Transcript 423, 6039 and Global ESPPs

ESPPs – 423, 6039 and Global
Employees: A Practical Review
Boston Chapter NASPP Meeting
August 17, 2010
Valerie Diamond - [email protected]
Barbara Klementz - [email protected]
Agenda
– Introduction
– 423 Regulations
– Key Changes
– Applying Final Regulations to Solve Challenges for
Global ESPPs
– 6039 Regulations
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Introduction
– Baker & McKenzie and Global ESPPs
– Assisted 500+ companies (including 26 of the Fortune
100 companies) with rollout of global equity plans,
including ESPPs
– Pioneered omnibus plan approach to facilitate offering
of 423 ESPPs to non-US employees
– Commented in depth on new 423 and 6039
regulations
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Final 423 Regulations
– Issued for publication November 16, 2009
– Effective for offerings commencing on or after January 1,
2010
– May electively apply to prior offerings
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Final 423 Regulations
– Key Changes
– Reiterated and clarified “grant date” issues
– Introduced flexibility in applying employee coverage
and equal rights privileges requirements through
concept of “separate offerings” by entity
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Final 423 Regulations
– Grant Date
– Why is “grant date” important for ESPPs?
– Allows lookback to beginning of offering period for
“lower of” 85% price
– Starts two-year holding period for disqualifying
disposition purposes
– Determines FMV of shares for calculating $25,000
limit
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Final 423 Regulations
– Grant Date
– How to make sure beginning of offering period is grant
date:
–
–
–
State maximum number of shares any employee can
purchase (e.g., 1,000 shares). Number does not have to be
realistic.
Provide a formula that fixes maximum number of shares for
each offering period
Could be determined by Board/Committee resolution (i.e., may
not have to be set in plan document)
– If no maximum number of shares fixed, then grant date
is considered to be purchase date
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Final 423 Regulations
– Excludable Employees (less than two years service, 20 or less
hours per week/less than 5 months per year, highly
compensated employees)
– “Lesser included” approach to exclusions is permitted:
– E.g., Okay to exclude only top officers (lesser included group of
highly compensated employees)
– But – must apply uniformly across all participating employers in
the same “offering” (more restrictive than 401(k) rules)
– Limited Exceptions:
– Okay to exclude if participation by group of employees (e.g., in a
particular country) is illegal or if compliance with the law of the
foreign jurisdiction would cause the plan to violate Section 423
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Final 423 Regulations
– Equal Rights and Privileges
– Proposed Regulations were quite restrictive
9
–
Applied across corporate entities, not entity-by-entity
approach
–
Could exclude all employees in a separate corporate
entity (be careful with check-the-box disregarded
entities), but could not apply different rules across
entities unless treating non-U.S. employees less
favorably is necessary to comply with foreign law
Final 423 Regulations
–New Separate Offering Concept in Final
Regulations
– Permits consecutive or overlapping “offerings” to groupings of one
or more separate corporate entities within the corporate group
(e.g., one offering to U.S. parent, one offering to subsidiaries in
Europe, etc.)
– This permits variations in terms among corporate entities for
same offering/purchase period
– Can use to solve excludable employee and equal rights and
privileges problems
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Final 423 Regulations
– Key Requirements for Each Separate Offering
– Each offering must encompass one or more entities
that qualify as a “parent” or “subsidiary” as defined in
Code section 424(e) and 424(f)
– Within each offering, employee coverage and equal
rights and privileges requirements must be met
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Final 423 Regulations
– Example of Separate Offerings
– For U.S. parent, offering excludes part-time (< 20 hour
per week employees) and allows only payroll
deductions
– For European subsidiaries, offering includes part-time
employees due to EU Part-time Directive
– For Hong Kong and Argentine subsidiaries, no payroll
deductions permitted, only direct contributions
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Final 423 Regulations
– How to Make Offerings “Separate”
– Could spell out in plan document
– For each offering period, unless otherwise specified
by the Committee, a separate offering will be made
to the Company and each Participating Subsidiary
– Could accomplish this by Board or Committee
resolution (review Plan authorization language)
– Additional Plan language may be desirable to permit
acceptable variation in terms among the separate
offerings
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Final 423 Regulations
– Applying the Final Regulations to Solve (Some) Global
Challenges for ESPPs
– What are problems?
– Potential solutions
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Final 423 Regulations
– Global Challenges for ESPPs
– Difficult/costly securities/exchange control filings required
(e.g., China, EU, Japan)
– Compensation definition inadequate (e.g., 13th month
salary)
– Exclusion of part-time or fixed term employees (e.g., EU
directive prohibits discrimination)
– Payroll deductions not permitted (e.g., Hong Kong)
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Final 423 Regulations
– Global Challenges for ESPPs (cont’d)
– Separate bank account/interest required (e.g., Austria,
Australia)
– Imposition of holding periods for tax benefit (e.g., Israel)
– Check-the-box flow through structures not meeting 424(f)
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Final 423 Regulations
– Approaches to Date
– Exclude if illegal to offer plan in country
– If separate non-US sub, exclude sub as participating
entity
– Create Plan Design to Manage Non-423 Offering
– Omnibus ESPP design (423 and non-423
component)
– 423 plans with non-423 or foreign sub-plans
– Two plans: one 423 and one non-423
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Final 423 Regulations
– Approach after Final Regulations (Using Separate
Offering Concept)
– Allows different terms for different entities without
violating equal rights and privileges clause
– Avoids that operational failure within one entity taints
entire ESPP offering
– Allows more entities to participate in the 423 ESPP
(helpful for U.S. expatriate employees employed with
non-US entities)
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Final 423 Regulations
– Step one: Draft plan as broad as possible. Determine on
a corporate entity-by-entity approach where local
variations required
– Step two: Designate the separate offerings and the
specific terms applicable to each separate offering
– Step three: Be sure appropriate Plan, Board or
Committee resolutions correctly document the separate
offerings
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Final 423 Regulations
– Step four: Consider if still need non-423 component/subplan to solve check-the-box/branch office issue
– If so, designate relevant entities as participating in the
non-423 plan
– Note: These will not normally vary from offering period to
offering period, so can have “continuing” resolutions until
changed
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Final 6039 Regulations
– Background
– Section 6039 requires (1) employee information
statements and (2) returns to the IRS to be issued by
companies granting ISOs or tax-qualified ESPPs
– These requirements are separate from, and in addition
to, Form W-2 reporting required under Code Section
6051
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Final 6039 Regulations
– Background
– Obligation to file return with the IRS was waived for all
transactions prior to January 1, 2010
– But still need to provide information statement to
employees for earlier years
– IRS returns to be filed on Form 3921 (ISOs) and Form
3922 (ESPPs)
– Electronic returns required if filing 250 or more
forms
– Deadline for return likely March 1 for paper filers
and March 31 for electronic filers (penalties for later
filers!)
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Final 6039 Regulations
– Transfers to be Reported
– For public companies where upon purchase ESPP
shares are immediately deposited with a brokerage
account established on behalf of the employee, the
transfer on the purchase date has to be reported on
Form 3922
– Regulations provide for deposit of shares into
brokerage account as triggering event (which could
be a few days after actual purchase date)
– However, preamble to regs and IRS comments
make it clear that purchase date supposed to be
triggering event
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Final 6039 Regulations
– Transfers to be Reported (cont’d)
– In other cases, e.g., if share certificate issued to
employee or recorded in employee’s name in book
entry form, then subsequent transfer by employee is
reportable transfer
– Subsequent transfer could be sale of shares or
transfer of legal title to a brokerage account
– Multiple statements/returns required if more than one
purchase per year?
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Final 6039 Regulations
– No Form 3922 required with respect to a nonresident
alien to whom the corporation is not required to provide a
Form W-2 for any calendar year between grant date and
transfer
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Final 6039 Regulations
– Additional information required to be provided in employee
information statements (and IRS return) for transactions in
2010 and beyond
– Can rely on old regulations for transactions before January
1, 2010
– Electronic delivery of statements is permissible (but very
difficult to meet all requirements)
– Companies can (but are not required to) deliver copy of Form
3922 to employees to satisfy information statement
requirement
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Questions?
???
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Contact Information
– Valerie Diamond
Partner, San Francisco Office
+ 1 415 576 3086
[email protected]
– Barbara Klementz
Partner, San Francisco Office
+ 1 415 591 3211
[email protected]