Understanding Stock Administration Related to PAYROLL

Suzie Bentley, CPP, NVIDIA Corp. Christine Zwerling, CEP, SalesForce.com Gustavo Dalanhese, CEP, E*TRADE Financial Corporate Services, Inc. October 6th, 2016

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Agenda

• Overview – Common equity awards and their life cycles

• Restricted Stock

• Employee Stock Purchase Plans (ESPP)

• Tips on streamlining processes

• Working together!

• Appendix of other interesting info…

• Taxability Matrices

• Stock Options / Stock Appreciation Rights

• Terminated Employees

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A day in the life of Payroll…

Payroll Global / Sub

/ Other Payrolls

Legal / Compliance

Policies

Human Resources

Payroll Provider

Stock Admin

Tax Dept

Finance –G/L and A/P

IRS, State and Local Agencies

Employees

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A day in the life of Stock Admin…

Stock Admin

Securities Exchange

Commission

Legal / Compliance of

Plan

Human Resources

Administration

System

Brokerage

Firm

Payroll –

U.S. & Global Transfer

Agent

Financial Reporting

Finance - G/L and A/P

Tax Dept

Employees

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Restricted Stock

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Restricted Stock What is it?

• Restricted Stock (RSA) / Restricted stock units (RSUs)

• Outright grant of company stock to employees or other service providers

• 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

• Performance-based Vesting

• PSUs

• Vest based on achievement of a goal

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Restricted Stock What is it?

• Restricted Stock (RSA) / Restricted stock units (RSUs)

• Outright grant of company stock to employees or other service providers

• 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

• Performance-based Vesting

• PSUs

• Vest based on achievement of a goal

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Restricted Stock - Grant

• Payroll usually doesn’t have to do anything!

• UNLESS…

• IRC Section 83(b) election filed, then taxed immediately.

• Only available for RSA

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Planning for Restricted Stock Vesting Event • Decisions

• How are income and taxes calculated – equity system or payroll?

• DATES!

• Vesting date

• Income receipt date

• Taxes due date

• How are tax dollars covered (work with treasury)

• Selling shares

• Withholding shares

• Cash from employees

• Draft schedule / calendar A hot payroll is a good thing, right?

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Restricted Stock - Lapse

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Restricted Stock - Lapse

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Restricted Stock Unit Vesting • 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)

• YTD Pay Summary

• Mobile Employee Compensation

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2016 W-2 tax reporting

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Timely Tax Deposits

• 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 14

Penalties for Late Remittance

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‣ 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

Working with Payroll – Streamline Processes

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Streamlining Processes • Same-day or close proximity transactions • Example 1

This transaction will bring Social Security to annual maximum ($6,510 previously withheld + $837.00= $7,347.00)

Settlement to occur T+3 (4/15/16) Payroll Deposit to occur T+4 (4/18/16)

Transaction 1 - NQSO Exercise - 04/12/2016

Transaction Details Exercise Confirm to Employee

YTD Supplemental Income: $105,000.00 $24,000.00

YTD Total Income: $105,000.00 Federal (25%): $6,000.00

YTD FICA: $6,510.00 State (10.23%) $2,455.20

YTD Medicare: $1,522.50 Social Security (6.2% subject to annual

limit): $837.00

Taxable Income at Exercise: $24,000.00 Medicare (1.45% for wages up to $200,000): $348.00

FICA to Withhold: $837.00 Total Withholdings: $9,640.20

Medicare to Withhold: $348.00 Net Amount to Employee: $14,359.80

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Streamlining Processes • Same-day or close proximity transactions • Example 2

Social Security maxed out in Transaction 1

Settlement to occur T+3 (4/15/16) Payroll Deposit to occur T+4 (4/18/16)

Transaction 2 - NQSO Exercise - 04/12/2016

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: $7,347.00 State (10.23%) $439.89

YTD Medicare: $1,870.50 Social Security (6.2% subject to annual

limit): $0.00

Taxable Income at Exercise: $4,300.00 Medicare (1.45% for wages up to $200,000): $62.35

FICA to Withhold: $0.00 Total Withholdings: $1,577.24

Medicare to Withhold: $62.35 Net Amount to Employee: $2,722.76

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Streamlining Processes • Same-day or close proximity transactions • Example 3

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%)

+

Federal: ($866,700.00 taxed at 25% and $83,300.00 taxed at 39.6%)

Transaction 3 - RSU Vest - 04/12/2016

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: $7,347.00 State (10.23%): $97,185.00

YTD Medicare: $1,932.85 Social Security (6.2% subject to annual

limit): $0.00

Taxable Income at Vest: $950,000.00 Medicare (1.45% for wages up to $200,000): $21,724.70

FICA to Withhold: $0.00 Total Withholdings: $368,571.50

Medicare to Withhold: $21,724.70 Net Amount to Employee: $581,428.50

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Streamlining Processes • Payroll data entry needs to match stock system and employee

confirmations • Example Data Entry Sequence

#1 Entered First

#2 Entered Next

#3 Entered Last

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Streamlining Processes • Payroll data entry needs to match stock system and employee

confirmations • Example Data Entry Sequence

#1 Entered First #2

Entered Next

#3 Entered Last

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ADP Rates

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RSU: Reconciling W-2 with Broker 1099

Participant Communication - RSU

Employee Stock Purchase Plans (ESPP)

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ESPP – What is it?

• Plan to allow employees to purchase company stock at a discount through payroll deductions

• Contribution rate and changes collected by Equity

• Contributions collected and tracked by Payroll each pay period

• At the end of the purchase period, Payroll delivers contribution amounts to Equity who purchases shares of company stock at a discount

• Program governed by: • Plan, prospectus, and enrollment forms

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Example – six month purchase periods, one year offering period with a look back

The $10 price from the beginning of the offering period would be used in both purchases as it is the lowest price. Apply the 15% discount, and you’d purchase shares at $8.50!

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First day of the offering period – November 15, 2015

Stock price = $10

Oct

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Dec

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End of purchase period – May 15, 2016

Stock price = $12 Purchase price = $8.50

End of purchase period – November 15, 2016

Stock price = $15 Purchase price = $8.50

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ESPP Administration • Enrollment

• Open enrollment – typically 2-6 weeks before enrollment deadline

• Equity – collects enrollment elections and communicates to payroll

• Payroll – imports election amounts and for some companies, control contribution limits

• $25K limit = 15% discount is $21,250

How can the employees see how

much they’ve contributed to the

ESPP?

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ESPP Administration • Decisions:

• How will contribution rates and limits be communicated to payroll? Format?

• How is $25K limit applied – ongoing?

• What is considered eligible compensation?

• Who is eligible to participate?

• Part-time, non-employees, seasonal, highly compensated, executives…

• Which Pay Dates are included in each purchase period?

• ESPP purchase period 1/15/16 – 6/15/16

• (a) Pay period 12/27/15 - 1/9/16 pay date 1/15/16

• (b) Pay period 1/10/16 - 1/23/16 pay date 1/29/16

• (c) Pay period 5/15/16 - 5/28/16 pay date 6/3/16

• (d) Pay period 5/29/16 - 6/11/16 pay date 6/17/16 29

ESPP Administration • During period

• Equity – collect changes to contribution rates and communicates to payroll

• Types of changes – governed by plan.

• Withdraw, suspend, change

• Withdraw – ends participation and gets refund (don’t forget any “carry forward” from prior purchase)

• Suspend – contribution rate goes to zero

• after purchase either withdraw or pop back up to original rate (see plan document)

• Change – change contribution rate

• limit to # of changes?

• limit to type of change – decrease only?

• Becoming ineligible or terminating

• 401(k) Hardship Withdrawal

• If 401(k) contributions cease due to hardship, so should the ESPP contribution (not always known by stock administration)

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ESPP Administration • Decisions:

• How are changes communicated?

• How often are changes communicated and applied?

• Who tracks # of changes?

• Who tracks decrease only changes?

• Who handles what happens after suspend event?

• How are transfer employees treated?

• When are contribution amounts delivered to equity?

• How are amounts audited?

Why are there negative

contributions on the file? 31

ESPP Administration • After purchase

• Dollars used for purchase, journal entries

• What happens to unused ESPP contributions?

• Carried forward to next purchase

• Refunded upon termination

• Refunds

• After each purchase

• Upon termination

• Meet $25K maximum

• New deduction codes (accumulators)

• special calculation

• pay statement display

• Purchase cycle may cross calendar years 32

ESPP Administration • Decisions:

• Who makes journal entries for purchase?

• How are carried forward contributions tracked?

• Timing for refunds to be made?

How do you track the carry forward

amounts?

When will employees receive their refund?

Tomorrow?

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ESPP Administration • Misc planning issues

• Contribution file to Stock Admin (Timing is critical!)

• Per pay period OR per purchase period (once)

• 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!

• Pennsylvania state income taxes at purchase

• No Federal or Local tax due

• Foreign Countries tax at purchase

• Withholding required?

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1 Year

2 Years

2/1/14 2/1/15 2/1/13

Enrollment

Purchase

ESPP Dispositions –Disqualifying vs. Qualifying

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)

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

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ESPP –Dispositions • 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

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ESPP –Dispositions

• Decisions: • How will you collect the disposition information?

• Captive Broker

• Shares held at non-administrative brokerage firm

• How often will dispositions be reported to payroll?

• How long will W-2Cs be issued for late reported dispositions?

Here are 100 late reported ESPP DDs.

When will the W-2Cs be ready?

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ESPP – W-2 Reporting • 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

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2016 W-2

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Form 3922 – Informational Only

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ESPP: Reconciling W-2 with Broker 1099

Participant Communication-ESPP

But what happens if…

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Terminated Employees • 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

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Payroll and Stock Admin - Working Together

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Payroll and Stock Admin: Working Together

‣ Both need to understand:

o 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

‣ Solutions:

o Regular calls/meetings or trainings

o Multiple states/jurisdictions

o Employees and former Employees

o Create a matrix of taxability of various transactions

o Include in Year End Payroll Planning/Reconciliation

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Yeah, we’re done! Here you go…

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Thank you

Please remember to complete your evaluation of this session

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Suzie Bentley, CPP Director , Stock Admin & 401(k) NVIDIA Corp. sbentley@nvidia.com 408.566.6591 tel Christine Zwerling, CEP Manager – Exec. Comp & Equity SalesForce.com Christine.zwerling@salesforce.com 510.735.4487 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.

Appendix

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Sample Taxability Matrix: U.S. RSU and NQSO

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Sample Matrix: U.S. ESPP Taxable Values

Prepare matrices to explain taxability and timing to Payroll 51

Options/SARs - What are they?

• 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

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Options/SARs - What are they?

• 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

• QD or DD

• Section 421 ISO 53

Options/SARs – At Vesting

• Payroll usually doesn’t have to do anything!

• UNLESS…

• Exercise of unvested shares – Early Exercise

• Granted at a discount

• Look out for 409A!

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Option/SARs – At Exercise

• The spread between exercise price and FMV is income and taxable under IRC Section 83.

• US – supplemental income and withholding taxes due

• http://www.adp.com/tools-and-resources/compliance-connection/state-taxes/

• BE AWARE – ACCELERATED TAX DEPOSITS!

• Decisions

• How often will Stock Payrolls be run?

• How is transaction data given to payroll?

• See Timely Tax Deposits slide

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Timely Tax Deposits

• 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

• Immediate notification for stock option exercises

• Failsafe process to confirm/deny daily or periodic activity

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Options/SARs – W-2 Reporting • NQ (non qualified) or SAR • Recognize compensation when shares are Exercised

• Market Value minus Exercise price

• Form W-2 reporting: • Box 1 (Wages, tips, and other compensation) • Box 3 (Social Security wages), if applicable • Box 5 (Medicare wages and tips). • Box 12, with code V • Box 16 (State wages, tips, etc.) if applicable • Box 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

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2016 W-2 tax reporting

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Form 3921 – ISO -Informational Only

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Stock Options – Exercise (ISOs) • No Tax Withholding or Reporting at Exercise

• UNLESS…

• Pennsylvania

• Then the state income taxes are due (withheld and reported) upon exercise

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Stock Options – Disposition (ISOs)

• 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 exercise and the exercise price) or

• 2) the actual gain realized on the sale (the difference between the sale price and the exercise price) 61

Stock Options – Disposition (ISOs)

• Decisions: • How long will W-2Cs be done for late

reported dispositions?

• How often will dispositions be reported to payroll? • As they occur?

• Monthly

• Quarterly

• Annually?

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