The myStockOptions Blog

From AMT To VCD: A Guide To The Many Abbreviations Of Stock Compensation

Do you know NQSOs from ISOs? AMT from FICA and NIIT? What’s the FMV at option exercise? What's the PTEP if you lose your job? What would happen to your grants in a CIC? Can you sell company stock when you know MNPI? What’s the deal with RSUs, PSUs, ESPPs, and SARs? 

Stock options, restricted stock units, and employee stock purchase plans come with a confusing jumble of acronyms, initialisms, and jargon. Learning these abbreviations is a good way to become familiar with some of the key features and details of stock compensation—and given how long and cumbersome some of the underlying terms are, you’ll soon learn to appreciate their brevity.

This article provides a handy guide, organized by topic.

WYSIWYG: Types Of Grants

SBC: stock-based compensation, pay that involves company stock rather than cash.

ESO: employee stock option, a right that a company awards to purchase a specific number of its shares for a specified price (exercise price) and period (often up to 10 years). Employee stock options are different from listed or exchange-traded options.

NQSO or NSO: nonqualified stock option, the basic and most common type of ESO. NQSOs do not qualify for special tax treatment under the Internal Revenue Code (IRC).

ISO: incentive stock option, the other major type of stock option. An incentive stock option is a type of ESO that qualifies for special tax treatment under the IRC if certain requirements and holding periods are met.

RSU: restricted stock unit, the most common type of equity award nowadays in public companies. A grant of RSUs is a promise to issue you a set number of shares after you’ve met the related vesting conditions, usually a specified length of continued employment or services. Restricted stock awards (RSAs) are similar to RSUs but have a few differences, such as being able to make an 83(b) election to pay taxes on the value of the shares at grant rather than at vesting.

PSU: performance share unit, a grant of shares that vests or pays out based on performance rather than just continued employment. Performance-based grants can be in the form of performance stock awards (PSAs), which are similar to restricted stock, or performance stock units (PSUs), which are similar to RSUs. The most common performance goal metrics are total shareholder return (TSR) and relative total shareholder return (rTSR).

ESPP: employee stock purchase plan, a type of broad-based stock plan that permits employees to use payroll deductions accumulated over a purchase period (e.g. one, three, six, twelve months) to acquire stock from the company, often at a discount or at least without commission.

SAR: stock appreciation right, a contractual right that lets you receive cash or stock equal in value to the appreciation of a specified number of company shares between the grant date and the exercise date. The taxation of SARs is similar to that of NQSOs.

LTI: long-term incentive, a formal name for stock and cash compensation that is earned based on a time horizon, performance goal, or vesting period of more than one year, by contrast with short-term incentives (e.g. an annual cash bonus).

OMG: Taxes

OI: ordinary income. Salary, wages, interest, and types of income taxed at ordinary tax rates. Most forms of stock compensation generate ordinary income, and tax withholding applies.

CG: capital gain, income that arises from the sale of a capital asset, such as the sale of shares acquired from your equity comp. Capital gains and losses may be short-term (held 12 months or less) or long-term (held longer than 12 months). Short-term capital gains (STCG) are taxed at the rates of ordinary income. Long-term capital gains (LTCG) are taxed at 0%, 15%, or 20%, depending on your taxable income during the year.

AMT: alternative minimum tax. The alternative minimum tax system runs parallel to ordinary income tax. Under the AMT system, your alternative minimum taxable income (AMTI) is similar in concept to adjusted gross income (AGI) for ordinary income tax. When you exercise ISOs and hold the shares beyond the calendar year of exercise, the spread is part of your AMTI and you can trigger the AMT, depending on a number of other factors.

FICA: Federal Insurance Contributions Act. Together, Social Security and Medicare taxes are called FICA taxes because they are collected under the authority of the Federal Insurance Contributions Act. You know them from your paycheck and the Form W-2 you use for your tax returns. FICA taxes, also know as the federal payroll taxes, apply when you exercise NQSOs or SARs and at the vesting of restricted stock and RSUs.

FMV: fair market value. The FMV of a company’s stock is used to determine the amount of taxable income to report for an exercise of NQSOs and SARs and for the vesting of restricted stock/RSUs. The FMV is also used to set the exercise price of stock options on the grant date.

IRC: The Internal Revenue Code, possibly the most complex tax system in human history, is the body of legislation that governs all federal taxation in the United States, including the taxes that apply to stock compensation. For example, IRC Section 422 governs the taxation of ISOs, while Section 423 sets the rules for tax-qualified ESPPs.

NIIT: Net Investment Income Tax, a 3.8% Medicare surtax on investment income, such as capital gains and dividends, when your income is over specified threshold amounts. This extra 3.8% tax applies on top of the usual capital gains tax (15% or 20%, depending on income) for taxpayers with yearly modified adjusted gross income (MAGI) of more than $200,000 (more than $250,000 for married joint filers).

FITW: federal income-tax withholding, which applies at the exercise of NQSOs and SARs and the vesting of restricted stock and RSUs.

QSBS: Qualified Small Business Stock. Stock in a startup company that allows you, under certain conditions, to sell shares held more than five years at a 0% capital gains rate. There are detailed rules that determine whether the new company’s stock, and your stock, is QSBS.

SRF: substantial risk of forfeiture, a tax term that applies when rights to compensation are conditioned upon future services (e.g. working X years for a company) or certain targets (e.g. reaching a performance goal or stock price). If the condition is not satisfied, the stock is forfeited. In the context of restricted stock and RSUs, income is not recognized while the stock is still subject to risk of forfeiture (i.e. must vest).

BTW: Other Abbreviations

PTEP: post-termination exercise period, the length of time you have to exercise stock options after your employment at the company ends. This period is almost always shorter than the term that would remain if your employment had continued. It usually lasts 90 days from the termination date, but it can be much less, and if you miss the exercise window you cannot get the options back. See your stock plan and grant agreement for details, including what happens with a leave of absence (LOA).

BSM: Black-Scholes model, a complex mathematical formula used to calculate the theoretical present value of a stock option using variables such as stock price, exercise price, volatility, and expected option term (i.e. the time until exercise). Black-Scholes is the option-valuation model most commonly used in accounting for stock options and in certain financial-planning tools.

CIC: change in control. This denotes a merger or acquisition or other substantial change in shareholder ownership of a company. A change in control can trigger the acceleration of vesting in stock options, restricted stock, and RSUs. The specifics of what constitutes a change in control and its impact are defined in your company’s stock plan documents.

SDS: same-day sale. In this type of option exercise, the immediate sale of the underlying shares from the exercise generates the proceeds to pay the exercise price and any tax withholding. This is also called a cashless exercise.

STC: sell-to-cover. In this type of option exercise you sell just enough of the stock to “cover” the total exercise costs (exercise price + taxes), with the remaining stock held. With restricted stock/RSUs, this applies to selling shares at vesting to cover the tax withholding.

GTC: good-till-canceled order. This is an order to sell stock associated with an exercise when the stock reaches a specific price while the order remains open. To prevent sales of its stock from occurring outside authorized trading windows, some companies do not allow this.

IPO: initial public offering, the process in which a privately held company first offers its shares to the investing public, usually through a registration statement under the securities laws. An IPO is what brings a private company into the stock market as a public company.

SEC: Securities and Exchange Commission, the US federal government agency responsible for the supervision and regulation of the securities industry, the stock markets, securities offerings, and the ongoing disclosure obligations of public companies in the United States. SEC rules and regulations affect many aspects of equity compensation and stock ownership.

MNPI: material nonpublic information, confidential information that will move the company’s stock price (whether up or down) when it is made public. Buying or selling stock when you know material nonpublic information is insider trading, which is illegal, along with insider tipping. To avoid getting into trouble for insider trading, refrain from trading company stock when you know MNPI.

VCD: vesting commencement date, used in some stock plans to note the start of a grant's vesting period.

GTK: Further Resources

Hopefully the wealth your equity comp or ESPP creates will give you lots of WAFF. If you need it (you will), the glossary of stock compensation terms at myStockOptions.com has nearly 1,000 detailed definitions of stock comp terms and phrases. The glossary is also available as a smartphone app: Stock Compensation Glossary, available free from the App Store (Apple devices) and from Google Play. It includes a “term of the day” and a handy quiz.

In addition, our website has an interactive quiz on stock comp abbreviations where you can test your knowledge.

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WEBINAR: Stock Option Exercise Strategies: Managing Risk & Building Wealth (June 15)

The next webinar at the myStockOptions Webinar Channel is coming up on June 15:

Stock Option Exercise Strategies: Managing Risk & Building Wealth
2:00pm to 3:40pm ET (11:00am to 12:40pm PT)

In 100 minutes, three leading financial experts will provide up-to-the-moment practical guidance for stock options in both public and private companies, including real-world case studies. Volatile stock markets and widespread layoffs in the tech industry make the need for effective guidance even more important, as this webinar will cover.

The webinar offers 2.0 CE credits for CFP, CPWA/CIMA, CEP/ECA, CPE (live webinar only), and EA (live webinar only).

After the live webinar, the webinar recording will be available in on-demand format both to registered webinar attendees and to those who later purchase streaming access.

Boost Your Equity Comp Literacy With The myStockOptions Glossary App

When you receive stock options, restricted stock units, or other types of equity compensation from your company, you are plunged into a new world of technical terms and jargon. To make the most of your equity comp and avoid costly mistakes, you need to understand the terminology in your stock plan, grant agreements, company communications, and other documents relating to your awards. It's a matter of "financial literacy" in its most literal form!

Ever since myStockOptions.com went live in 2000, the goal of our website has been to provide education on equity comp for employees, their advisors, and stock plan professionals seeking to further their knowledge. With clear explanations and independent, unbiased expertise, we seek to make you smarter about the basics, financial planning, taxation, and legal issues.

Now the practical expertise of our website has a handy extension in the form of our free app for Apple and Android smartphones: Stock Compensation Glossary. Available from the App Store (for Apple devices) and from Google Play (for Android devices), it's the first and only smartphone app devoted to the often confusing terminology of equity comp and executive comp.

Based on the popular glossary at myStockOptions.com, this searchable reference guide defines almost 1,000 words, phrases, and abbreviations in the areas of equity compensation and executive compensation, along with the related taxation, financial planning, corporate accounting, and securities law.

Clearly written in plain English with a navigation that's easy to use, the app covers terms relating to all types of equity awards, including stock options, restricted stock, RSUs, and ESPPs. In addition:

• The "Term Of The Day" helps users improve their technical vocabulary.
• Recent searches can be quickly recalled.
• Users can test their knowledge with a quiz game right in the app.

Our app is just one of the many innovative multimedia ways in which myStockOptions.com delivers stock plan education for employees who want more than traditional written content:

• Our videos serve as helpful gateways into the website’s detailed educational materials on equity compensation.
• Engaging podcasts cover many topics in equity compensation.
• 18 fun, interactive quizzes let users test their knowledge about all aspects of equity compensation, including restricted stock and restricted stock units, employee stock purchase plans, the rules against insider trading, financial planning, and the impacts of job and life events on equity awards.
• Modeling tools, calculators, and a stock compensation portfolio tracker help stock plan participants and/or their advisors manage equity comp financial planning.

All of the content on myStockOptions.com is ideally suited for licensing by companies and stock plan providers for their stock plan participants.

ICYMI: Test Your Knowledge Of Stock Comp Abbreviations

As if texting shorthand wasn’t confusing enough (IKR?), equity comp comes with an alphabet soup of initialisms and acronyms that can make you go WTF. Do you know NQSOs from ISOs? Your AMT from your FICA and your NIIT? What’s the FMV at option exercise? What’s the deal with RSUs, PSUs, ESPPs, and SARs?

Now you can test your knowledge with our fun interactive quiz on stock comp abbreviations. With a little practice it’s easy to become proficient in them—and BTW, given how long and cumbersome some of the underlying terms are, you’ll soon learn to appreciate them. Moreover, learning these abbreviations is a good way to become familiar some of the key facts and concepts of stock compensation.

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WEBINAR: Restricted Stock & RSU Financial Planning: Insights From Leading Advisors (May 18)

The next webinar at the myStockOptions Webinar Channel is coming up on May 18:

Restricted Stock & RSU Financial Planning: Insights From Leading Advisors
1pm to 2:40pm ET, 10am to 11:40am PT

In 100 minutes, the webinar will feature insights from a panel of three leading financial advisors, including real-world case studies, to provide practical info, guidance, and expertise for restricted stock/RSUs in both public and private companies. They will delve into financial and tax planning to effectively build wealth and prevent expensive mistakes. Volatile stock markets and widespread layoffs in the tech industry make the need for effective guidance even more important, as this webinar will cover.

The webinar offers 2.0 CE credits for CFP, CPWA/CIMA, CEP, CPE (live webinar only), and EA (live webinar only).

After the live webinar, the webinar recording will be available in on-demand format both to registered webinar attendees and to those who later purchase streaming access.

Financial Literacy With Stock Options, RSUs, And ESPPs: 7 Key Lessons

Financial literacy is all the rage now. In fact, April was National Financial Literacy Month! With the growing complexity of many financial instruments, financial literacy is more important than ever.

For most employees, few financial endeavors are more complex than understanding stock options, restricted stock, restricted stock units (RSUs), employee stock purchase plans (ESPPs), and other forms of stock compensation. These valuable forms of compensation can make a big difference in achieving both short-term and long-term life goals, such as boosting cash flow, funding college, buying a house, or saving for retirement. But they can also be tricky. Pitfalls await the unwary.

Below are seven ways you can improve your fluency with stock compensation. Before you start, be sure you gather and review all of your stock-plan-related documents, including the grant agreement, the grant notice, the stock plan itself, and any company communications about these.

1. Set Goals

All financial planning starts with setting goals. What do you want to do with the proceeds from the eventual sale of shares acquired from stock options, restricted stock/RSUs, or an ESPP?

Having a purpose motivates you to improve your financial literacy. A clear understanding of how stock comp fits into your life will strengthen your incentive to understand all the complicated details.

Coming up with concrete goals will also help to clarify your use of the shares in relation to your salary, cash bonus, and 401(k) holdings and other savings.

2. Know What Type Of Equity Award(s) You Have

Many financial advisors I’ve spoken with have clients who initially tell them they have stock options when it turns out they have restricted stock units—which work very differently. While in popular parlance stock options has become a generic term for all types of equity compensation, you need to know the difference between actual stock options and other grant types.

Employee stock options give you the right to purchase a specified number of shares of the company’s stock at a fixed price during a rigidly defined timeframe.

Alert: Know your company’s procedures for accepting grants and exercising options. Exercise often involves a third-party website, such as that of the broker it designates.

Companies can grant two types of options: nonqualified stock options (NQSOs), the more common variety, and incentive stock options (ISOs). Before exploring the differences between NQSOs and ISOs, you must check your grant notice to know which type of options you have. ISOs have tax advantages and complexities, as explained in #3 below.

Restricted stock and restricted stock units (RSUs) are grants of company stock that you get outright once they vest. Usually, you don’t pay anything for shares granted by a public company.

Restricted stock and RSUs differ in a few ways. Restricted stock is issued at the time of grant and is held in escrow. You can’t sell or otherwise transfer the stock until vesting occurs. By contrast, RSUs are technically an unfunded promise to issue you shares when the vesting period has been satisfied. The shares are then “delivered” to you. RSUs are simpler for companies to administer, and in public companies RSU grants are much more common than grants of restricted stock.

3. Understand The Core Tax Treatment

With nonqualified stock options, at the time of option exercise you pay withholding taxes (federal income tax, any state income tax, Social Security up to the yearly maximum, Medicare). After that, any gains above stock price at exercise (i.e. your cost basis) follow the capital gains tax rules.

Incentive stock options qualify for special tax treatment under the Internal Revenue Code. You do not have any Social Security or Medicare tax and no income tax withholding, even if you sell the shares immediately.

Should you decide to hold ISO shares for more than two years from the date of grant and one year from the date of exercise, all appreciation over the exercise price is taxed at the lower long-term capital gains rates (i.e. none of the gain is taxed at ordinary income rates). However, the exercise spread on shares acquired from ISOs and held beyond the calendar year of exercise can subject you to the alternative minimum tax (AMT) and additional tax-return reporting.

Alert: You should consult a qualified financial or tax advisor do an AMT calculation whenever you hold the ISOs shares at exercise. Do it again at calendar year-end to decide whether to sell the shares to avoid the AMT.

With RSUs, you pay taxes through withholding on the income recognized at vesting (federal income tax, any state income tax, Social Security up to the yearly maximum, Medicare). When you sell the shares, any gain or loss above the compensation income you recognized (i.e. your cost basis) is taxed under the capital gains rules.

Alert: Compare the withholding rates your company uses for your stock compensation income to your marginal tax rate. If the withholding rate is lower and thus won’t cover all the taxes you owe, consider putting money aside to pay the taxes with your tax return or the need to pay estimated taxes.

OI = ordinary income tax (income and any withholding reported on Form W-2)
CG = capital gains tax (reporting on Form 8949 and Schedule D of tax return, even for capital losses or just commissions/fees)
AMT = alternative minimum tax
FICA = Social Security up to yearly maximum, plus Medicare
* Depends on when shares are sold, and on the price at sale relative to the price at exercise/purchase.
** Assumes shares are delivered at vesting and not deferred. With proper deferral, OI is delayed until later.

4. Identify The Vesting Schedule Of Stock Options, Restricted Stock, And RSUs

The vesting schedule of your grant dictates when you may exercise stock options, when forfeiture restrictions lapse on restricted stock, or when shares are delivered with RSUs in the standard public company equity awards.

Alert: Each grant you receive has its own vesting schedule and other terms.

Vesting is usually based on continuing to provide services for the company over a specified period. A grant can be designed to vest all at once (e.g. after four years) or in pieces, called tranches (e.g. 20% of the grant every year for five years, or 25% of the grant the first year and monthly after that). Especially for executives, the vesting schedule can also or instead be performance-based (e.g. tied to company-specific or stock-market targets, such as total shareholder return).

Once stock options have vested, you can exercise them—but you don’t have forever to do so. Stock options have a fixed term, usually ten years. At the end of the option term, any unexercised stock options expire and you have no way to get them back. Therefore, if your options have a ten-year term and are fully vested after four years, you will have six years during which to exercise them, assuming you keep working for the company (you will have less time to exercise options after job termination, as explained in #6 below).

5. Learn How Your ESPP Works

Employee stock purchase plans (ESPPs) are a type of stock-related company benefit in which your company deducts money from your paycheck to buy shares of its stock, often at a discount. ESPPs have their own key dates and rules to know, especially regarding enrollment to participate in the plan and how to change your contributions. During an ESPP purchase period, payroll deductions are accumulated. Shares are typically bought on the purchase date at the end of the period.

Alert: If your company has an ESPP, it can be a great deal. It’s vital that you know how and when to enroll and to later make any changes you may want.

There are two types of ESPPs: tax-qualified and nonqualified.

Tax-qualified ESPPs (also called Section 423 ESPPs for the tax-code section that sets the rules) let you buy shares at a specified discount of up to 15% from the stock price. Some companies use a lookback provision that bases the discount calculation on the stock price at either the start of the offering or end of the purchase period, whichever is lower. The IRS lets you buy up to $25,000 in shares during any calendar year, based on the price at the start of the offering, though your company may impose a lower limit.

You have no Social Security or Medicare tax and no income tax withholding at all. The sale (not the purchase) triggers taxes. If you hold the shares long enough to meet the holding periods (more than one year from purchase and two years from enrollment) for favorable tax treatment, most of your gain is taxed as long-term capital gain when you sell the shares.

Nonqualified ESPPs work in the same way but without the IRS rules and favorable tax treatment of qualified plans. A discounted price or contribution match (if any) produces ordinary income at purchase.

OI = ordinary income tax (income and any withholding reported on Form W-2)
CG = capital gains tax (reporting on Form 8949 and Schedule D of tax return, even for capital losses or just commissions/fees)
FICA = Social Security up to yearly maximum, plus Medicare
* Depends on when shares are sold, and on the price at sale relative to the price at purchase

6. Study What Will Happen If You Lose Your Job

Read your stock plan documents and your grant agreement carefully to know your rights if you are fired or if you quit, work for a competitor, retire, become disabled, or die. Make sure you, as well as your family or close friends, are aware of these rights.

With stock options, many plans give you no more than 90 days to exercise vested options after job termination, though the post-termination exercise period can be longer for certain life situations. However, you may lose vested options immediately if you leave the company to work for a direct competitor.

With restricted stock and RSUs, job termination almost always stops vesting and causes the forfeiture of unvested grants—you lose shares that have not yet vested. You keep any shares that vested before your termination date.

Exceptions can occur to accelerate vesting or let it continue, depending on the terms of your grant agreement or stock plan, such as special provisions for disability or death, for retirement, or for a change in corporate control (e.g. a merger or acquisition), or in a broad layoff.

Alert: If you are planning to leave your job soon, you may want to stick around long enough to get any valuable equity grants that may vest in the near future.

For more details on this topic, see my Forbes.com article Protect Your Stock Options And RSUs In Job Loss: 3 Key Actions.

7. Keep A Stock Comp Checklist

One good way to start with your stock compensation is to be sure you know the answers to the questions in a checklist you prepare. Questions on it may include:

1. What is the vesting period of stock options or restricted stock/RSUs?

2. How do I enroll in my company’s ESPP and make any changes in contribution amounts?

3.  With stock options, how long do I have before the grant expires?

4. What would happen to my grant if I were to leave or lose my job, die, become disabled, or retire? How do these events affect vesting and the forfeiture of the grant?

5. What are my goals for the income that I will receive from my stock compensation and/or ESPP? Do I want to use the gains for near-term goals (e.g. college tuition, downpayment for a house purchase) or for long-term goals (e.g. retirement)?

myStockOptions.com can help you with all aspects of stock compensation and ESPPs, from the basics to tax reporting and financial-planning strategies. Our resources include calculators and modeling tools, videos, and interactive quizzes to test your financial fluency with stock options, restricted stock/RSUs, and ESPPs. If you want personal guidance, seek the counsel of a qualified financial or tax advisor.

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WEBINAR: Stock Comp Bootcamp For Financial Advisors (May 3)

The next webinar at the myStockOptions Webinar Channel is coming up on May 3: Stock Comp Bootcamp For Financial Advisors (1pm to 2:40pm ET, 10am to 11:40am PT). Whether you are new to stock comp or want to sharpen your knowledge, this webinar will provide practical info and insights to maximize your success. All the essential topics will be presented in 100 lively minutes by Bruce Brumberg, the editor-in-chief and co-founder of myStockOptions and a Forbes contributor.

The webinar offers 2.0 CE credits for CFP, CPWA/CIMA, CEP, CPE (live webinar only), and EA (live webinar only).

After the live webinar, the webinar recording will be available in on-demand format both to registered webinar attendees and to those who later purchase streaming access.

Job Loss: How To Protect Your Stock Options And RSUs

Laid off? Worried about layoffs? Remember your stock options or RSUs. In a myStockOptions webinar a panel of financial, tax, and legal advisors came together to discuss various topics on negotiating equity comp in hiring offers, protecting it at employment termination, and avoiding big mistakes when leaving a job with outstanding stock grants (Negotiating Equity Compensation: How Advisors Can Help Clients).

The danger is real. Sudden layoffs have recently erupted at many companies, even corporate giants such as Amazon, Google, Meta, and Microsoft. You want to be sure you take as much extra compensation for the road as you can. After all, you earned it during your time at the company.

Below are highlights of what the webinar panelists had to say about equity comp in job termination.

1. Keep All Documents Related To Equity Comp And Employment

The first and most important point in job loss is to know what equity awards you have, what their vesting status is, and your company’s policies and rules that apply when you’re laid off.

For that, you need to have all of the documents related to your equity awards and your employment in general. Be sure you keep all of these during your employment. If you don’t have them, contact the person or department in charge of stock plan administration at your company. You want to avoid getting caught without them in a sudden job loss.

“You need to obtain all the documents before employment termination occurs,” asserted webinar panelist Arthur Meyers, the founding attorney of Meyers Law Firm in Naples, Florida. “You have to understand how many awards you hold, what the terms are, whether there are any restrictive covenants such as noncompete clauses, and so on.”

Arthur listed some of the key items to keep in your possession, ideally before job termination:

• employment agreement
• grant agreements and any separate grant notice for each award
• the stock plan itself
• information about all your grants from the company’s online stock plan portals: both your company’s intranet and the website of a designated brokerage firm or transfer agent

Alert: Confirm you can continue to access these website(s) to view your outstanding stock grants, and the procedures for making exercises and stock trades, after you leave the company.

Don’t count on your company to provide this information after you’ve left. “It is often surprising to find out how little information you can actually get from your employer,” cautioned panelist AJ Ayers (CFP®, EA, CEP), a co-founder of Brooklyn FI in New York City. “Sometimes more mature public companies will have robust finance departments and equity ‘ninja squads.’ But recently public companies or private companies typically don’t have those departments.” Unfortunately, as a result you may end up having “to beg them for this information,” she warned.

2. Understand Your Post-Termination Rules

With your documents, check what equity awards you have, what the vesting status is for each grant, and any special treatment for involuntary layoff. “Confirm not only the award type but also the terms of the exit,” said AJ.

In general, you have rights only to stock options and restricted stock/RSUs that have already vested by your termination date. While the typical timeframe for exercising options after job loss is 90 days from your official end date, your period for exercise will be dictated by the company’s plan and your grant agreement. Make sure you know the date from which the post-termination exercise period (PTEP) is calculated.

Alert: Companies strictly follow PTEP rules, do not give you a grace period for missing the deadline, and have no legal obligation to notify you of upcoming expiration dates.

Usually, to get a different treatment, you’d have to negotiate at hire for the continuation or acceleration of vesting (or have enough clout or justification to do so in any separation agreement). The PTEP can also vary according to the reason for the job termination, AJ continued. “Sometimes if it is a ‘for cause’ firing, we’ve seen all equity being forfeited. But if it is an amicable separation, there is often room for moving the termination date back or forward, depending on when a particular grant may vest.”

These rules can also vary by industry and your level in the company, along with your ability to negotiate them at hire, observed panelist Beata Dragovics (MSFP, CFP, CEP), who advises many clients in the biotech industry with Freedom Trail Financial in Boston.

A few companies, such as Square, Pinterest, and Quora, have extended PTEPs for vested stock options as a feature to make their grants more attractive in recruiting and retaining talented employees.

In a large layoff, some companies will extend the post-termination exercise period beyond what was in the initial grant, perhaps to the full term of the option. Employees are then not rushed into exercising their stock options. In a private company, this extension of the exercise window is an especially beneficial feature, as a private company’s shares have no liquidity to provide the funding for the exercise. Should the company go public or be acquired in the future, the options could become very valuable.

With restricted stock and restricted stock units (RSUs), you almost always forfeit whatever stock has not vested at the time of your termination, unless your grant specifies another treatment or the company decides to continue or accelerate vesting. Therefore, if you are planning to leave your job, you may want to stick around long enough to get any valuable chunk of restricted stock/RSUs that may vest in the near future.

Sometimes the end of your time as an employee does not trigger forfeiture/termination provisions if you will continue to perform services for the company in some way, whether working part-time or as a consultant. “If you’re not going to a new position immediately,” suggested Arthur Meyers, “you may want to explore the opportunity to be a consultant for the company and continue vesting in your existing awards.”

Alert: While this article is focused on the standard job-loss situation, for various life and company events the rules that apply may be different, e.g. in retirement, early retirement, disability, death, or an acquisition of the company (“change of control”). Check your grant agreement and stock plan.

3. Understand The Tax Impact

You also need to understand the tax impact that leaving the company has on your equity compensation. Even for terminated employees, companies withhold taxes upon exercises of nonqualified stock options (NQSOs) and the vesting of restricted stock/RSUs. The income and withholding are typically still reported to you on Form W-2, even if the option exercise occurred after your employment ended—but not always.

“We have seen cases in which a client departs a public company where typically an exercise of nonqualified stock options would show up in their paycheck,” noted AJ Ayers. “Welp, the client does not work there any more, so there is no longer a paycheck. Where is that stuff getting reported?” She urges clients to keep a contact at the employer in the accounting or HR department so that there is someone to reach out to. “Often with tax-return deadlines approaching, we still have issues with getting W-2s from the company.”

AJ went on to note that sometimes companies do not withhold taxes on NQSO exercises by former employees, raising another set of concerns. “It can depend on the staffing in their accounting departments.” If taxes are not withheld and you instead receive a 1099-NEC, which can happen for grants that vest only after you terminated, you need to decide whether to: pay estimated taxes for that quarter or wait until your tax return for the year to pay what you owe.

Be Extra Careful With Incentive Stock Options

Special tax issues arise with incentive stock options (ISOs). Under the federal tax code, you have only 90 days to exercise ISOs after a standard job termination and still retain the special tax treatment that ISOs offer (12 months with disability and no limit with death). However, if your company’s post-termination exercise period is shorter than 90 days, that is the specified period you have until expiration and forfeiture.

After 90 days from termination, ISOs become nonqualified stock options, which have a different tax treatment.

Alert: If your company allows more than 90 days to exercise ISOs after your termination date, you need to be aware that your type of option—and thus your tax treatment—will change if you wait beyond the 90-day point to exercise.

“Be sure you are well versed on those tax consequences,” AJ urged. “We have seen in many cases where a client will log into their equity portal and it will actually still say that the options are ISOs when we know that they are not because the client left the company years ago. Watch out for that and be sure you understand the rules.”

Further Resources

The myStockOptions webinar in which these panelists spoke, which also extensively covers ways to negotiate equity compensation at hire, is available on demand. Our website section Job Events has abundant educational resources on equity comp in job search, negotiation, hire, termination, and consultant/contractor status.

Tax Returns & Nonqualified Deferred Comp: Issues To Be Aware Of

Below is a quick take on things you need to be aware of in 2023 when your tax return involves nonqualified deferred compensation (NQDC) distributed to you in 2022. It's extracted from the comprehensive resources on nonqualified deferred comp at our sibling website myNQDC.com.

Did you also have income in 2022 from equity compensation or sell shares acquired from equity comp? See the Tax Center at myStockOptions for resources and guidance on tax returns involving equity comp and sales of company shares.

Changes In Reporting On IRS Form 1040

The IRS Form 1040 tax return has been revised for the 2023 tax season (reporting income received in 2022). Distributions from NQDC plans, as well as salary income, are now reported as part of income on Line 1a of Form 1040. (See also the article on tax-return changes at myStockOptions for more details on changes in Form 1040 reporting.)

W-2 Reporting Still Potentially Unclear

The IRS has still not finalized the Section 409A rules on W-2 reporting. Therefore, your company does not need to indicate deferred income from an NQDC plan on your Form W-2, though it may do so voluntarily in Box 14. (Once the IRS has finalized the 409A rules on W-2 reporting, income deferred during the year will have to be indicated with Code Y in Box 12.) Distributions from plans usually appear in the W-2 boxes used for wages and other compensation, along with Box 11 for nonqualified plans (see an FAQ on this topic at myNQDC).

What To Do If Your Company’s NQDC Plan Violates Section 409A

If your plan violates Section 409A and you need to pay a penalty and interest, you report that on Schedule 2 of your IRS Form 1040 tax return: Line 17h, “Income you received from a nonqualified deferred compensation plan that fails to meet the requirements of section 409A.”

The total on Schedule 2 is then entered on Line 23 (“Other taxes”) of Form 1040.

Depending on your employment status, the income that is subject to this additional tax will appear on Form W-2 or on the revised Form 1099-MISC and new Form 1099-NEC.

Alternative Minimum Tax

Consider the alternative minimum tax (AMT) income exemption amounts, the point where the AMT exemption phaseout starts, and the threshold for the higher AMT rate. Nonqualified deferred compensation itself is not an AMT preference item. However, income deferrals or distributions can serve to prevent you from triggering the AMT in a tax year or can cause to you trigger it, depending on your other income. While the 2018 tax changes reduced the likelihood of triggering the AMT by raising the exemption amounts and phaseout thresholds, you still need to calculate it (see an FAQ on this topic myStockOptions).

Need An Extension?

If you need to file an extension of your tax-return deadline because of nonqualified deferred compensation, see the FAQ at myNQDC on mistakes to avoid with extensions. Note that the IRS routinely postpones the filing due date for taxpayers in areas affected by natural disasters. You can find out whether you qualify for a postponement in the IRS website section Tax Relief In Disaster Situations. For most taxpayers in California, the due date for 2022 tax returns (April 18, 2023) has been extended to October 16.

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The popular myStockOptions tax-season webinar is available on demand: Preventing Tax-Return Mistakes With Stock Comp & Stock Sales. It features a panel of tax experts discussing how to prevent errors in tax returns that involve equity comp and company shares. Their presentations include real-world case studies showing how to use information in tax returns to create better financial plans.

• Stephanie Bucko, CPA, CFA®, Mana Financial Life Design
• Dan Hodgin, CPA, Silicon Valley Tax Group
• Daniel Zajac, CFP®, EA, Zajac Group
• moderator: Bruce Brumberg, JD, editor-in-chief of myStockOptions

The webinar recording offers 2.0 CE credits for CFP, CPWA/CIMA, and CEP/ECA. A detailed agenda is available at the webinar registration page.

Two Special Tax-Return-Reporting Issues In 2023: Volatile Stock Prices And Employee Mobility

Over a decade passed between the Great Recession of 2008–2009 and the volatile market downturn of 2022. As a result, many younger employees with equity compensation—whether stock options, restricted stock units, employee stock purchase plans, and/or and company shares—are new to the impacts of fallen stock prices and capital losses in their tax-return reporting. For some, the 2023 filing season will be the first time they hear the terms "tax-loss harvesting" and "wash sales."

Another widespread issue for tax reporting that is new to many employees involves interstate employee mobility and the allocation of income between states. That is, of course, on the rise as more employees than ever work remotely in a different state from their employer, whether in one place or as “digital nomads” moving from state to state.

In a recent myStockOptions webinar on tax returns that I moderated (Preventing Tax-Return Mistakes With Stock Comp & Stock Sales), three leading financial and tax advisors with expertise in equity comp presented ideas and tips for preventing costly tax-return errors in 2023. This article summarizes some of the key points they made about capital losses, wash sales, and employee-mobility issues.

Down And Volatile Stock Prices? Consider Tax-Loss Harvesting...

Amid the down and volatile stock markets of 2022, many employees with stock comp have capital losses from selling company stock whose value fell after vesting, exercise, or purchase. On your tax return, you can apply your capital losses to offset your capital gains, thus reducing your taxable capital gains income. After that, you can also net up to $3,000 (for joint filers) of capital losses against ordinary income (e.g. your salary, income from RSU vesting, income from NQSO exercise). Any usused capital losses are carried forward. This is called tax-loss harvesting.

Webinar panelist Stephanie Bucko, a CPA and the co-founder of Mana Financial Life Design in Los Angeles, routinely uses this strategy to help reduce her clients’ taxable income on tax returns. “It definitely impacts the strategy. You can cut out a ton of taxes if you’re able to offset gains with losses.” She uses software to capture her clients’ full financial picture and also talks through their history to identify any capital losses that may be available to net against gains.

“It is likely for tax year 2022 that clients will have capital losses on their tax return,” Stephanie concluded. She pointed out that selling loss-makers can be useful not only to harvest the loss but also to diversify out of a concentrated stock position. “This presents an opportunity for clients with concentrated positions to reduce risk without suffering tax consequences. Our recommendation is to review Schedule D for these tax losses.”

Tax-loss harvesting is also pursued by webinar panelist Daniel Zajac, a CFP, Enrolled Agent, and managing partner of Zajac Group (Exton, PA). He noted that the volatile and declining stock prices of 2022 presented opportunities to take advantage of capital losses not only to offset any capital gains in 2022 but also to carry remaining losses forward to future tax years.

“In a year like last year,” Daniel went on, “I think that a lot of advisors were talking to clients about capturing some losses and carrying them forward. For many advisors that’s part of the process at year-end, and it’s funneled through to the tax preparer to be sure it gets accounted for.”

...But Watch Out For Wash Sales

Be aware that there are limits on tax-loss harvesting for those who try to be too clever with it. If you sold loss-generating stock before the end of 2022 for tax-loss harvesting and then repurchased the same stock in January to keep your investment in it, you will run into the “wash sale” rule. This is triggered by a sale of stock at a loss coupled with the repurchase of the same stock within 30 calendar days before or after the sale.

The result? Your capital loss is disallowed on your tax return for that year, with the basis and holding period added to the replacement shares that you purchase.

Most experts believe that option exercises, RSU vestings, and ESPP purchases are “buys” of company stock for tax purposes. You want to watch out for monthly RSU vestings, as these will trigger a wash sale if you have also sold company stock at a loss within 30 days before or after.

Your brokerage firm will usually track and report wash sales by account. However, it may not do this across different accounts that you (and your spouse) have at the firm and at other brokers. Therefore, you and/or your tax-return preparer must consider trading activity in securities across all the accounts you have.

“The first thing I try to do is to educate my clients to avoid the issue,” chuckled webinar panelist Dan B. Hodgin, a CPA and the owner of Silicon Valley Tax Group (Campbell, CA). “But obviously that can’t always be accomplished.”

How should you track all of this? First, he said, you calculate the number of shares sold during the year. “Sometimes it looks as if clients have wash sales throughout the year, but by the end of the year they don’t. They’re all netted out. But if they do in fact have wash sales that are going to carry to a future year, you really just have to do a manual calculation. There’s really no other way.”

You report on Schedule D the wash-sale amount, which may differ from the amount on the Form 1099-B you receive from the broker, Dan explained.

“In a future year, when those shares are sold that have an adjusted basis, you’re going to adjust in the opposite direction. You want to be sure you have full backup for that. In the year when you report the wash sale, the IRS is not going to bother you or question you. They will just see less of a loss, and that’s the end of that. But in the year when you have a bigger loss than the one on the 1099-B for that year, because you are adjusting for those previous wash sales that have now been cleared out, that’s when the IRS is going to have questions.”

Dan observed that many taxpayers haven’t experienced the issue of wash sales amid the rising stock markets of the past 10 years or so. “But with down markets and 80,000 new IRS agents, I’m going to be very careful with wash sales,” he stated. “I’m going to get a full inventory of shares and track those wash sales and the basis outside the brokerage account. If they’re not tracking wash sales on RSUs or ESPPs, then you have to. It’s the only way.”

“What if wash-sale RSU shares were sold in the same calendar year?” asked a webinar attendee. “If you generate a wash sale in February or March and then sell all the shares you have by December, I’m not going to put it in,” replied Dan. “The two are just going to wash each other out. I’m going to report it only if it has a net effect on the tax return at the end of the year.”

For more details on wash sales, see another recent myStockOptions blog commentary: Selling Stock At Year-End To Harvest Losses? Don't Get Tangled In The 'Wash Sale' Rule.

Remote Work And Digital Nomads: Issues With Employee Mobility

Generally, each state you live in determines what income is taxable and when. Many companies report income to and withhold taxes for only the state where you live when restricted stock units (RSUs) vest or when you exercise nonqualified stock options (NQSOs).

However, other states where you lived during the vesting period may contact you later if its tax officials learn of this stock comp income. The state’s tax authorities may seek a proration of your compensation income for your former residence, basing their tax on the part of the vesting period during which you performed services in their state.

The general rule for sourcing and allocating stock comp income is the number of days worked in the state divided by (for RSUs) the number of days between the grant date and the vesting, or (for NQSOs) the number of days between the grant date and either the vesting or exercise date, depending on the state rules.

In the myStockOptions webinar, panelist Dan Hodgin gave some key guidance for mobile employees. “Get a travel history for the current year,” Dan recommended. “Establish a residency history for the duration of the vesting schedule.”

This is important, he explained, because you can’t necessarily trust your Form W-2 on income determination. “Payroll department staff are not tax experts,” he cautioned, “and the complexity of this issue has grown exponentially since remote working became more readily available.”

State reporting of state-sourced wages on Form W-2 can vary, he added. “New York, for example, requires state wages to equal federal wages. Sometimes the year-end paystub can provide a more accurate state breakdown.”

Once you have your records in place, compare your fact pattern to your W-2, Dan advised. “If the W-2 does not match the fact pattern, ask your company to amend it. If you can’t get the company to amend the W-2, adjust the information on the tax return. Make sure you can back up your allocation with a strong fact pattern.”

With that fact pattern documented, you will be ready for any notice from the “aggrieved” state. He also warned employees to “be wary of low- or no-tax states versus high-tax states.”

Additional Tax-Reporting Resources

The 100-minute webinar in which these tax experts spoke, Preventing Tax-Return Mistakes With Stock Comp & Stock Sales, is available on demand along with many other on-demand webinars at the myStockOptions Webinar Channel.

For guidance on the tax-return reporting for stock compensation and sales of company shares, including annotated diagrams of Form W-2, Form 8949, Schedule D, Form 3921, and Form 3922, see the myStockOptions Tax Center.

Tax Season 2023: myStockOptions Resources And Special Webinar Offer Crucial Guidance

Tax Season 2023 is here. The tax reporting for equity comp income and stock sales in 2022 can be complex, given the year's stock-market volatility and declines. With that and the many tax-reporting changes of recent years, the 2023 tax-filing season presents more risk than ever for expensive errors on tax returns. Taxpayer mistakes can lead to overpaid tax, underreported income, IRS penalties, or even an IRS audit.

Fortunately, the award-winning resources of myStockOptions are here to lessen your stressin'. The fully updated myStockOptions Tax Center provides expert yet easily understandable guidance on the filing and reporting of tax returns that involve stock options, restricted stock, restricted stock units, performance shares, stock appreciation rights, employee stock purchase plans, and sales of company stock.

myStockOptions Tax Center: In-Depth Resources For Tax Season

An article and FAQ summarize changes in forms and reporting that taxpayers with stock compensation must know:

• Tax Season 2023: What You Need To Know About New Reporting Rules
• What's new for the 2023 tax-return season?

Other core articles and FAQs spell out the most common mistakes people make with stock grants on their tax returns. These include:

• 12 Tax-Return Mistakes To Avoid With Stock Options And ESPPs
• Restricted Stock & RSUs: 10 Mistakes To Avoid On Your Tax Return

You, your financial advisor, and your CPA or EA can quickly run through these to be sure you submit error-free returns.

More in-depth resources of the Tax Center include the following:

• special FAQs with annotated how-to diagrams of IRS Form 8949 and Schedule D
• diagrams of Form W-2, Form 3922 (for employee stock purchase plans), and Form 3921 (for incentive stock options)
• a fun interactive quiz on tax-return topics that lets you test your reporting knowledge in a painless way, before you file your return, and links to related content from the answer key
• an animated video guide to avoiding costly mistakes that can lead to the overpayment of taxes on stock sales.
• engaging podcasts with tips for tax returns

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Special Webinar On Tax Returns & Error Prevention

On February 15, myStockOptions.com will hold a special webinar featuring a panel of tax experts who will provide insights on tax returns involving stock comp and present real-world case studies showing how to use information in tax returns to create better financial plans: Preventing Tax-Return Mistakes With Stock Comp & Stock Sales

• February 15 (2pm–3:40pm ET, 11am–12:40pm PT)
• 2 CE credits for CPE, EA CFP, CPWA/CIMA, and CEP/ECA

Panelists:

• Stephanie Bucko, CPA, CFA®, Mana Financial Life Design
• Dan Hodgin, CPA, Silicon Valley Tax Group
• Daniel Zajac, CFP®, EA, Zajac Group
• moderator: Bruce Brumberg, JD, editor-in-chief of myStockOptions

A detailed agenda is available at the webinar registration page.

2023 Tax Planning: The 3 Numbers All Employees Should Know

Before tax-return season sets in, putting your focus on your 2022 income, this is a good time to meditate on your tax planning for 2023. That includes the federal tax-related numbers for 2023 that are crucial for all employees, their paychecks, and their planning.

The IRS and the Social Security Administration annually adjust for inflation a myriad of key numbers in federal tax-law provisions—and in 2023, given the economic cycle we're in, some of these changes are bigger than in past years. However, it can be difficult to spot the adjustments that matter to you.

Some apply only to very high-net-worth executives and other super-wealthy people. For example, there's the federal estate-tax exemption (in 2023, $12.92 million for single taxpayers and $25.84 million for married joint filers). Others of interest mainly to administrators of corporate benefit plans and other experts (like us here at myStockOptions) who keep track of this stuff. For example, the income definition of “highly compensated employee,” which affects eligibility for employee stock purchase plans (ESPPs) and 401(k) plan non-discrimination testing, is $150,000 in 2023.

This article clears away all that to focus your mind on the essential points for you. Below are the top three sets of tax figures in 2023 that all employees should know. They relate to compensation from work: paycheck withholding, the potential need for estimated taxes, and your retirement savings.

1. The Social Security Wage Base

The Social Security tax (at a rate of 6.2%) applies to wages up to a maximum amount per year that is set annually by the Social Security Administration. Income above that threshold is not subject to the Social Security tax. (By contrast, the Medicare tax is uncapped, with a rate of either 1.45% or 2.35%, depending on your income level.)

In 2023, the Social Security wage cap is $160,200, up from $147,000 in 2022. This means the maximum possible Social Security withholding in 2023 is $9,932.40. Once your income is over the wage cap and you’ve maxed out the withholding, you’ll see 6.2% more in your paycheck!

2. Your Income-Tax Bracket And Withholding

If you’re an employee, your company withholds taxes from your paycheck according to the information on your Form W-4. Showing the federal income-tax brackets and their rates, the table below can help you understand how an additional amount of compensation would be taxed at your marginal tax rate, i.e. the percent of tax you pay for an additional dollar of income in your current tax bracket. That number tells you whether the withholding as indicated on your W-4 will cover the total tax you will owe for 2023. To avoid “penalizing” additional income in your mind, be sure you know your effective or average tax rate.

Need To Pay Estimated Taxes?

Additional compensation received, such as a cash bonus or income from a nonqualified stock option exercise or vesting of restricted stock units, is considered supplemental wage income. For federal income-tax withholding, most companies do not use your W-4 rate for this income. Instead, they apply the IRS flat rate of 22% for supplemental income (the rate is 37% for yearly supplemental income in excess of $1 million).

As shown by the table above, once you know your marginal tax-bracket rate, you may find the withholding rate of 22% does not cover all of the taxes that you will owe on supplemental wage income. In that case, you must either put extra money aside for the 2023 tax return you will file in 2024, pay estimated taxes during 2023, or adjust your W-4 for your salary withholding as soon as possible to cover the shortfall. Speak with a qualified tax professional, such as a CPA or Enrolled Agent, when you’re uncertain about the best approach to take.

If estimated taxes are the route you choose, know that due dates for quarterly estimated tax payments in the 2023 tax year are April 18, June 15, and September 15 of 2023 and January 16 of 2024. (The IRS routinely postpones these due dates for taxpayers in areas of the United States affected by natural disasters. See the IRS website section Tax Relief In Disaster Situations.)

3. Your Contribution Limit For Qualified Retirement Plans

In 2023, you can elect to defer up to $22,500 from your paychecks into qualified retirement plans, such as your 401(k). That annual limit increased from $20,500 in 2022.

The total ceiling for deferrals to defined contribution retirement plans, including any extra part contributed by your employer, rose to $66,000 in 2023, a $5,000 increase over last year’s amount. If you are 50 or older, you can contribute an additional $7,500 per year, a limit that also went up in 2023.

The amount of compensation income that can be considered in the calculation for qualified deferrals grew to $330,000 in 2023. Check with your company’s 401(k) plan administrator for the process of making changes in your compensation deferral election.

Want To Defer More Income?

Look into whether your company has a nonqualified deferred compensation plan, sometimes called an excess 401(k) plan. For more on these plans, see the website myNQDC.com.

Inflation Adjustments For Health Savings Accounts (HSAs)

While not all employees have them, health savings accounts (HSAs) are also getting an increase in their pre-tax contribution limits for 2023 in response to inflation. HSAs are available only for high-deductible health plans.

The IRS has raised the yearly contribution limit for HSA self-only coverage to $3,850, up by $200 from last year, and for family coverage it is now $7,750, up from $7,300 in 2022. The limit for HSA catch-up contributions, available for people ages 55 or older, remains $1,000. With more companies setting up pre-tax payroll deductions for HSAs and matching employee contributions, these increases could be significant for many people as the cost of health care continues its relentless rise.

IRS Resources

Here are resources with more details on the many adjusted 2023 tax numbers:

• Revenue Procedure 2022-38 gives inflation adjustments in various income-tax-related provisions for 2023, which are also summarized in a more reader-friendly IRS news release.
• IRS Notice 2022-55 gives the annual adjustments in 2023 for various tax-qualified retirement plans.
• Revenue Procedure 2022-24 has details on the HSA contribution limits for 2023.

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WEBINAR: Preventing Tax-Return Mistakes With Stock Comp & Stock Sales

Wednesday, February 15
2pm–3:40pm ET, 11am–12:40pm PT
2.0 CE credits for CFP, CPE, EA, CPWA/CIMA, CEP, ECA

This tax season brings extensive risk for mistakes with tax returns involving stock comp. Complications in tax reporting due to the volatile markets of 2022, along with more IRS agents for audits, make the need for expert tax guidance more important than ever.

Register for this lively educational webinar on tax-return topics for stock comp. In 100 minutes, it will feature insights from three tax experts on issues with tax returns involving equity comp and sales of company shares. The panelists will present real-world case studies on how to use information in tax returns to create better financial plans.

For a detailed agenda of topics covered, see the webinar registration page.

Time conflict? No problem. All registered attendees get unlimited streaming access to the webinar recording for their personal viewing, along with the presentation slide deck. Therefore, even if you have a time conflict, please still register, as you will receive a link to the recording and presentation.

ALERT: SEC Adopts Key Changes To 10b5-1 Plans To Prevent Insider Trading

A Rule 10b5-1 trading plan is a prearranged plan for selling and/or buying company stock under SEC Rule 10b5-1 that provides an affirmative defense against charges of insider trading if you later trade stock while you possess MNPI. Many companies now either require or strongly encourage their executives and directors to set up 10b5-1 plans. The SEC has just finalized important additional rules for 10b5-1 plans that affect those who use them, as we summarize in this article.

SEC Has Long Suspected Misuse Of Rule 10b5-1 Trading Plans

First, some background. The law prohibits you from trading stock on the basis of material nonpublic information (MNPI), i.e. information that will move the company's stock price when it is made public. You can commit insider trading accidentally as well as intentionally, even if the MNPI that you possess did not influence your decision to trade. Avoiding insider trading is a major concern for executives, directors, and employees with company stock who need to sell shares to diversify or generate cash but also frequently know MNPI. Those could be shares you purchased on the open market or from a stock option exercise, restricted stock unit (RSU) vesting, or employee stock purchase plan (ESPP).

The SEC has been building up to its new rules for 10b5-1 plans over the past several years. A growing body of evidence suggests 10b5-1 plans have occasionally been abused to commit insider trading rather than prevent it. The SEC has been scrutinizing 10b5-1 plans in the wild for some time and is bringing more enforcement actions for abuses.

For example, earlier this year the SEC announced it had settled an enforcement proceeding involving alleged insider trading by Cheetah Mobile's CEO and its former president; this case and the related SEC Order involved the misuse of a 10b5-1 plan. The SEC's statement on the matter quotes Joseph G. Sansone, Chief of the SEC Enforcement Division's Market Abuse Unit, who explains that "while trading pursuant to 10b5-1 plans can shield employees from insider-trading liability under certain circumstances, these executives' plan did not comply with the securities laws because they were in possession of material nonpublic information when they entered into it."

SEC Adopts Additional Rules For 10b5-1 Plans

In response to its findings, the SEC has taken action to tighten up the rules for 10b5-1 plans. On December 14, the agency adopted final amendments for 10b5-1 plans, a year after these additional rules were proposed.

For corporate officers, directors, and employees seeking to use 10b5-1 plans as an affirmative defense against insider-trading liability when they sell or buy company stock, these rule changes include:

1. A "cooling off" (i.e. waiting) period before trades can start after the plan's adoption or modification:

• For directors and officers, the later of (1) 90 days or (2) two business days after the disclosure in SEC Form 10-Q or 10-K of the company's financial results for the fiscal quarter in which the plan was adopted or modified (but not to exceed 120 days). The proposed rules had a 120-day cooling-off period before any trading could start after the plan's adoption or modification.
• For people other than directors and officers, 30 days. This is an important difference from the proposed rules, which did not clearly specify a cooling-off period for regular employees and managers.

2. A requirement to certify in the plan itself when adopting or modifying it that you are not aware of material nonpublic information about the company. This certification requirement is just for directors and officers.

3. No overlapping 10b5-1 plans for open-market trades. One exception would be another plan set up just to allow sales of stock (i.e. sell-to-cover) for tax withholding when restricted stock/RSUs vest.

4. A limit on single-trade plans to one per 12-month period.

These final rules are effective 60 days after publication of the adopting release in the Federal Register. Existing plans appear to be grandfathered unless modified.

Companies must also now annually disclose their insider-trading policies and procedures. For more details on the additional requirements, including the need to check a box on SEC Form 4 and Form 5 when a reported stock transaction is made under a 10b5-1 plan, see the SEC Fact Sheet on the rule changes.

The related FAQ at myStockOptions explains the background of this development, including the SEC's long-running scrutiny of 10b5-1 plans and research suggesting that abuses of 10b5-1 plans do occur, and has a growing curated list of detailed commentaries on the rule changes from law firms.

Leading Financial Advisors Unbox Year-End Planning Amid Down And Volatile Markets Of 2022

After a tumultuous year of stock-price volatility and declines, year-end financial and tax planning in 2022 may be trickier than usual for some people with equity comp and holdings of company shares. This was the emphasis of a popular webinar we held at the start of December: Year-End 2022 Financial & Tax Planning For Equity Comp. In the spirit of the season, leading advisors with expertise in equity comp presented ideas and tips for year-end 2022 and year-start planning 2023:

• John P. Barringer (CFP®), Executive Wealth Planning
• Rebecca Conner (CPA, CFP®), Founder, SeedSafe Financial LLC
• John Owens (CFP®, EA, ECA, CPWA®), Director of Financial Planning, Brooklyn FI

The article below summarizes some of the key points they made. The webinar in which they spoke is available on demand at the myStockOptions Webinar Channel. Meanwhile, myStockOptions.com has a comprehensive section on year-end planning, including extensive articles and FAQs. Seek guidance on your specific situation from qualified tax and financial advisors.

The Importance Of Multi-Year Planning

“When we start off with a client, we begin right away with the idea of multi-year planning,” noted webinar panelist John Barringer of Executive Wealth Planning in Denver, Colorado. “We treat every meeting with clients as if it’s year-end. There are so many overlapping issues: trading windows, new grants, vesting.”

Multi-year planning is especially valuable with stock comp, as you can control the timing of stock sales and option exercises, and you know when RSUs will vest. Getting this planning right is crucial, for example, if you are considering option exercises or stock sales at the end of 2022.

For a start, you need to be aware of the 2022 and 2023 thresholds for higher tax rates on compensation income and capital gains, the phaseouts for various tax credits, and the Medicare surtax on investment income. If you believe your tax rates will be higher in 2023 and beyond, you want to consider whether to accelerate income into 2022.

Webinar panelist Rebecca Conner, the founder of SeedSafe Financial in Austin, Texas, outlined her systematic approach to multi-year planning. “What we do for all of our clients is just lay out what we expect each year and then see what we can play with,” she explained. “If they’re receiving RSUs as well as nonqualified or incentive stock options, we’ll map out RSUs over the years and where we think taxable income is going to be. Then we’ll see how we can pop other things around and fit them in over those next few years.”

Stock Option Exercises: Variables To Consider

As Rebecca acknowledged, the vesting dates of RSUs are fixed, so you can’t control when you receive RSU income at vesting. By contrast, you choose when to exercise stock options, making them a variable to play with in multi-year planning.

Example: You are a joint filer with $290,000 of taxable income in 2022 and projected taxable income of roughly the same in 2023, putting you in the 24% tax bracket. You also have a $100,000 spread on your nonqualified stock options (the grant will expire in March 2023). By exercising just enough options in 2022 to generate $50,000 of additional income (giving you $340,000 for the year), you can then exercise the remaining options in early 2023 and avoid the higher 32% tax bracket in both years.

However, many advisors emphasize that taxes should not be your only consideration in year-end planning. “At year-end, we don’t let the tax tail wag the dog,” cautioned Rebecca. “The main question is really how much cash are you willing to lose toward options? They’re never a guarantee. It’s important to recognize that this may be a moonshot. If we can treat it like a very small company stock with high volatility, what would you want to put toward that? We’ll recognize what our clients would like from that perspective.”

Other factors in planning for stock option exercises at year-end are holding periods for capital gains and your company’s stock-trading windows, as discussed by webinar panelist John Owens, Director of Financial Planning at Brooklyn FI in New York. “One of the things that’s top of mind is going through what the timeline looks like,” he said. “If you’re doing an exercise on, say, December 8, you might not be able to sell those shares for long-term capital gains next year because your company’s trading window is closed during that time. We need to understand cash-flow needs for clients and how long they actually want to hold the stock.”

Incentive Stock Options: Year-End Dilemma

The advisors emphasized that in a down market it is crucial to review incentive stock option (ISO) exercises that you made earlier in the year if you are still holding the stock. Selling that ISO stock before the year ends removes the spread at exercise from the AMT calculation, thus eliminating the need to pay the AMT on it. However, making that move also means you don’t meet the ISO holding periods for beneficial tax treatment.

Diversification In Down And Volatile Markets

The need to diversify is a common theme in all investment planning. Do the down markets and volatility of 2022 make that need more or less urgent at year-end?

“I think it really depends on what the client is anchoring to,” offered John Owens. “If they’re anchoring to a stock price that was 80% higher a year ago, it may be hard to get them to sell. But I try to spin it by saying hey, your company’s stock may be down but the broader stock market is also down, so you’re selling something at a discount to buy something at a discount. You’re still getting upside, and it’s a more diversified upside.”

The webinar panelists all said they generally recommend that clients sell RSU shares at vesting as a way to diversify out of company stock. “With our clients, we explain that diversification is something we’re going to recommend in every trading window,” asserted Rebecca Conner. “For RSUs that are vesting and available to sell immediately, we will do that from the get-go. And we’ll have that conversation during the good years as well as the bad years. It’s part of the process. Clients understand that they’re dollar-cost-averaging over a period of time.”

To those who are skeptical about this concept, she points out that loyalties to single stocks can be dangerous allies. For example, after an initial public offering (IPO), “statistically 70% of IPO companies do not get back to their initial high price,” an observation that may help to ease the client away from anchoring on that price.

Private Companies In 2022: Delayed IPOs

John Owens noted the special relevance of multi-year planning in 2022 for employees of private companies which were expecting an IPO this year that was postponed by a year or more due to economic uncertainty or other factors.

“Many clients have had delayed liquidity events this year because the IPO market has dried up,” he explained. “For clients who we now know are going to have huge liquidity events in future years, we’ve actually been looking at accelerating income into this year because their income is lower than we thought it was going to be.” This strategy, he observed, takes advantage of the client’s lower tax rate this year for any income that can be recognized now instead of later, when the rate will be higher at the time of the company’s IPO, acquisition, or other liquidity event.

Ways To Reduce Taxable Income At Year-End

What if you did have a big income spike from stock compensation this year? What are some of the ways in which you can reduce your income on other fronts to keep your 2022 income in a lower tax bracket?

John Barringer mentioned first the need to max out 401(k) plans and, beyond that, perhaps consider a contribution to a nonqualified deferred compensation plan. However, he cautioned, this type of planning should be prospective rather than retrospective. “Before that big income hit happens, we need to know how we’re going to proceed,” he urged. “By the time the event happens, if there wasn’t some planning before, it’s getting close to being too late.”

Rebecca Conner agreed. “A client will come to us with a double-trigger RSU vesting and say ‘How do I minimize taxes?’ Oh, man!” she laughed. “Not very easily. However, we can talk about ways to defer future taxes. Maybe it’s a great time to do a mega-contribution to a 529 college-savings plan for a young child. Maybe it’s time to make choices with investments now to really set you up to defer those kinds of taxes in a bigger picture over multiple years in the future.”

Tax-Loss Harvesting

One popular year-end strategy is tax-loss harvesting: you sell stock at a capital loss that can then be used on your tax return to first offset capital gains and then up to $3,000 of ordinary income. “We’re focusing a lot on tax-loss harvesting, mainly for people with huge first-time capital gains, perhaps $2–3 million payouts,” said John Owens. Rebecca Conner added that her firm is doing the same. “We look at how much a tax loss can really help clients and what we think is justifiable,” she explained. “It may help them for a lot of additional stock sales.”

But not all advisors are big fans of this technique. “I do not oversell the idea of tax-loss harvesting,” said John Barringer. “It’s not going to make a huge difference on your tax return. It’s going to lock in losses that you may or may not regret later. And there’s not a lot of bang for your buck in focusing on this when there are so many other issues to focus on with equity comp.”

If you do seek tax-loss harvesting and plan to repurchase the same stock after selling it at a loss, beware of the rules on wash sales, which are explained in an article at myStockOptions: 7 Wash Sale Facts To Know Before Selling Stock For Tax Loss Harvesting.

Year-Start Planning In 2023

Part of year-end planning is also thinking about the coming year. “What new grants do you expect in 2023?” asks John Barringer of his clients. “An ongoing down market may mean a bigger share grant or at least a lower exercise price for stock options.” You should also be aware of stock option grants that are scheduled to expire in 2023, he added, along with what would happen to stock options and RSUs if you were laid off.

John Owens pointed out that now is a great time to enroll in an employee stock purchase plan (ESPP), especially if it has “a good lookback provision for calculating the purchase price.” ESPPs with that feature can be a surprisingly profitable deal in a down market.

Rebecca Conner urges clients to think about employment prospects. “Review job expectations and career goals. If you’re making a move in 2023, consider your total expected income and the impact of any stock options that you may need to exercise when you leave your current job for a new one.”

She and the other panelists also recommend evaluating whether to exercise ISOs early in the new year and hold the shares if the company’s stock price is still depressed but the outlook for the company is good. This can minimize your AMT risk while starting the holding-period clock for the beneficial ISO tax treatment.

myStockOptions Webinars

See the myStockOptions Webinar Channel for upcoming webinars and past webinars on demand. Each webinar (100 mins) offers 2.0 CE credits for CFP, CPWA/CIMA, CEP, EA (live webinars only), and CPE (live webinars only):

Year-End 2022 Financial & Tax Planning For Equity Comp. Boost your knowledge of year-end and year-start strategies for stock options, restricted stock/RSUs, ESPPs, and company stock holdings to help you make smarter decisions and prevent costly mistakes.

Restricted Stock & RSU Financial Planning: Advanced Bootcamp. Insights from a panel of three leading financial advisors, including case studies, to provide practical expertise for restricted stock/RSUs in public and private companies.

Stock Option Exercise Strategies: Advanced Bootcamp. It is crucial to have a plan for stock option exercises. This webinar features compelling strategies from a panel of three experts in financial and tax planning for option exercises.

Stock Compensation Bootcamp For Financial Advisors. Whether you are new to stock comp or want to sharpen your knowledge, our bootcamp webinar provides practical information and insights to maximize success.

Stock Comp Financial Planning For Private Company Employees: From Startup To IPO Or Acquisition. Equity comp in private companies is different. Learn the related financial and tax planning with three leading financial advisors, including real-world case studies.

"The knowledge I gained from myStockOptions both as a premium member and from your webinars has made me stand out at work." —Vincent Leonardo (EA), Tax Analyst, Intuit

Negotiating Equity Compensation: How Advisors Can Help Clients. Learn the best ways to evaluate and negotiate equity compensation in job offers and how to protect it at job termination.

Strategies For Concentrated Positions In Company Stock. Wealth is won and lost through the management of concentrated company stock positions. In this webinar, experts at managing concentrated stock wealth explain strategies and solutions.

10b5-1 Trading Plans And Other SEC Rules Advisors Need To Know. Learn the fundamentals, best practices, and most effective designs for Rule 10b5-1 trading plans. This webinar features top legal and financial experts presenting practical guidance and real-world case studies for financial advisors.

Preventing Tax-Return Errors With Stock Comp And Stock Sales. Understand the rules of tax-return reporting for stock options, restricted stock/RSUs, ESPPs, and sales of company shares. Learn how to avoid the common mistakes that can lead to overpaying taxes or unwanted IRS attention.

Selling Stock At Year-End To Harvest Losses? Don't Get Tangled In The 'Wash Sale' Rule

“Harvesting” capital losses to offset capital gains on your tax return is a popular year-end strategy. But watch out for wash sales, which can tangle up your tax planning. This article explains what you need to know to avoid this tax trap.

Tax-Loss Harvesting And Wash Sales

In brief, the tax rules let you net capital losses against capital gains on Schedule D of your Form 1040 tax return. Any unused capital losses you can then net against up to $3,000 of ordinary income. Lastly, you can then carry forward any remaining losses to the next tax year. If you think stocks will go up in 2023, you may think it makes tax sense to sell loss-makers now, before the end of 2022, and repurchase those stocks soon afterward to keep your investment in them.

For example, after the stock market declines of 2022, you may now hold securities—whether stocks, ETFs, or mutual funds—that would generate capital losses if sold. Those losses could then be used to offset capital gains and a limited amount of ordinary income.

Here’s where that crafty tax plan runs into trouble. A sale of stock at a loss coupled with the repurchase of the same stock within 30 calendar days after the sale will trigger the wash-sale rules, disallowing, for now, the capital loss. Below are key facts to understand about these rules.

Seven Points To Know About Wash Sales

1. The disallowed loss is not “lost” (with one big exception: see #4 below). Instead, the loss you’re not able to claim on your upcoming Form 1040 tax return is added to the replacement stock’s basis and holding period. If you purchase fewer shares than you sold, the wash-sale treatment applies only to that number of shares (i.e. not the entire number of shares initially sold).

2. While the timeframe for wash sales is often presented as a 30-day window, it’s actually a 61-day window covering the 30 days before and after your sale, regardless of whether that period spans two years. Buying in early January the same stock you sold at a loss at the end of December would definitely be deemed a wash sale.

3. The rules are triggered when you buy “substantially identical securities” before or after the loss. Let’s say you’re selling at a loss the stock in the company you work for but believe strongly that its price will rebound. You’re stuck with the wash-sale time limits once you sell it, and you also need to follow the insider-trading rules even before you do. You could instead buy the stock of another company in the same industry or in a mutual fund or ETF tracking that industry.

4. The wash-sale rules do not directly apply when the sale and purchase both occur in your 401(k) or IRA, as capital gains and losses are not tracked in those accounts. However, after the sale in your retail brokerage account, you cannot outfox the IRS by instead purchasing the same security in your IRA or 401(k). IRS Revenue Ruling 2008-5 goes even further: it prevents you from adding this loss to the basis of the shares purchased in your IRA. That would permanently eliminate the capital loss disallowed in the year of sale.

5. Trades involving listed options, employee stock option exercises, and shares bought through employee stock purchase plans (ESPP) or dividend reinvestment plans (DRIPs) can cause a wash sale when they occur within 30 days after you sell the stock at a loss. The treatment for incentive stock options (ISOs) is more draconian still, as a wash-sale loss is triggered even when you sell the ISO stock at a price higher than the exercise price but lower than the market price on the date of exercise. For restricted stock or restricted stock units, the grant itself or its vesting may also trigger the wash-sale rules when you have sold stock at a loss, as explained by an FAQ at myStockOptions.com.

6. Your brokerage firm will track and report wash sales by account. It may not do this across different accounts that you (and your spouse) have at the firm and at other brokers. Therefore, you and/or your tax-return preparer must consider trading activity in securities across all the accounts you have.

7. Form 1099-B, which you receive from your broker in time for tax season (usually by Feb. 15), reports all of your stock sales from the prior year. It shows (in Box 1g) the amount of any nondeductible loss stemming from a wash sale involving covered securities (at least for those in the same account). Note that many brokerage firms reformat Form 1099-B into their own substitute statement that has columns labeled the same as the boxes on the IRS form. You still need to report the wash sale on your tax return on Form 8949, even though the loss on those shares will not be immediately recognized, and adjust the tax basis on the replacement shares when you sell them.

More Tax Resources

See IRS Publication 550 for the IRS guidance on wash sales. It appears in the subsection “Capital Gains & Losses” of Chapter 4 (pages 56–57 in the version for 2021 tax returns).

When your tax planning (and your tax return) for 2022 involves income from company stock sales and/or equity compensation, such as stock options, restricted stock units, or ESPPs, explore the Tax Center at myStockOptions.com and consult a qualified tax or financial advisor. We have articles, FAQs, videos, and annotated IRS forms that demystify the complex federal tax rules. On December 1, myStockOptions.com is also holding a webinar on year-end and year-start financial planning and tax strategies for equity comp (see section below).

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WEBINAR: Year-End 2022 Financial & Tax Planning For Equity Comp

Thursday, December 1, 2022
2:00pm to 3:40pm ET (11:00am to 12:40pm PT)
2.0 CE credits for CFP, CPE, EA, CPWA/CIMA, and CEP

In this lively webinar, boost your knowledge of year-end and year-start strategies for stock options, restricted stock/RSUs, ESPPs, and company stock holdings to help you make smarter decisions and prevent costly mistakes. Volatile markets and economic uncertainty make the need for effective guidance even more important, as this webinar will cover.

In 100 minutes, the webinar features insights from a panel of three leading financial and tax advisors, including real-world case studies, to provide practical expertise on equity comp in both public and private companies. Minimize taxes and build wealth with their know-how on the essentials of year-end and year-start planning.

Time/date conflict? No problem. All registered attendees get unlimited streaming access to the webinar recording for their personal viewing, along with the detailed presentation slide deck and handouts.

Agenda and panelist details are available at the webinar registration page.

"The knowledge I gained from myStockOptions, both as a premium member and from your webinars, has made me stand out at work." —Vincent Leonardo (EA), Tax Analyst, Intuit

Nonqualified Deferred Comp: IRS 2023 Qualified Plan Limits Affect Year-End Deferral Decisions

For many participants in nonqualified deferred compensation (NQDC) plans, November and December are the time to be like an autumn squirrel and decide how much of next year’s salary to defer and store for the future. This decision about nonqualified plans is heavily influenced by the IRS contribution limits for qualified retirement plans. The IRS just set the qualified plan limits for 2023.

Those yearly contribution limits for qualified retirement plans are a big reason why companies offer nonqualified plans: to let executives and other highly compensated employees put away extra amounts for retirement with an elective nonqualified plan or an excess 401(k) plan. NQDC allows you to put away amounts of money beyond the permissible contribution amounts of standard qualified retirement plans.

The deferred income is “nonqualified” because it does not fit the rules in the tax code that allow tax-qualified plans, such as 401(k) plans. For retirement planning, NQDC can therefore bridge the considerable gap that arises between the amount of income that you will actually need in retirement and the amount of income that can be provided via your 401(k) plans and Social Security.

The complex rules under Section 409A of the US tax code must be followed in the deferral and distribution elections. The amount that you defer can only be informally funded by your company and is at risk should the company enter bankruptcy proceedings. Our sibling website myNQDC.com is a comprehensive resource on NQDC plans, including the basics, the deferral/distribution process, the risks, and the related financial and tax planning.

How 2023 IRS Qualified Plan Limits Affect NQDC Deferrals

Generally, you defer income via nonqualified plans only when you know you will max out your yearly contributions to qualified plans, such as your 401(k). Therefore, the contribution limits set by the IRS on qualified plans, adjusted annually for inflation, are important for NQDC planning:

Contribution type/limit	2022	2023
Compensation allowed in qualified deferral and match calculation	$305,000	$330,000
Elective comp deferrals	$20,500	$22,500
Catchup contributions for people 50+	$6,500	$7,500
Total defined contribution limits (employee and employer contributions)	$61,000 + catchup contribution	$66,000 + catchup contribution
Defined benefit plan payout limits	$245,000	$265,000
Income threshold defining key employees for top-heavy plans and six-month delay on payout upon separation	$200,000	$215,000
Income threshold defining highly compensated employees for the purposes of nondiscrimination testing	$135,000	$150,000

Given the current inflation, the IRS changes in limits from 2022 to 2023 are much larger than they have been in recent years. However, if you’ve already maxed out your qualified plan contributions for 2022, you will still probably do the same in 2023, so you will need NQDC plans to defer any salary and bonus increases you expect in 2023. Also, if you believe tax increases are on the way and will affect you, you may feel a growing need to defer income.

Set by the Social Security Administration, the Social Security wage cap will rise in 2023 to $160,200, up from $147,000 in 2022. With the 6.2% rate of Social Security tax, the maximum possible Social Security withholding is $9,114 in 2022 and will rise to $9,932.40 in 2023. Social Security tax (up to the yearly limit) and Medicare tax (uncapped) are withheld at the time of deferral.

For a table comparing the features of 401(k) plans and NQDC plans, and their relative advantages and disadvantages, see an FAQ at myNQDC.com. See also the website’s FAQ on the top NQDC-related issues in year-end planning.

myStockOptions Webinars

See the myStockOptions Webinar Channel for upcoming webinars and past webinars on demand. Each webinar (100 mins) offers 2.0 CE credits for CFP, CPWA/CIMA, CEP, EA (live webinars only), and CPE (live webinars only):

Restricted Stock & RSU Financial Planning: Advanced Bootcamp. Insights from a panel of three leading financial advisors, including case studies, to provide practical expertise for restricted stock/RSUs in public and private companies.

Stock Option Exercise Strategies: Advanced Bootcamp. It is crucial to have a plan for stock option exercises. This webinar features compelling strategies from a panel of three experts in financial and tax planning for option exercises.

Stock Compensation Bootcamp For Financial Advisors. Whether you are new to stock comp or want to sharpen your knowledge, our bootcamp webinar provides practical information and insights to maximize success.

Stock Comp Financial Planning For Private Company Employees: From Startup To IPO Or Acquisition. Equity comp in private companies is different. Learn the related financial and tax planning with three leading financial advisors, including real-world case studies.

"The knowledge I gained from myStockOptions both as a premium member and from your webinars has made me stand out at work." —Vincent Leonardo (EA), Tax Analyst, Intuit

Negotiating Equity Compensation: How Advisors Can Help Clients: Learn the best ways to evaluate and negotiate equity compensation in job offers and how to protect it at job termination.

Strategies For Concentrated Positions In Company Stock. Wealth is won and lost through the management of concentrated company stock positions. In this webinar, experts at managing concentrated stock wealth explain strategies and solutions.

10b5-1 Trading Plans And Other SEC Rules Advisors Need To Know. Learn the fundamentals, best practices, and most effective designs for Rule 10b5-1 trading plans. This webinar features top legal and financial experts presenting practical guidance and real-world case studies for financial advisors.

Preventing Tax-Return Errors With Stock Comp And Stock Sales: Understand the rules of tax-return reporting for stock options, restricted stock/RSUs, ESPPs, and sales of company shares. Learn how to avoid the common mistakes that can lead to overpaying taxes or unwanted IRS attention.

How 10b5-1 Plans Can Help You Build Wealth And Avoid Insider Trading With Your Company Stock

Executives and other key employees with equity compensation face a unique conundrum with company stock. While much of their pay is in the form of restricted stock units (RSUs) and/or stock options, they often cannot sell company shares because they possess what's called material nonpublic information (MNPI), i.e. knowledge of confidential company info that will affect the stock price when made public. In other words, they have to sell company shares to meet financial goals but also don’t want to be accused of insider trading.

Fortunately, there is a way out of this Catch-22 situation: SEC Rule 10b5-1, which provides for a Rule 10b5-1 trading plan.

Insider-Trading Risk

MNPI is confidential information about the company that will move the stock price up or down. When you know MNPI about a company, whether you’re an executive, employee, or outsider, you cannot trade in that company’s securities until the MNPI is disclosed.

When you possess MNPI, regardless of whether or not you factored that information into your buy or sell decision, you’re at risk of being charged with insider trading by the Securities and Exchange Commission (SEC) and criminal prosecutors. To make matters even more challenging, the intervals when company insiders do not possess MNPI, and can sell shares without the risk of insider trading, may be brief and infrequent.

Test your knowledge of the rules: Try our quiz on insider-trading prevention and its interactive answer key at myStockOptions.

Rule 10b5-1 To The Rescue

If you’re in this position, how can you regularly sell company stock? You can use what’s called a Rule 10b5-1 trading plan. When properly created, a 10b5-1 plan gives you a way to diversify your stock holdings, sell stock to meet goals under your financial plan, and avoid getting into trouble for insider trading.

Alert: The SEC is focusing on abuses with these plans and has proposed new rules.

myStockOptions recently held a webinar on 10b5-1 plans and other SEC rules: 10b5-1 Trading Plans & Other SEC Rules Advisors Need To Know. A panel of three experts provided key insights on both the legal framework of 10b5-1 plans and the role they can play in financial planning for company insiders.

Basics Of 10b5-1 Plans

A 10b5-1 plan is a prearranged stock-trading plan under SEC Rule 10b5-1 that provides an affirmative defense against charges of insider trading when you later sell or buy stock while you know MNPI about your company. Created when you do not know MNPI, the plan is set up in advance to make automatic, periodic sales and/or purchases of your company’s stock.

The plans need to follow the requirements, as the SEC is starting to bring enforcement actions for abuses. For example, the SEC recently announced (September 21, 2022) that it had settled an enforcement proceeding involving alleged insider trading by Cheetah Mobile’s CEO and its former president; this case and the related SEC Order involved the misuse of a Rule 10b5-1 plan.

The SEC’s statement quotes Joseph G. Sansone, Chief of the SEC Enforcement Division’s Market Abuse Unit, who explains that “while trading pursuant to 10b5-1 plans can shield employees from insider-trading liability under certain circumstances, these executives’ plan did not comply with the securities laws because they were in possession of material nonpublic information when they entered into it.”

Rule 10b5-1 trading plans have become popular since SEC Rule 10b5-1 was adopted in 2000. “Over 50% of Fortune 500 companies have at least one executive using a 10b5-1 plan,” observed webinar panelist Mike Andresino, a partner in the Boston office of the law firm ArentFox Schiff, in his opening remarks.

Mike went on to outline the basic parameters of 10b5-1 plans. “The insider who establishes the plan cannot be in possession of MNPI when the plan is established,” he asserted. “The person cannot exert any subsequent influence over the implementation of the plan and must have entered into the plan in good faith.”

There are various ways to establish a 10b5-1 plan, he noted. By far the most common is the contract method. “You enter into a binding contract to buy or sell company stock that specifies, or has a formula to determine, the number of shares, the stock price they will be sold at, and the timing. That formula doesn’t have to be precise. You don’t have to specify prices. You can refer to the market; you can refer to extrinsic events.”

Two examples:

Period-sales approach: Sell X number of shares on the first day of every month/quarter, as long as the price is above $Y 

Price-only approach: Sell X number of shares at any time during the plan when price reaches $B; sell an additional C number of shares if price gets to $D 

Importance Of 10b5-1 Plans

Rule 10b5-1 trading plans can become very important financial tools for executives, employees, and directors who know MNPI about their companies most of the time. While companies have regular open trading windows when you are permitted to trade stock, amid blackout periods when you are not allowed to trade, those window periods may not be helpful for some executives and key employees.

“In reality, for many of them, they may have inside information at any point, whether the window is open or closed,” said webinar panelist Rich Baker, the executive director of Morgan Stanley Executive Financial Services in New York. Whether the MNPI involves a product rollout, M&A, or company litigation, it can keep executives in blackout periods for quarter after quarter. “I’ve seen executives who are unable to sell company stock for two years,” Rich stated.

Ideally, Rich went on, you set up a 10b5-1 plan when you have an open trading window and do not possess MNPI. “There’s a waiting period, a ‘cooling off’ period, before you can start trading,” noted Rich. “Then trading should be allowable from a legal perspective under the plan on an ongoing basis thereafter.”

Rich explained that 10b5-1 plans can confer other benefits beyond just letting corporate insiders trade company stock in good faith and get on with their financial planning. “10b5-1 plans can reduce investor concerns. They let the company facilitate an orderly disposition for all of their executives so that they don’t have lots of optic-concerning trades going on when activity is high at the company.”

“Diversification, selling long shares, is the most commonly thought of use for 10b5-1 plans,” chimed in Mike Andresino. “You can also exercise and sell stock options under a 10b5-1 plan. In combination with restricted stock and restricted stock units, you can use 10b5-1 plans to sell shares to cover taxes at vesting even during a blackout period.”

Best Practices For 10b5-1 Plans

Mike then discussed some of the best practices for 10b5-1 plans that have arisen to help ensure they work as an affirmative defense against insider trading. “The letter of the law doesn’t have a lot of requirements, but over the years a series of practices have developed,” he observed as a prelude to covering the SEC’s proposed rules. One is the “cooling off” period. “Companies often have a period that must elapse between the adoption of the plan and the first trade that takes place under the plan. Sometimes it’s as short as two weeks. The sweet spot is generally 30, 60, or 90 days.”

Terminating the plan early can, Mike noted, put a big dent in any later claim that you entered the plan in good faith. “One thing which indicates to courts and the SEC that you may not have had good faith is adopting a plan and then, when it looks like it may be beneficial to hold the shares, you terminate the plan.” Similarly, Mike said, multiple overlapping plans can also raise questions about good faith. “Companies often impose restrictions on that.”

SEC Proposed Rules

The SEC has proposed new rules for 10b5-1 plans to combat suspected abuses, explained Rich Baker. These rules would codify many of the best practices that have arisen. The amendments add new conditions to the availability of the affirmative defense to insider-trading liability, including:

1. 120-day cooling-off period before any trading can start after the plan’s adoption or modification
2. Requirement to certify when adopting or modifying the plan that you are not aware of material nonpublic information about the company
3. No overlapping 10b5-1 trading arrangements for open-market trades
4. A limit on single-trade plans to one per 12-month period
5. Plan must be entered into and operated in good faith

The first two SEC rules would apply only to senior officers and directors, though a company could decide under its own rules to impose them on other executives and on employees. The final SEC rules are expected in the spring of 2023.

Financial Planning With 10b5-1 Plans

Webinar panelist Megan Gorman, the founder of Chequers Financial Management in San Francisco and a Forbes.com contributor, spoke about the role a 10b5-1 arrangement can play in financial planning. She presented tips and case studies on how she effectively uses and designs these plans for clients.

When putting together a plan, she explained, you should answer four questions:

1. What shares are you selling?
2. How long is the plan?
3. What is the frequency of sales?
4. What is the selling method?

“Monthly selling plans with limits are often a great approach,” she said. She noted that the optimal length of the plan is typically 12 months. “You can also structure the plan to change at different points to meet cash-flow requirements.”

Using what she calls an “elevator design” allows more shares to be sold as the company’s stock price rises, as illustrated in one of her webinar case studies. She asserted that it is also crucial to factor tax planning into your 10b5-1 arrangement, along with future vestings of restricted stock or restricted stock units.

Optics are another key consideration, Megan emphasized, especially for senior executives who can easily stumble into the media spotlight. “Just because you are allowed to do a 10b5-1 plan doesn’t mean you should,” she cautioned. “Even the most innocent actions can look nefarious on the outside.” One test Megan applies is a thought experiment: how would this stock trade look if it were reported on the front page of The Wall Street Journal?

Seek Expert Advice

Starting a Rule 10b5-1 trading plan is not a DIY activity. You need expert legal, financial, and tax advice, to follow both the SEC and your company’s rules. You want to assure you are setting up the plan properly and that it achieves what you want it to without getting you into trouble.

Before you set out, see the myStockOptions content sections on Rule 10b5-1 trading plans and insider-trading prevention. In addition, the webinar in which the experts quoted above spoke is available on demand at the myStockOptions Webinar Channel.

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myStockOptions Webinar Channel: Next Webinar

Negotiating Equity Compensation: How Advisors Can Help Clients

• October 13, 2022, 1:00pm to 2:40pm ET, 10am to 11:40am PT
• 2.0 CE credits for CFP, CPWA/CIMA, CEP, EA, and CPE
• Agenda and panelist details at the webinar registration page

Learn the best ways to evaluate and negotiate equity compensation in job offers and how to protect it at job termination. Discover how to help clients get the best deal to maximize and preserve their wealth in company shares, stock options, and restricted stock/RSUs.

This webinar will provide practical info and guidance on negotiating equity comp, how to safeguard grants when leaving a job, and big mistakes to avoid. In 100 minutes, it will feature insights from three leading financial and legal advisors, including real-world case studies. Their expertise applies to employees and executives at all types of companies, whether startups, recently public companies, or long-time public corporations.

Register now. All registered attendees get unlimited streaming access to the webinar recording for their personal viewing, along with the detailed presentation slide deck and handouts. Therefore, even if you can't attend the live webinar, please still register, as you will receive access to the recording along with the presentation and handouts.

 

Stock Options & RSUs: 6 Pro Tips For Navigating Volatility

For many of you who have equity comp, the extreme market fluctuations of 2020–2022 may be your first experience of volatility after a decade of rising markets. Know that it's normal to feel a little rattled. Sudden stock-price declines can stress out even the most experienced holders of stock comp (and their financial advisors).

Sooner or later, volatility may force you to make decisions that affect your financial future and long-term wealth. Should you change your financial plan or stick with it?

Financial strategies for equity compensation amid volatility and falling stock prices were dominant themes in two recent myStockOptions webinars. In one webinar on stock option exercise strategies and another on planning for restricted stock and RSUs, panels of financial advisors and tax experts discussed how to navigate volatility and down markets. This diverse group, including CFPs, EAs, and JDs, presented a variety of insights from different angles.

1. Listen To Your Risk Tolerance

David Marsh, a financial-planning case manager at Ameriprise (Minneapolis), pointed out in the stock option webinar that market declines offer a useful period to “confirm or reset risk tolerance.” In good times for your company’s stock price, he observed, it’s easy to be aggressive and bullish in your financial strategy. It’s harder to keep up that resolve when the stock price tumbles. In fact, he continued, a falling stock price can give you a helpful reality check on your tolerance for investment risk.

He suggests you listen to what your emotions in a downturn are telling you. “How much of a downturn are you willing and able to stomach, and how does that impact your goals? If you’ve been relying on equity comp to meet regular living expenses, that’s a real danger zone which comes to light in stock-price volatility and downturns.” Insights you derive from dark times for the stock price can help you re-examine your goals for share proceeds and re-assess the portion of them that is discretionary.

With nonqualified stock options, he went on, a reduction in the difference between the stock price and the exercise price may seem to create a tempting opportunity to exercise the options. That starts the holding period for the beneficial tax treatment on long-term capital gains at sale when the stock price eventually recovers. This is a common strategy for incentive stock options (ISOs).

However, with nonqualified stock options (NQSOs) there may be better uses for the same money. “You should compare whether to exercise and hold NQSOs or maybe just hold on to that option and put the cash to work in another way,” he advised. “Consider investment risk and tax factors. What I would bear in mind is that if you’re game enough to exercise NQSOs at this time, I would say let’s take that cash and simply buy more shares. If indeed the stock price does recover, by increasing the equity position in the company we may produce a better result.”

2. Welcome New Option Grants, But Have A Layoff Plan

Megan Gorman, the founder of Chequers Financial Management (San Francisco), complemented David’s thoughts in the stock option webinar with the fact that a depressed stock price is an excellent time to get new stock option grants. Playing a long game, she emphasized, is key to success with equity compensation. “If you go back to March 2009, when the stock market was miserable, it was an amazing time to get a grant with a very low exercise price,” she observed. The stock-price increases during the long recovery made option grants awarded at that time extremely wealth-generating.

But beware of layoffs, she cautioned. Option grants have finite terms and typically only very short periods when options can be exercised after job termination. “It’s important to have a strategy for exercising options and selling stock in the event you are laid off. In these more volatile markets, think about the fact that you are at risk of losing your job. Don’t lose the equity awards you worked so hard for.”

3. Don’t Forget The Big Picture, But Revisit Your Cash Position

Keep your big-picture financial goals in mind, advised Chloé Moore, the founder of Financial Staples (Atlanta), in the restricted stock/RSU webinar. “Things are a little volatile now, but keep a handle on your financial goals. Focus on what you can control: continue to build savings, pay off debt, and put yourself in a stronger financial position to shield yourself as much as you can from the impact of volatile markets.”

To that end, now is a good time to increase your cash position, she noted. “Your restricted stock units can help with this,” she points out. “That’s a good reason to sell the shares as soon as the stock vests.” If you’re using your RSUs to fund your lifestyle, it’s crucial “to revisit cash flow,” she asserted.

4. Try To Be Logical Rather Than Emotional

This is often easier said than done, but it’s an attitude worth reinforcing. In the RSU webinar, Meg Bartelt, the founder of Flow Financial Planning (Bellingham, Washington), addressed the irrational tendency to place too much importance on the grant price of restricted stock/RSUs. If the stock price falls between grant and vesting, this mental “anchoring” makes it easy to feel as if you’ve lost something.

“If you received Google RSUs a year ago, the much higher grant value is really depressing now,” she mentioned as an example. “Your projected comp used to be $500,000. Now it’s $300,000. But it’s important to remember that the $500,000 was literally never yours. The only thing that is yours is the number of shares, if you stick around long enough at the company. Be aware of that bias.”

Should you hold your RSU shares or sell them? The test for answering this question, Meg pointed out, “doesn’t change with the stock price.” Rather, she went on, it’s always this: “If you had cash of the same amount, would you buy stock in the same company?” If the answer is yes, you probably want to hold your shares. If the answer is no, you probably want to sell them. “The answer may change with the stock price and market conditions, but not the logical framework,” she emphasized.

Daniel Zajac, the managing partner of Zajac Group (Exton, Pennsylvania), brought up an alternative approach to minimize downside risk in volatile markets if you have both stock options and RSUs. Speaking alongside Meg and Chloé in the RSU webinar, he suggested doing an analysis to determine whether it makes sense for you to hold your vested RSU shares and instead exercise your options and sell those shares. That can safeguard the generation of proceeds you need for specific goals.

5. Watch Your Estimated Taxes; Look Ahead To Future Grants

Meg also observed that a big drop in income between last year and this year means that if you pay estimated tax to keep up with income spikes from RSU vestings, you should revisit how much estimated tax you’re paying. “Estimated tax vouchers for the current tax year are based on last year’s income. If you use last year’s estimated tax vouchers for this year’s lower income, you’re going to be way overpaying estimated taxes this year.”

The inverse is also true, she continued, should you lower your estimated tax payments this year. If the stock price goes back up next year, you want to be sure you’re not underpaying estimated taxes on the basis of your lower income this year.

Daniel echoed Meg’s observations by stressing the importance of “actively working with a CPA” to be sure that you’re neither overpaying nor underpaying estimated tax throughout the year, instead of simply relying on the safe harbors based on your prior year’s income. “If you have significant equity comp,” he stated, “you should be doing quarterly check-ins for estimated taxes.”

Daniel and the other presenters in the RSU webinar also pointed out that a fallen stock price presents new opportunities. If your annual equity comp grants are based on a percentage of your salary, “you may be getting additional shares because the stock price is lower.” This is good news to offset the bad news of a lower stock price.

6. Now Is The Time To Seek Professional Financial Advice

Bill Dillhoefer, the CEO of Net Worth Strategies (Bend, Oregon), which developed the StockOpter analysis tool, urges employees with equity comp in a downturn to seek advice from a professional financial planner, if they haven’t already. “When the stock price is going up, you may be getting advice from the watercooler chat and think you don’t need a financial advisor,” he said in the stock option webinar. Confidence is easy in bull markets. However, the game changes when stock prices tank and a bear market looms.

Bill emphasized how much a financial advisor can help you make better decisions and avoid mistakes with stock compensation. A good advisor can “establish and track diversification criteria based on risk.” He recommended understanding your “forfeit value,” a metric an advisor can calculate that shows the value lost if you leave your company to work for a competitor. Even if you’re generally confident in your knowledge of personal finance, advisors can help you “be a little more secure about lasting through these volatile markets without going crazy.”

Further Resources

The webinars in which these financial-planning experts spoke are available on demand at the myStockOptions Webinar Channel:

• Stock Option Exercise Strategies: Advanced Bootcamp
• Restricted Stock & RSU Financial Planning: Advanced Bootcamp

myStockOptions.com has other resources and tools on financial planning amid volatility and down markets.

Concentrated Company Stock Positions: How Financial-Planning Strategies Can Manage Risk

Everyone knows the old investment adage: don’t keep all your eggs in one basket. Having a significant portion of your net worth in just one stock is risky.

Concentration in company stock can easily arise for employees and executives who receive equity comp. Whether you acquire company shares through restricted stock unit (RSU) vesting, stock option exercises, or founders’ stock in a fast-growing startup, your investment in that single stock of your company can pile up quickly. While a concentrated position can create tremendous wealth if the stock skyrockets, it can also erase your wealth in just one bad day for the stock.

But diversification, the obvious answer to overconcentration, isn’t always so simple. Many executives have ownership requirements for the stock of their companies and therefore cannot sell large portions of their holdings. Corporate insiders often possess material nonpublic information, which puts them at risk for insider trading when they sell shares.

Moreover, under company rules you may have only very brief open trading windows when you are able to sell your stock. Sometimes sheer loyalty to the company and confidence in its future may make it personally hard for executives and employees to diversify wealth out of the stock.

Strategies exist to mitigate the risk of a concentrated stock position. Some of these techniques were the focus of a recent myStockOptions webinar: Strategies For Concentrated Positions In Company Stock (available on demand). The panel of financial and tax experts who presented during the webinar outlined several key approaches, from simple to complex and from short-term to long-term.

Concentration Risk Applies To All Stocks

While experts do not agree on exactly what constitutes a dangerously concentrated stock position, they do agree that the risk applies to the stocks of all companies. Recent volatility has provided fresh examples, as pointed out by webinar panelist Valerie Gospodarek (CFA), the owner of VG Financial Consulting in Lafayette, California. She noted that, at the time of the webinar (May 4, 2022), Netflix was down 70% from its peak, Wayfair 75%, Zoom 80%, and Zillow over 80%. Even stalwarts such as Amazon (then down 25% from its peak), Google (down 21%), and Home Depot (down 28%) have shown alarming volatility and declines, she continued.

Sudden stock losses often do not involve internal and foreseeable business reasons within a company’s operations. “There were no specific company issues causing these declines,” Valerie pointed out. “A lot of stock declines happen due to macroeconomic factors, such as the pandemic, supply-chain shortages, high inflation, and the war in Ukraine. These can affect every stock out there.”

A commonly cited threshold for dangerous concentration is 10% or more of net worth in a single stock. “Many of my clients who receive equity compensation have far more than 10% of their wealth in their employer,” said Valerie. “Usually somewhere around 20% to 30%, I start to get very concerned for my clients.”

Core Strategies: Selling, Gifting, Or Donating

The simplest recourse for a dangerously concentrated stock position is to sell the shares and diversify. An executive should set up a Rule 10b5-1 trading plan for selling shares, as this can provide an affirmative defense against any insider-trading charges that arise. However, said Valerie, her clients may be reluctant to sell their shares because of combined federal and state tax rates on capital gains that can approach 40%.

An alternative strategy Valerie cited is gifting the stock. A gift of stock, no matter how large, is not taxable income, and the recipient does not have to report it. Depending on the size of your estate at death, a strategy of making lifetime gifts can reduce your estate taxes, and you may want to consider using GRATs and other techniques involving trusts. Another approach is stock donations, including the use of a charitable remainder trust.

Short-Term Strategies: Hedging

More complex strategies for concentrated stock positions were discussed by webinar presenter Marcel Quiroga (RMA®), the founder and CEO of TQM Wealth Partners in Marblehead, Massachusetts. These strategies involve "hedging" the stock: techniques for protecting gains against the risks of concentration without the full tax consequences of selling the shares.

Alert: Hedging transactions are sophisticated devices. They involve legal and tax rules that require professional advice and may attract IRS attention. Some companies prohibit them altogether.

Marcel discussed four short-term hedging strategies during the webinar:

1. A put option gives you the right to sell a specified amount of an underlying security at a specified strike price when or before the option expires. “With a put option, you have the potential to control downside risk,” Marcel observed. “This is a shorter-term strategy,” she emphasized, “because the premiums are high.” However, she noted, there are ways to reduce the out-of-pocket expenditure, such as lowering the strike price.

2. A covered call consists of selling a call option that is covered by a long position in the asset. “This strategy provides income for the stockholder,” continued Marcel, “but it doesn’t offer downside protection. You would use a covered call when you are neutral about the stock, meaning you don’t think it will either increase or decrease in price.”

3. A zero-cost collar does offer some downside protection, said Marcel. “Here you are protecting your losses by purchasing a put and selling a call. The cost of the put is canceled out by what you create in income with the call. You forgo some upside potential, but the put option protects you on the downside. This becomes really interesting not only for that downside protection but also for the possibility of eliminating the cost.” While forfeiting some upside potential may be considered a disadvantage, “with a concentrated position what you’re doing is hedging your bets, so it can be worth giving up that upside potential to protect on the downside.”

4. A variable prepaid forward, like a zero-cost collar, includes buying a put and selling a call, but it has an extra twist. “A variable prepaid forward is packaged with a loan for 75% to 90% of the value of the securities that will be sold in the future, typically in two to five years,” explained Marcel. “Based on the market price at the time the contract expires, the number of shares delivered to the counterparty is variable.” Taxes on capital gains are not due until the transaction is finalized.

“This technique can be useful for executives who are granted stock options but have ownership requirements that prohibit them from selling the acquired shares for a certain time.” However, Marcel warned, this approach can draw IRS scrutiny and is less popular for that reason.

Long-Term Strategies: Exchange Funds And Protection Funds

Two approaches for managing concentrated stock positions over a longer term were discussed by webinar panelist Brian Yolles, the founder and CEO of StockShield in Pasadena, California. These involve what are called exchange funds and protection funds. Both are ways to “pool” concentration risk and thus soften its potential impacts.

An exchange fund, Brian explained, is a partnership or similar entity. Each participant contributes low-tax-cost-basis shares in exchange for a pro rata interest in the fund. As each investor provides stock from different public companies, the fund holds a diversified portfolio of stocks in a variety of industries.

After seven years, if you don’t want to stay in the fund, you can exit by receiving a basket of stocks equal to your fund interest. Contribution of shares to an exchange fund does not trigger a taxable event. The tax basis of your fund interest equals the basis of shares you contributed (i.e. a carryover basis).

“Economically it’s as if each investor sold his or her shares without triggering a taxable event and immediately reinvested the proceeds into the fund,” said Brian. “This is useful for investors with highly appreciated stock positions who wish to diversify out of some or all of their position in a tax-deferred manner.”

However, the stocks you get when you exit the fund seven or more years later “are not really your call,” he cautioned. “That’s down to the portfolio manager of the fund company. The concern there is that when you redeem your exchange-fund interest, you’re going to get stocks that the portfolio manager does not want. You may end up with a bunch of stocks you don’t really like and then have to sell them and pay taxes.”

A protection fund is an alternative risk-pooling strategy. It’s for investors who, unlike with an exchange fund, want to continue owning some or all of their stock position as a core long-term holding. “Each investor contributes a modest amount of cash (not their shares, which they can keep) into a cash pool that’s used to protect the participants from a large decrease in the value of their stock after a period of years,” said Brian, who holds patents for this strategy and whose firm specializes in protection funds. “It’s a way to mitigate the risk but let you keep the stock.”

The pool of cash, he went on to detail, is provided by several investors, “each with a different stock in a different industry and each looking to protect the same amount of stock.” The particular terms of a Stock Protection Trust (SPT) can vary depending on the risk of the underlying stocks. In the example Brian presented, every investor contributes cash (paid up front) equal to 2% of the value of stock being protected per year for five years. The pool of cash is invested to maturity in US government bonds with a five-year duration. The stock being protected is not pledged or subjected to any lockup provision.

At maturity, investors whose stock has appreciated retain their stock’s full upside gain; for investors whose stock lost value, the cash pool is distributed on a “total return” basis. If the cash pool exceeds total stock losses, all losses are eliminated and the excess cash is returned to the investors. If total stock losses exceed the cash pool, large losses are substantially reduced.

Incentive Stock Options (ISOs) And Special Tax Issues

If your concentrated position arose from exercises of incentive stock options (ISOs), you need to know the special ISO tax rules. For ISO shares held more than two years from grant and one year from exercise, you get long-term capital gains tax treatment at sale for the full gain over your exercise price. According to webinar panelist Mark Leeds, an attorney at Mayer Brown in Manhattan, New York, the ISO rules do not automatically prohibit hedging transactions; they consider whether a disqualifying disposition (i.e. sale, gift, etc.) has occurred during the required holding period for ISO shares.

Certain strategies or ways of structuring a strategy can be considered a constructive sale, triggering a disqualifying disposition of the ISO shares and the loss of tax benefits, Mark warned. He also cautioned that any strategy must avoid being labeled as a tax straddle.

Further Resources

The webinar in which these experts spoke, which included case studies and tax analyses, is available on demand at the myStockOptions Webinar Channel. In addition, myStockOptions.com has extensive content on financial planning for concentrated stock positions, diversification, and other high-net-worth situations involving stock options, restricted stock and RSUs, ESPPs, and substantial holdings of stock in public and private companies.

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WEBINAR! Stock Option Exercise Strategies: Advanced Bootcamp

June 15, 2pm–3:40pm ET, 11am–12:40pm PT
2.0 CE credits for CFP, CEP, CPWA/CIMA, and EA

Employees with stock option grants, whether NQSOs or ISOs, face important wealth-building and tax-minimizing decisions about when to exercise their stock options. Volatile stock markets make the need for effective guidance even more important. In this 100-minute webinar, a panel of three leading financial experts will provide practical info, guidance, and expertise for stock options in both public and private companies, including real-world case studies.

For details of the webinar agenda and panelists, see the webinar registration page.

Time/date conflict? No problem. All registered attendees get unlimited streaming access to the webinar recording, along with the presentation slide deck. Therefore, even if you have a time conflict, please still register, as you will receive a link to the recording and presentation.