Equity Comp Pandemic Planning: Leading Financial Advisors Headline myStockOptions Webinar

Gettyimages-989429846-612x612Like all storms, both literal and figurative, the pandemic of 2020 will pass, but at the moment it's a wild ride. Like everything else, company approaches to equity compensation and the financial-planning strategies advisors must consider for clients are being heavily impacted by Covid-19 and its ripple effects.

After wild waves in the stock markets, financial planning for stock compensation continues to be tested by volatility, economic uncertainty, corporate layoffs, and indefinite employment furloughs. It is more important than ever for financial advisors to re-evaluate approaches in this planning niche. Client strategies that may have been ideal for the economic boom years may need adjustment or revision in the unprecedented circumstances of the novel coronavirus.

Webinar: Financial Planning For Stock Compensation During The Pandemic

This is the subject of a special one-hour webinar from myStockOptions on July 22. Bruce Brumberg, the editor-in-chief of myStockOptions, will moderate a panel discussion among three leading financial advisors and a top compensation consultant:

myStockOptions webinar July 22

In this online event, leading financial advisors and equity comp experts will discuss how to reconsider planning for stock compensation and company shares amid Covid-19 and its fallout. Registration is open at the webinar homepage.

The webinar discussion panelists are:

  • Meg Bartelt, CFP® (Flow Financial Planning)
  • Tim Kochis, CFP® (Kochis Global, former CEO and Chairman of Aspiriant)
  • C.J. Van Ostenbridge, CEP (Infinite Equity)
  • Jane Yoo, CFP® (Jane Financial)
  • Bruce Brumberg, discussion moderator (myStockOptions)

After explaining how companies are changing their stock grants, including trends in approaches to underwater stock options, the discussion will turn to what the pandemic and its impacts mean for financial planning. Key topics:

  • what to do with vested stock options
  • strategies for nonqualified stock options and incentive stock options
  • whether to immediately sell restricted stock or restricted stock units when the grant vests
  • whether to participate in an employee stock purchase plan, and ESPP benefits even in down markets
  • special strategies for grants in private companies
  • helping stock comp clients through layoffs, furloughs, and new job opportunities

The webinar offers 1.0 CE credit hour for:

  • Certified Financial Planners (CFPs)
  • Certified Equity Professionals (CEPs)
  • CIMA and CPWA

Webinar Joins Related New Financial-Planning Articles

Many employees with stock compensation are facing tough choices with their equity grants and holdings of company shares.

  • You may need to sell company stock for cash to meet living expenses.
  • Your company's stock price has probably steeply declined and rebounded, going through volatility that makes you wonder about your equity comp and financial planning.
  • You may have lost your job or been furloughed, or you may have changed jobs.

New articles at myStockOptions address these and other timely topics:

7 Things To Know When You Sell Company Stock To Raise Cash
For reasons beyond your control, you may find yourself in a position where you suddenly need to sell stock for cash to meet urgent living expenses. When selling stock you must always proceed with caution. Review this checklist of topics to understand on tax, company, brokerage firm, and SEC rules.

ESPPs Offer Special Benefits In Down And Volatile Markets
ESPPs cannot be "underwater" like stock options, but a declining stock price can have an impact on your plan participation and the tax consequences. This article explains what you need to know for participating in your company's ESPP with a falling or volatile stock price.

What To Do With Your Just-Vested Shares After Your Company's Stock Price Drops
Market volatility can rattle anyone's financial plan for stock compensation and company shares. What should you do with shares acquired from equity awards now? Sell them immediately? Hold them in the hope that the stock price will recover? Should you change the strategy you've been following? This article provides a financial planner's insights on how to consider these questions.

These articles join our longstanding expertise on equity comp and company stock during down markets in our sections on volatility and job loss.


Stock Sales: 7 Topics To Understand When You Sell Shares To Raise Cash Quickly

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These are challenging times for everyone. For reasons beyond your control, you may find yourself in a position where you suddenly need to come up with cash to meet living expenses or other urgent financial demands. The proceeds from selling shares of your company's stock, whether acquired via equity compensation or open-market purchases, can be a source of these needed funds.

However, when making stock sales you must always proceed with caution. Before you sell your company shares, review this checklist of topics to understand on tax, company, brokerage firm, and SEC rules.

1. Understand Capital Gains Tax Basics To Generate Capital Losses

When you sell shares, assuming they’re not in a retirement plan account (e.g. a 401(k) or IRA), you generate a capital gain or a capital loss. The calculation is the amount of the sale proceeds over or under your cost basis, i.e. what the shares cost to acquire plus any W-2 income you recognized for the equity compensation. For stock held over one year after a stock option exercise, vesting of restricted stock units (RSUs), or a purchase in an employee stock purchase plan (ESPP), the gain or loss is long-term, meaning a lower tax rate applies. Shares held for less than one year are taxed at short-term capital gains rates, similar to that of your salary income.

If you have a choice of company shares to sell, you want to first sell stock that generates a capital loss which you can harvest against capital gains. What that means is that you can net the capital losses against any current capital gains, with unused losses deducted against $3,000 of your ordinary income. The remainder of the loss is carried forward to future tax years. When you do not have shares to sell at a loss, your next choice is stock that has the smallest long-term capital gain.

2. Clearly Identify The Lot Of Shares You Want To Sell

When you hold company shares that you’ve received at various times, such as yearly RSU vesting or twice-yearly ESPP purchases, you want to identify at the time of sale which share lot is being sold. The default rule is “first in, first out” (FIFO), but you can choose. Any shares you received at a recent market high are the ones you want to sell for a loss. Make sure you get clarification on how to indicate specific lots to sell through your brokerage firm’s website.

3. Watch Out For Wash Sales

A “wash sale” is deemed to occur if you sell company stock at a loss but you have also separately purchased the same stock within 30 days before or after the sale. That triggers the special rules for wash sales. Under those rules, the loss and holding period are carried over to the replacement shares.

According to most experts, any restricted stock or RSU vesting 30 days before or after the loss sale would be considered a wash sale and trigger the related rules. Similar treatment applies to an option exercise, ESPP purchase, or dividend reinvestment plan on company stock. Those are all considered purchases.

4. Job Loss? Carefully Follow Your Company’s Post-Termination Stock Option Exercise Rules

You may intend to exercise stock options and immediately sell the shares to generate needed cash.  However, if you lose your job, vesting usually stops on all types of stock compensation. In that case, you must quickly exercise any outstanding vested stock options, typically within 90 days or less of your employment termination. As explained in the section Job Events at myStockOptions.com, if you do not exercise vested in-the-money stock options in time you will forfeit their value.

Alert: Check your stock grant agreement and your stock plan for the rules and exercise deadlines that apply to each option grant upon job loss. If anything is unclear, ask your company’s stock plan administrator.

5. Know Your Company’s Rules For ESPP Contributions

In an employee stock purchase plan, you can usually withdraw any accumulated funds that are waiting for the next purchase date. You need to check your company’s ESPP rules for how you do this. While an ESPP with a lookback and a 15% purchase discount can be an attractive investment in down markets, withdrawn ESPP funds can be another source of emergency funds. Furthermore, you can reduce or stop future ESPP contributions from your salary.

6. Be Mindful Of Holding Periods For ESPPs And ISOs

With stock from a purchase in a tax-qualified ESPP or an exercise of incentive stock options (ISOs), holding the shares for more than one year from enrollment/grant or two years from purchase/exercise gives you special tax treatment on the sale. Remember that the tax treatment is affected by selling those shares early. That’s called a disqualifying disposition, with different ramifications for ESPPs and ISOs. This is another reason to carefully choose and specify the lot of shares you want to sell, as explained in #2 above.

7. Beware Of Insider Trading

Understand that sometimes stock trades can actually get you into trouble. If you buy or sell shares of your company’s stock while you know material nonpublic information (MNPI), you are committing insider trading, which is illegal. Material nonpublic information refers to company secrets that, when made public, would move the company’s stock price up or down. This prohibition against trading on confidential inside information applies even if you are no longer employed by the company.

The type of information that could be considered MNPI is not always clear. However, common sense is a good guide. MNPI is any confidential company information that, once publicly known, could affect your company’s stock price in a positive or negative way. Examples include undisclosed financial results, a merger or acquisition that has not been announced, or a new product that has not been publicized. This prohibition also applies to confidential information you learn in your job about a corporate client, supplier, or other organization that you work with.

Alert: The SEC and the US Department of Justice are watching closely for insider trading related to the stock-market impacts of the COVID-19 pandemic and expect to pursue enforcement activities.

In addition to the securities laws about insider trading, your company may also have its own stock-trading pre-clearance rules, along with mandated blackout periods and window periods for stock trading.


More Lawsuits Involving Stock Compensation

Back in January, this blog looked at some recent lawsuits of interest involving stock compensation. In recent months, a few additional court decisions involving equity comp have caught our attention.

Online Grant Acceptance

Electronic distribution and acceptance have become common procedures for stock grants. Occasionally lawsuits challenge these, often when the agreement has a provision that restricts an employee who later contends that he or she did not see it or agree to it (e.g. a covenant not to compete). That's what happened in ADP v. Lynch, in which the US Court of Appeals for the Third Circuit upheld a lower court's decision enforcing restrictive covenants in electronically delivered grant agreements. In the company's online procedure, employees needed to check boxes confirming that they had reviewed the documents, which included the plan, the award agreement, and the noncompete. The first page of the grant agreement also specifically told employees that acceptance of the award depended on their agreeing to the noncompete. The court found that by checking the box affirming their reading of these documents, employees agreed to the provisions. It rejected as irrelevant the contention that the employee did not recall doing so and was not adequately informed about the consequences of accepting the grants.

This case is a clear warning that you need to read and understand the provisions in your grants agreement and stock plan. Plus, don't assume that the provisions in new grants you receive are identical to the provisions of prior grants. For more on restrictive covenants in stock grants, including this case and others, see the myStockOptions article Watch For Noncompetes And Other Restrictive Covenants In Stock Grant Agreements.

Divorce

Like other assets and forms of compensation, stock comp sometimes gets dragged into divorce property settlements and alimony payments, though the issues can be more complex. In the case Ludwig v. Lamee-Ludwig, the Massachusetts Court of Appeals looked at the question of whether unvested shares are considered assets for the property settlement and/or income for child care/alimony. The court confirmed a lower court's decision that the calculation of an employee spouse's alimony obligation may include income received from unvested employee stock options that were not subject to equitable division as assets, under application of the "time rule" in Baccanti v. Morton (434 Mass. 787, 2001), for dividing unvested grants. This would not constitute "double counting" if the income were included in determining the husband's alimony or child support. At his blog, divorce attorney Jason Owens discusses the importance of this case, which in his view offers "precision" for treating unvested options not divided under the property settlement (Treating Stock Options And RSUs As Assets Vs. Income In A Divorce).

For more details on the treatment of restricted stock and stock options in an divorces, see the articles and FAQs in the Life Events: Divorce sections of myStockOptions.com.


Soaring Tuition Raises The Importance Of Stock Grants & Nonqualified Deferred Comp For College Funding

The price of higher education has never been, well, higher. Some private colleges now cost up to $60,000 per year; even at state universities, annual tuition can approach $30,000 for students who aren't state residents. This means smart financial and tax planning for college funding has become more important than ever. However, surprisingly little has been written about paying for college expenses through the use of stock grants and nonqualified deferred compensation (NQDC).

For the millions of US employees who have stock grants or NQDC from their companies, expert guidance on college funding is available in articles written by Troy Onink, a noted college-funding authority and Forbes blogger. Tailored for each website, his article series at myStockOptions.com and myNQDC.com explain the issues and planning involved in using these forms of compensation to meet the costs of university tuition.

On myStockOptions.com, the three-part series Funding Your Child's College Education With Stock Options And Other Stock Grants explains:

  • the impact of equity awards on financial aid eligibility
  • the basics of gift tax and the tax treatment of stock compensation in the financial planning for higher education
  • methods to minimize capital gains at sale, planning for the kiddie tax and education tax credits, and strategies that students can use

Meanwhile, myNQDC.com has the two-part series College Financial Aid & Funding With Nonqualified Deferred Compensation. Contributions to NQDC plans allow participants to defer income to future years and defer taxes on that income until they receive it at the scheduled distribution date(s). Therefore NQDC often has long-term planning considerations. For many NQDC recipients, the expense of their children's higher education, even if it is many years away, can be one of the most important goals for NQDC deferrals. In his NQDC articles, Troy explains:

  • NQDC in the context of eligibility for need-based financial aid
  • the ways in which NQDC income deferrals and distributions by parents affect a student's eligibility for financial aid
  • impact of NQDC on eligibility for the American Opportunity Tax Credit
  • financial-planning strategies with NQDC that can help your cash flow for meeting college expenses

For a range of planning ideas with stock comp and NQDC, see the Financial Planning sections of myStockOptions.com and myNQDC.com.


Using Stock Comp To Help Grow IRA Savings

Our latest article series, in two parts, takes on one of the hottest topics in personal finance today: Strategic Planning With Roth IRAs And Stock Compensation by Sue Stevens, a noted wealth advisor and the former director of financial planning at Morningstar. Anyone can now convert a traditional IRA to a Roth IRA, and for a conversion in 2010 you can split the taxes due over 2011 and 2012 (50% each year). Part 1 explains the rules of converting traditional IRAs to Roths, discusses the role that stock compensation can play, and examines the related planning issues. Part 2 illustrates these points with a detailed case study. These articles superbly enhance our extensive content on the use of stock compensation in retirement planning.


Restricted Stock In Divorce

In Private Letter Ruling 201016031, the IRS confirmed the tax treatment of restricted stock in a divorce. In the individual situation addressed by this PLR, at vesting the shares will be delivered by the company to the ex-spouse. The PLR confirms that the transfer of the restricted stock is not a taxable event, and the employee-spouse will pay the income tax owed on his or her portion of the grant. This outcome is similar to the treatment of stock options in a divorce under other IRS Revenue Rulings, discussed by the FAQs in the section Life Events: Divorce at myStockOptions.com.