September 26, 2014

© 2013 Equity Administration Solutions, Inc. All rights reserved.

1

September 26, 2014

The Treatment of Equity

Awards Upon Termination


2Today’s Discussion

Death

• Beneficiary designations, exercise periods, accounting and tax issues

Leaves of Absence

• Types of leave, best practices, tax consequences , ESPP considerations

Divorce

• Tax issues, asset distributions Terminations

• Global plan issues, tax considerations


3Today’s Discussion

Retirement

• 409A, Tax issues, 162(m) Overall Process and System Considerations Best Practices


4Death Beneficiary

Issues

• Problems with beneficiary designation forms• Enforceability outside the US

• Employees failing to update their beneficiary designation

• Overriding state law

• Community property law, simultaneous death rule, killer statute

• Specifying beneficiaries in the plan document• Requires interpretation by plan administrator

• Does “children” include adopted children and step children?

• Meaning of “spouse” after U.S. v. Windsor

Considerations

• Automatic transfer to the estate• State in plan document that upon death options would be exercisable by

representative of the estate


5Exercise Period After Death

Considerations

• Allow time for probate process• 12-month exercise period after death is most common

• 51% of companies according to 2010 NASPP domestic survey

• Consider Section 409A limit when extending exercise period

• Extending in-the-money option beyond original term or 10 years after grant date may cause Section 409A to apply to option

• Modification• If change in terms, then Type I modification

• Calculate incremental expense for outstanding shares


6Vesting Acceleration

Performance awards

• Common provision for vesting upon death• Pro rata vesting based on portion of period completed

• Payout at the end of performance period based on actual performance

• 28% of companies according to 2010 NASPP survey

• Payout upon death based on an assumed performance level, or

• 16% of companies according to 2010 NASPP survey

• Modification• If change in terms, then Type III (Improbable to Probable)

• Calculate change in value for the accelerated shares only


7Accounting Treatment

Vesting or forfeiture upon death

• Impact on expense and estimated forfeiture• Forfeiture upon death

• Reverse expense

• Cancellation at end of performance period

• Nonattainment of performance condition – reverse expense

• Nonattainment of market condition – expense is not reversed

• Accelerated or pro rata vesting upon death

• Vesting per original grant terms – fair value is not remeasured

• Vesting due to modification – Type III


8Tax Consequences

NQSO Exercise By Estate

• Estate recognizes ordinary income equal to spread at exercise• Report gain on estate’s Form 1099-MISC (Box 3, not 7)

• Tax withholding and reporting • Not required if exercise occurs after the year of employee’s death

• If exercised in the year of employee’s death, only FICA is withheld

• Apply FICA wage cap using employee’s wages

• Report FICA/FUTA wages on employee's Form W-2


9Tax Consequences

Transfer of ISO or ISO shares to estate

• Transfer of option to estate• Does not disqualify ISO. Holding periods no longer applicable.

• No tax withholding or reporting by company at exercise by estate

• Gain upon sale by estate is capital gain

• Stepped up basis = exercise price + fair value of ISO at employee’s death

• Transfer of ISO shares to estate• Holding periods no longer applicable

• Gain upon sale by estate is capital gain

• Stepped up basis = exercise price + FMV of shares at employee’s death


10Tax Consequences

Transfer of ESPP shares upon death

• Transfer of ESPP shares upon death is a qualifying disposition• Ordinary income

• Lesser of discount at grant or spread at employee’s death

• Reported on employee’s final Form W-2

• Basis in shares for sale by estate is FMV of shares at employee’ death

Right to participate in ESPP ends upon death

• Unused contributions are refunded to estate


11Leaves of Absence

Types of Leave

• Protected vs. Discretionary Leaves

• Paid vs. Unpaid Leaves Effects on Equity Compensation

• Vesting• Continued vesting, suspension, or cancellation

• Grace period

• Exercisability and Share Release

• Continued Participation in ESPP


12Leaves of Absence for Global Plans

Differences globally

• Protected leaves

• Claims of indirect discrimination

• Paid vs. unpaid leaves

• Definition of disability Best Practices

• If feasible, allow vesting to continue• More than 85% of companies (2010 NASPP domestic survey)

• If suspend vesting, specify in grant agreement

• Maintain equity-related LOA policy at US parent level


13U.S. Tax Consequences

ISO

• Extended leaves• No impact if employee has guaranteed right to return to work

• No impact on ISO if leave is not longer than 3 months

• If both of the above do not apply

• Termination due to disability• Plan may allow exercise up to one year after disability termination


14Divorce – Tax Consequences

NQSO

• Transfer of NQSO pursuant to divorce is not a taxable event

• Ex-spouse recognizes ordinary income upon exercise• Report income and FIT withholding on Form 1099-MISC of ex-spouse

• Box 3, not box 7

• Income tax and FICA must be withheld• FICA is based on employee’s income, attributed to employee, and

reported on employee’s Form W-2 (but paid by ex-spouse)

• Report FICA/FUTA wages on employee’s Form W-2• Boxes 3 and 5 only, do not report in Box 1



ISO

• Transfer of Option• Transfer of ISO disqualifies the option from ISO treatment

• PLR 200737009, 9/14/07

• Community property state – portion of ISO owned by spouse

• Employee agrees to exercise ex-spouse’s ISO in the future if instructed

• Neither the division of ISO nor transfer of shares to ex-spouse will disqualify the ISO

• Transfer of Shares • Transfer of ISO shares does not disqualify shares

• Statutory holding periods still apply

• Report any ordinary income upon sale on Form 1099-MISC of ex-spouse



Restricted Stock

• Transfer of RSA pursuant to divorce• PLR 201016031, 4/23/10 *

• Non-community property state

• Divorce decree that employee transfers the shares upon vesting

• Shares remain in the name of the employee until vest

• Ex-spouse recognizes ordinary income upon vesting

• Tax withholding & reporting at vest similar to NQSO exercise


17Termination of Employment in General

Issues for Global Plans

• Forfeiture on termination• Right to retain and continue to vest in award

• Termination date (notice period, garden leave)

• Continued vesting after qualified termination (e.g., retirement)• Age discrimination issues

• Acceleration of taxable event

• Impact on Severance Pay• May need to include value of award

• Mitigate by separating equity awards and employment relationship


18Tax Issues

Grant agreements with retirement acceleration provision

• RSA• Income tax and FICA/FUTA at retirement eligible date

• RSU• FICA/FUTA at retirement eligible date

• FICA withholding

• FICA reporting: Form W-2, Boxes 3, 5 and 11

• Income tax at release date

• In no event can FICA/FUTA be later than income tax

• Example: Employee eligible for retirement on 12/1/13. Shares released on 1/15/14. FICA/FUTA using short-term deferral rule would be based on FMV at 1/15/14.


19Section 409A

RSU with retirement acceleration provision

• Section 409A not applicable to RSUs if payable upon vesting• Common mistakes in design

• Vesting upon retirement

• Vesting upon termination for non-compliant “good reason”

• If Section 409A applies (and for Phantom Stock)

• Releases/payout must be tied to pre-established dates or a permissible event, including “separation from service”, death and disability

• One release schedule for each permissible event

• Erroneous determinations of “separations from service” may result in Section 409A violations

• Must comply with short-term deferral rule


20Tax Issues

PSU with retirement acceleration provision

• FICA/FUTA accelerated at retirement eligible date only if payout is reasonably ascertainable• No FICA/FUTA if the award does not guarantee a minimum payout

• Awards with accelerated/continued vesting on retirement and minimum payouts should be closely examined to minimize unforeseen tax consequences


21Termination of Employment in General

PSU with retirement acceleration provision

• Rev. Rul. 2008-13 • If the plan or an agreement provides for vesting upon retirement,

• Exemption for performance-based compensation is not available, even if the accelerated vesting is never triggered

• Best Practice• If performance-based RSU vests upon retirement

• Limit payment to pro rata amount that would otherwise be payable on achievement of performance goals

• Delay release until end of performance period


22Process and System Considerations

• Data capture• Administration – change in employment status date, termination reason,

retirement eligible date, breaks in service (rehires), etc.

• Accounting – accounting dates, post-termination substantive services

• Processing changes in employment status• Effects on administration – vesting, exercise period, eligibility for plan

• Effects on taxation – withholding, reporting, timing, ISO status

• Flagging/relabeling administrative data for accounting purposes

• Vesting – due to modification vs. “qualified termination” trigger

• Cancellation – due to service condition vs. market condition

• Effects on accounting – expense acceleration, types of modification

• Documentation• Identify system limitations & document manual processes


23Best Practices

• Update employee data from HR system on periodic basis

• Reconcile changes of employment status between the systems

• Perform on monthly basis and before any major stock event

• Include effective date of change of status in reconciliation

• Develop and document process

• Transferring awards upon death & divorce

• Required documentation; notice to broker; SEC compliance

• How to handle late notifications of change in status

• Post-dated transactions report; notice to Finance

• Action upon discovery of inappropriate releases and exercises

• Notice to Legal


24Q & A Discussion

Nicole Dmitruchina, CEP

Consultant, Professional Services

+1-925-730-4229

[email protected]

Equity Administration Solutions, Inc.

Compliance with Confidence

www.easiadmin.com

Vince Alessi, CEP

Manager, Private Markets

+1-925-475-4398

[email protected]

Equity Administration Solutions, Inc.

Compliance with Confidence

www.easiadmin.com

mailto:[email protected]


http://www.easiadmin.com/


http://www.easiadmin.com/


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Thank You!

Questions?

September 26, 2014

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