Suzie Bentley, CPP, NVIDIA Corp.
Christine Zwerling, CEP, Stock & Options Solutions
Gustavo Dalanhese, CEP, E*TRADE Financial Corporate Services, Inc.
October 9, 2015

Overview – Common equity awards and their
life cycles
◦
◦
◦
◦



Employee Stock Purchase Plans (ESPP)
Stock Options
Stock Appreciation Rights
Restricted Stock
Tips on streamlining processes
Working together!
Appendix of other interesting info…
Payroll
Provider
Stock
Admin
Human
Resources
Finance –G/L
and A/P
Legal /
Compliance
IRS, State
and Local
Agencies
Policies
Global / Sub
/ Other
Payrolls
Tax Dept
Payroll
Employees
Brokerage Firm
Payroll – U.S. &
Global
Administration
Financial
Reporting
System
Human
Resources
Finance G/L and A/P
Legal /
Compliance of
Plan
Securities
Exchange
Commission
Transfer Agent
Tax Dept
Stock
Admin
Employees

Purchase of Company Stock typically at a discount
Contributions collected through Payroll each pay
period, (calculated before tax, deducted after tax)
At the end of the purchase period, contributions are
used to purchase company stock at a discount
Common Terms:

Example: Look back and 15% Discount



◦ Grant Date / Offering Period Start Date / Purchase Period
Start / Enrollment Date
◦ Exercise Price, Strike Price, Grant Price, Purchase Price, FMV
◦ Exercise / Purchase
◦ Dispositions
◦ Qualified / Disqualified
◦ Section 423 ESPP / Non-423
◦ First Day (enrollment date) January 1; FMV $10/share
◦ Last Day (purchase date) June 30; FMV $12/share
 Purchase Price $10 * 85% =$8.50
40 Shares Purchased
$15
$20
15%
Purchase Price
Contribution Amount
$510
Enrollment Date
15% Discount
Purchase Date

Plan documents govern the program and
define:
◦ What compensation is eligible
◦ Who is eligible to participate
◦ Deadlines
 Enrollment
 Changes and
 Withdrawals
◦ Limits
 Purchase period (accumulator assistance)
 Calendar or Rolling 12 month-IRS $25,000 limit

READ the PLAN Document!

Plan documents govern and define:
◦ How contributions are made
 Lump Sum Contributions
 Payroll Deductions
◦ How contributions are calculated
 Gross pay
 Deducted from net pay
◦ Excess contribution distribution - refunded or
rolled forward
◦ Timing of refunds

Plan documents govern and define:
◦ Correction Type
 Over or Under contributed
◦ Correction Methodology
 Offering Period vs. Purchase Period
 Verify against plan document, discuss with Legal
Counsel and/or Administrator
 Collection from employee – lump sum
 “Catch-up Contribution” – through payroll
 Gain adjustment – payroll payment
 Others?
Considerations: Transferred or Mobile employees
‣ Employment changes
o
o
o
Termination
Ineligibility
Withdrawal
‣ Contribution rate changes
o
o
Process
Effective date
‣ 401(k) Hardship Withdrawal
‣ If 401(k) contributions cease due to hardship, so
should the ESPP contribution (not always known by
stock administration)


Contribution file to Stock Admin (Timing is critical!)
◦ Per pay period OR One Time (end of purchase period)
◦ Prior to purchase – Adjustments or Test Run
◦ Multiple payroll groups sending contributions – global program
◦ Currency conversion
◦ No reporting or tax in U.S. at purchase! Exception……Pennsylvania!
◦ Foreign Countries tax at purchase
Carry forwards
◦ Refunded
◦ Remain in the plan until the next purchase
 Who tracks?
 What happens with Terminations
 Participation?
 Company?

Pennsylvania
o
o
Report state income taxes at purchase
No Federal or Local tax due


Reporting Dispositions for 423 plans
◦ How often - monthly, quarterly, annually?
◦ Compensation income recognized on Disposition
of shares in U.S.
◦ Terminated employee Dispositions
ESPP sale income exempt from FICA/FUTA under
the American Jobs Creation Act of 2004
ESPP Dispositions –Disqualifying vs. Qualifying
DISQUALIFYING: Statutory holding period not met -
recognize income equal to the spread in the stock when the
shares were purchased versus when they were sold
2/1/13
Enrollment
2/1/14
2/1/15
2 Years
Purchase
1 Year
QUALIFYING: Statutory holding period met - recognize
lesser of
1) the discount offered under the plan as computed on the
participant's offering date, or
2) the actual gain on the sale (Sale Price minus Purchase Price)

Form W-2 reporting:
◦ Box 1 (Wages, tips, and other compensation)
◦ Box 16 (State wages, tips, etc.), if applicable
◦ Box 18 (Local wages, tips, etc.), if applicable

Just for fun!
◦ Regulation
§1.6041-2(a)(1)
requires
Form W-2 even if those payments are not
subject to withholding:
 Disqualified Disbursements (also receive Corporate
Tax Credit)
 Qualified Disbursements
 IRS Publication 15-B: Employer’s Tax Guide to
Fringe Benefits
Source: Equity Edge Online(r). Hypothetical data for illustrative purposes only.


Stock Option
◦ Contractual right to purchase shares of the company's
stock
 A specified number
 A specified price (the exercise price) and
 A specified period of time
 Value grows as stock price appreciates
◦ Two Types
 Non Qualified (NQ)
 Qualified (ISO – Incentive Stock Option)
Stock Appreciation Right (SAR)
◦ Only pays out the appreciation in the stock price

Definitions
◦ Grant / Award
 Grant Date, Date Of Grant, Award Date
 Exercise Price, Strike Price, Option Price, Grant
Price, Purchase Price, FMV
◦ Vest
◦ Exercise / Purchase
 Cash
 Cashless / Same-Day Sale
◦ Disposition / Sale
 Qualified or Disqualified
 Section 421 ISO

Payroll usually doesn’t have to do anything!
◦ UNLESS…
 Exercise of unvested shares – Early Exercise
 Granted at a discount
 Look out for 409A!

NQ (non qualified) or SAR
◦ Recognize compensation when shares are Exercised
 Market Value minus Exercise price
◦ Form W-2 reporting:






Box
Box
Box
Box
Box
Box
1 (Wages, tips, and other compensation)
3 (Social Security wages), if applicable
5 (Medicare wages and tips).
12, with code V
16 (State wages, tips, etc.) if applicable
18 (Local wages, tips, etc.) if applicable
NOTE: Taxes withheld should be aggregated with employees’
other withholdings for the year and reported in Boxes 2, 4, 6, 17,
and 19, as appropriate


No Tax Withholding or Reporting at Exercise
UNLESS…
◦ Pennsylvania
 Then the state income taxes are due (withheld and
reported) upon exercise

May be subject to tax at sale
(disposition)
◦ Meet required statutory holding periods
(qualified)
 No reporting or withholding obligations at sale
◦ Do not meet the required statutory holding
period (disqualified)
 The compensation income recognized is equal to the
lesser of:
 1) the spread at exercise (difference between the
market value of the stock at that time and the exercise
price) or
 2) the actual gain realized on the sale (the difference
between the sale price and the exercise price)

Restricted Stock (RSA) / Restricted stock
units (RSUs)
◦ Outright grant of company stock to employees or other
service providers
◦ Known as “Free Shares”
◦ No cost to grantee

“Restricted"
◦ Subject to a vesting schedule
 Time Based or Performance Based
 May be governed by other limits on transfers or sales
imposed by the company

Payroll usually doesn’t have to do anything!
◦ UNLESS…
 IRC Section 83(b) election filed, then taxed
immediately.
 Only available for RSA

Compensation income reported at
vest
◦ Market value
◦ FIT / FICA / FUTA taxable at vest
 unless the RSU is subject to deferral
◦ Not reported in Box 12
◦ May voluntarily report income in Box 14
(Other)
Source: Equity Edge Online(r). Hypothetical data for illustrative purposes only.

IRS requires tax receivables in excess of
$100,000 per day to be deposited within one
business day.
◦ All receipts combined from all sources
◦ Stock admin primary sources are stock option
exercises and restricted stock vestings
 Deposit date of T+1 for non broker stock option
exercises
 Deposit date of T+4 for stock option transactions via
broker
 Deposit date of V+1 for RSUs and RSAs

Calendar “known” transactions
◦ Stock administration knows when RSU vest
◦ Immediate notification for stock option exercises
 Failsafe process to confirm/deny daily or periodic
activity
‣ If late 5 days or fewer, penalty is 2% of the tax due
‣ If late 6 to 15 days, penalty is 5% of the tax due
‣ If more than 15 days late, penalty is 10% of the tax due
‣ Individuals in the company that are responsible to
make these payments can also be found to be liable
for the tax
‣ If non-payment is deemed to be intentional,
individuals can be held criminally liable
32


Same-day or close proximity transactions
Example 1
Transaction 1 - NQSO Exercise - 04/20/2015
Transaction Details
Exercise Confirm to Employee
YTD Supplemental Income:
$105,000.00
YTD Total Income:
YTD FICA:
YTD Medicare:
Taxable Income at Exercise:
FICA to Withhold:
Medicare to Withhold:
$105,000.00 Federal (25%):
$6,000.00
$6,510.00 State (10.23%)
Social Security (6.2% subject to annual
$1,522.50 limit):
Medicare (1.45% for wages up to
$24,000.00 $200,000):
$744.00 Total Withholdings:
$348.00 Net Amount to Employee:
This transaction will bring Social Security
to annual maximum ($6,510 previously
withheld + $744.00= $7,254.00)
$24,000.00
$2,455.20
$744.00
$348.00
$9,547.20
$14,452.80
Settlement to occur
T+3 (4/23/15)
Payroll Deposit to
occur T+4 (4/24/15)


Same-day or close proximity transactions
Example 2
Transaction 2 - NQSO Exercise - 04/20/2015
Transaction Details
Exercise Confirm to Employee
YTD Supplemental Income:
$129,000.00
$4,300.00
YTD Total Income:
$129,000.00 Federal (25%):
$1,075.00
YTD FICA:
$7,998.00 State (10.23%)
$439.89
YTD Medicare:
Social Security (6.2% subject to annual
$1,870.50 limit):
Taxable Income at Exercise:
FICA to Withhold:
Medicare to Withhold:
Medicare (1.45% for wages up to
$4,300.00 $200,000):
$0.00 Total Withholdings:
$62.35 Net Amount to Employee:
Social Security
maxed out in
Transaction 1
$0.00
$62.35
$1,577.24
$2,722.76
Settlement to occur
T+3 (4/23/15)
Payroll Deposit to
occur T+4 (4/24/15)


Same-day or close proximity transactions
Example 3
Transaction 3 - RSU Vest - 04/20/2015
Transaction Details
Vest/Release Confirm to Employee
YTD Supplemental Income:
$133,300.00
$950,000.00
YTD Total Income:
$133,300.00 Federal (25% and 39.6%):
$249,661.80
YTD FICA:
$7,054.00 State (10.23%):
$97,185.00
Social Security (6.2% subject to annual
$1,932.85 limit):
YTD Medicare:
Taxable Income at Vest:
FICA to Withhold:
Medicare to Withhold:
+
$0.00
$950,000.00 Medicare (1.45% for wages up to $200,000):
$0.00 Total Withholdings:
$21,724.70 Net Amount to Employee:
YTD income surpasses $200,000
(Medicare threshold) and $1,000,000
(Supplemental Income threshold); part
of transaction to be taxed at 2.35%
Medicare rate and 39.6% Federal rate.
Medicare:
($66,700.00
taxed at 1.45%
and $883,300.00
taxed at 2.35%)
$21,724.70
$368,571.50
$581,428.50
Federal:
($866,700.00
taxed at 25% and
$83,300.00
taxed at 39.6%)


Payroll data entry needs to match stock
system and employee confirmations
Example Data Entry Sequence
#1
Entered
First
#2
Entered
Next
#3
Entered
Last
‣ Both need to understand:
Who to tax
o Employees vs. non-employees, jurisdictional
requirements
o What tax rates to apply
o Income reporting and tax withholding triggers
o Timing of reporting transactions
o
‣ Solutions:
o
o
o
o
o
Regular calls/meetings or trainings
Multiple states/jurisdictions
Employees and former Employees
Create a matrix of taxability of various transactions
Include in Year End Payroll Planning/Reconciliation
Prepare matrices to explain taxability and timing to Payroll

Transactions by former employees are generally subject to the same
withholding and reporting requirements that apply to current
employees.
◦ Under Regulation §31.3401(a)-1(a)(5) any payment for services constitutes wages
regardless of whether or not the employment relationship exists at the time the
payment is made:

“Remuneration for services, unless such remuneration is specifically excepted by the
statute, constitutes wages even though at the time paid the relationship of employer
and employee no longer exists between the person in whose employ the services were
performed and the individual who performed them.
◦ Thus, excluding the exceptions described below, compensation income recognized
by a former employee should be reported on a Form W-2 and should be subject to
withholding.

W-2s need to be prepared for terminated employees and may need to
be reactivated in payroll system
◦ Address changes



See if changes can be forced through company (e.g. broker doesn’t unilaterally change
in their own system)
Explore messaging ability on vendor sites to remind former employees to change their
address if necessary
Advance communication about transactions for terminated employees
◦ Develop batch process for communicating post termination activity to Payroll
◦ Don’t wait until the very end of the year = during crunch time
Thank you and please remember to complete
your evaluation for this session.
Christine Zwerling, CEP
Suzie Bentley, CPP
Director , Stock Admin & 401(k) Manager – Stock Administration
Twitter, Inc.
NVIDIA Corp.
czwerling@twitter.com
sbentley@nvidia.com
510.735.4487 tel
408.566.6591 tel
Gustavo Dalanhese, CEP
Senior Account Executive
E*TRADE Financial Corporate Services, Inc.
Gustavo.dalanhese@etrade.com
801.556.7120 tel
The information presented herein is of a general nature and has been simplified for presentation to a large
audience. It is not a complete discussion of all aspects of the laws, rules, regulations, standards, and principles
that govern equity compensation plans. The contents are neither designed nor intended to be relied upon, and
should not be considered, as legal, tax, or accounting advice. Your specific situation may involve circumstances
that cause the laws, rules, regulations, standards and principles described herein to apply differently. Consult your
own advisors before deciding what, if any, course of action to take in your own particular situation.