. 2

3 Agenda Disqualify Whole Plan Disqualify Individual s Purchase Disqualify Some Shares Other Consequences Just use your best judgment. We trust you. - Joel s parents before they leave town. 3

4 Notes on ESPP Risks None of us has EVER heard of an IRS audit of a 423 qualified ESPP None of us are aware of ANY enforcement action re: 423 qualfied ESPP violations That said, better to avoid the situation than test the boundaries 4

5 ESPP Trends Does your company have an employee stock purchase plan (ESPP)? (n=581) 48% 52% Yes No NASPP / Deloitte 2011 Domestic Stock Plan Administration Survey 5

6 ESPP Business Objectives 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 93% Indicate the objectives of this plan. (Check all that apply.) 64% 59% 47% 36% 32% 30% 13% NASPP / Deloitte 2011 Domestic Stock Plan Administration Survey

7 Length of Offering Period 70% 60% 50% 40% 30% 60% 53% All Companies High-Tech Companies 20% 10% 0% 13% 10% 11% 9% 1% 2% 15% 9% 8% 2% NASPP / Deloitte 2011 Domestic Stock Plan Administration Survey

8 It seems to me that if there were any logic to our language, trust would be a four letter word. DISQUALIFY ENTIRE PLAN

9 Refresher on Inclusion / Exclusion of Employees Covered Employees Revised 423 regulations clarify that employers may exclude: Employees who have been employed less than 2 years Employees whose customary employment is 20 hours or less per week or not more than 5 months in a calendar year Highly Compensated Employees (HCE) Compensation above a certain level (for 2012, $115K) or Section 16 officers Foreign employees, if prohibited under laws of jurisdiction or if compliance with the laws of the jurisdiction would violate 423 Exclusions must be applied in an identical manner to all employees eligible to participate in that particular offering 9

10 Missing an Enrollment Form Why does it disqualify entire plan? Requirement that all eligible employees be allowed to participate How do you avoid? ESPP Online Enrollment Records should be retained at least 3 years Confirm enrollment by logging into system / receipt of confirmation Confirmations of enrollment via Even if they have not enrolled, you have not enrolled (even if you use online enrollment?) Require them to respond/correct within X days or enrollment stands BEFORE enrollment closes? If paper forms, stamp date/time, initial and give employee a copy Make sure fax machine is current Be specific about enrollment deadline (time zone) 10

11 Data on ESPP Online Enrollment NASPP / Deloitte 2011 Domestic Stock Plan Administration Survey Which of the following actions are employees able to perform electronically with respect to your ESPP? 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 88% 77% 71% 69% 62% 59% 17% 4% 11

12 Solves Other Problems Too Missing Enrollment Form Terminated and rehired, not included in purchase Missed changes to contribution rates 12

13 Determination of Grant Date Establishing grant date is important for Determining compliance with requirements under section 423 Is discount > 15%? Lookback only works if grant date is first day of offering Determination of whether 2 year holding period is met $25K limitation is based on grant date Date of grant is first day of offering if: Designate max # of shares that may be purchased by each participant or Establish a formula that on first day of offering, max number of shares that may be purchased by each participant If maximum number of shares is not fixed or determinable on the first date of offering, purchase date = grant date Lookbacks not feasible Holding periods will not start until purchase date 13

14 Lookback Plans 34% The discount is applied to the fair market value at: 2%1% Lower of beginning/end of offering/purchase period End of offering period 62% Beginning of offering period Other NASPP / Deloitte 2011 Domestic Stock Plan Administration Survey 14

15 Purchase Limits How does the ESPP define the maximum amount of stock that can be purchased (excluding any statutory limits such as the $25,000 limitation required under Section 423)? (Check all that apply.) (Section 423 Plan) 17% 0% 23% 60% Number of shares Percent of salary per year Dollar amount Other 22% NASPP / Deloitte 2011 Domestic Stock Plan Administration Survey No limitations other than statutory requirements 15

16 Allowing Inconsistent Contributions Violates equal rights and privileges requirement Disqualifies entire offering Contribution rules must be applied consistently If bonuses are allowable income for one group of employees, must be allowed for all What about commissions? (Often only available to small subset of the employee population) Bonuses but not overtime? How to avoid Clearly define eligible pay in the plan Work with payroll to determine eligible pay codes Have payroll review source data from payroll system to ensure no ineligible pay types included 16

17 Compensation Types Allowed 100% 80% 60% 40% 20% 0% What forms of compensation can be contributed to the plan? (Section 423 Plan) 100% 58% 53% 47% 5% NASPP / Deloitte 2011 Domestic Stock Plan Administration Survey 17

18 Failure to Obtain Necessary Approvals? Necessary Approvals Shareholder Approval Approve max number of shares issued under plan Approve corporations or class of corporations eligible to participate Within one year before or after time plan is approved by BOD Without proper approvals, plan is not qualified Don t forget to get approvals for new subsidiaries Via acquisition, etc. 18

19 Individual Purchase Inconsistent with Plan Terms If eligible employee granted an option that is inconsistent with terms of the ESPP or offering, and does NOT receive another qualifying option: Can disqualify whole plan! Okay if option terms qualify, but option is administered in such a way that it violates terms Example 4 from regs ( (a)(5)): Option terms for eligible employees say price will be 90% of FMV, but purchase allowed at 85% for one employee. Only that option is disqualified. 19

20 Multiple Offerings Allowed under Same Plan One or more offerings may be made under a single plan Useful for non US subs Parent corporations may designate one or more subsidiaries that will participate in a particular offering Not all subs need be included Offerings may be consecutive or overlapping Terms need not be same as long as each offering and terms of plan satisfy rules Cannot use two offerings for a single corporation i.e. May have a separate offering for each corporate entity or for a group of corporate entities, but.. Cannot have some employees (e.g. US) of same corporate entity in one offering and other employees (e.g. foreign) in a different offering Take care regarding corporate versus branch status 20

21 You've done a lot of solid work here, but it's just not Ivy League, now is it? - Interviewers discussing Joel s work DISQUALIFY INDIVIDUAL S PURCHASE

22 Allowing Ineligible Participants to Participate Entire individual s purchase disqualified Taxed at grant (Includes non employees because of late termination notifications) How to Avoid Strive to exclude only a limited set of employees Clearly outline exclusion policy (and how to determine excluded employees via available data) and request confirmation/sign off Checklist for Payroll before they send contribution files Export from HR / Payroll database Compare to same export from last quarter Compare to attributes from payroll, other systems of record 22

23 Allowing Ineligible Participants to Participate How to Avoid (continued) Recon Process for Termination (HR to?) send list of employees term ed / hired to each manager, ask for confirmation / missing employees Manager of terminating employee log on and enter termination Who is responsible? HR or People Manager? Prep work is key! Start prepping at least a quarter in advance! 23 23

24 Leave of Absence Mishandling Review: Leave of absence = employment terminates after 3 months Unless employee has guaranteed right to continued employment by statute or contract FMLA or USERRA Issue: Allow Employees on Extended Leave to Purchase when they should be excluded Disqualifies their purchase tax due at purchase How to Avoid: Export from HR database Recon Process for Termination (HR to?) send list of employees on leave this quarter to each manager, ask for confirmation/missing employees Prep work is key! Start prepping at least a quarter in advance! 24

25 Exceeding the $25,000 limit If participant exceeds $25K limit, all shares are non qualified Taxed at purchase How to avoid Using a system? Run a test purchase before EACH purchase and confirm calculation is correct Export to Excel and confirm using steps below Even if nothing has changed Using a spreadsheet? One row per participant $25K/Grant Date FMV = Share Limit Add unused portion of $25K limit from last year (if applicable) Subtract shares purchased earlier THIS year 25

26 Exceeding the $25,000 limit How to avoid Stop contributions at $25K limit, if possible Even if plan says 1% to 10% (or whatever) Suspend contributions without withdrawing participant Many payroll systems can support this Avoids overlimit AND avoids refunds/ disgruntled employees Somewhat controversial Should stock / payroll take this much responsibility 26

27 $25K Limit Monitoring/Notification Do you monitor ESPP participants' progress towards the $25,000 limit or other plan limits and notify them when their contributions have reached an amount that is likely to cause them to exceed this limit? (n=265) Yes, via paper format for all ESPP participants 47% 4% 35% Yes, electronically for all ESPP participants 14% NASPP / Deloitte 2011 Domestic Stock Plan Administration Survey Yes, for a few participants (e.g., executives or other high-level employees) No, we do not provide this notification for any ESPP participants 27

28 Reduce to 0%? 31% 8% Are participants permitted to reduce their contribution rate to 0% without withdrawing prior contributions? (Section 423 Plan) 2% Yes, under any circumstances 59% Only if purchase likely to exceed statutory or plan limitation Not under any circumstances Other NASPP / Deloitte 2011 Domestic Stock Plan Administration Survey 28

29 It was great the way her mind worked. No guilt, no doubts, no fear. None of my specialties. Just the shameless pursuit of immediate gratification. What a capitalist. DISQUALIFY SOME SHARES

30 Running out of ESPP Shares / Oversubscribed If you run out of ESPP Shares, you must prorate the number of shares purchased Only shares already approved by shareholders qualify for preferential tax treatment If you allow purchase of more shares than are approved, issues abound How to avoid? Project share usage for next 2 to 3 years Factor in new hires and forfeiture rate Ensure management has plans to request shareholder approval of ESPP shares WELL in advance (12 to 18 months?) Set reasonable share limits as well use max to calculate possible max (if all increase contributions?) 30

31 ESPP Share Usage Projections 31

32 Exceeding Plan-specific Limits If participant exceeds plan limit, shares over limit are non qualified Taxed at purchase How to avoid Using a system? Run a test purchase before EACH purchase and confirm calculation is correct Export to Excel and confirm using steps below Even if nothing has changed Using a spreadsheet? One row per participant Apply your own share limit Strive for simplicity in the limit Example: 2,000 shares per purchase NOT 4,000 shares per year Easier to admin, less error prone Easier to communicate 32

33 OTHER ISSUES Sometimes you just gotta say What the Heck

34 No Offering Carryover Other than Fractional Shares Be careful about allowing carryover of withheld but unused amounts from one offering to another Have to allow other employees ability to make direct payments of an equal amount (less any amount they carried over) Carryover for fractional shares okay 34

35 Failed Disposition Tracking and Reporting Tracking Dispositions Disqualifying 2 years from enrollment, 1 from purchase Qualifying forever Why? Don t report it on the W 2, not entitled to the corporate tax deduction One company decided that if employees did not complete the survey, they would assume disposition and report the income and take tax deduction = HUGE penalty from IRS Reasonable Approach Require participants to hold shares in designated broker account (at LEAST while employed, perhaps after) Track / survey former employees for 5 years after termination? Forego tax deduction (confirm with CFO!) 35

36 Broker Usage Are ESPP participants (other than executives) required or encouraged to use selected brokerage firms? (Section 423 Plan) 11% Participants are required to use specified broker(s) 10% Participants are encouraged, but not required to use specified broker(s) 79% No brokerage arrangements have been made for participants NASPP / Deloitte 2011 Domestic Stock Plan Administration Survey 36

37 Restricting Transfers? For your company's Section 423 plan, if dispositions are reported to your company by brokers, are participants restricted from transferring shares acquired under the plan to a brokerage firm where your company does not have this reporting arrangement? 31% Yes No 69% NASPP / Deloitte 2011 Domestic Stock Plan Administration Survey 37

38 Failure to Comply with Section 6039 Requirements Participant statements by 1/31 IRS reporting By 2/28 if paper (only for < 250 transactions) By 3/31 if electronic (available to all, required if > 249 transactions) Transactions that trigger reporting First Transfer Usually purchase = transfer, if deposited into brokerage account Penalties increased by Small Business Jobs Act of 2010 (H.R. 5297) Failure to file with IRS Late by 30 days or less: $30 per form; $250,000 max Late by >30 days but filed by August 1: $60 per form; $500,000 max Filed after August 1 or not at all: $100 per form; $1,500,000 max Penalty for intentional disregard starts at $250 per form, no maximum 38

39 Closing Thoughts

40 Sarah Roberts, CEP Equity Consultant Bus: (408) Alison Wright Partner Bus: (415) Carrie Kovac, CPA, CEP Director, Finance Bus: (650) Contact Information 40