IRS Audits Of Equity Comp: New IRS Guide Shows What To Expect

An IRS audit: a prospect that provokes stress and anxiety. Even if you are not personally targeted for an audit, an IRS audit of your company's equity compensation can still put you on the hook. Depending on what IRS examiners find, a company audit can lead to individual audits and amended personal tax returns for executives and employees.

The IRS recently surprised tax experts by issuing a new version of its stock compensation auditing guide, which had not been updated since 2015. Developed as an internal manual for IRS employees, it also offers businesses a helpful window into what IRS agents examine in audits related to all types of equity compensation. It’s a heads-up on stock options, restricted stock, restricted stock units (RSUs), stock appreciation rights (SARs), phantom stock, and employee stock purchase plans (ESPPs) for anyone who has these benefits or advises clients with them.

Professionals and taxpayers alike should review the guide to avoid pitfalls and tax situations that could trigger a dreaded IRS audit—the worst of which has been vividly described by tax attorneys as “an autopsy without the benefit of death.”

What IRS Agents Inspect With Stock Options And ESPPs

The IRS manual is called the Equity (Stock) - Based Compensation Audit Technique Guide. It gives IRS examiners a roadmap for audit scrutiny into when income should have been recognized, reported, and subjected to withholding, along with the related records, documents, and terms to review. In some ways, it also provides a brief general review and summary of equity comp taxation and IRS interpretations of the Internal Revenue Code (IRC).

As publishers who takes pride in the clear plain-English explanations of tax rules offered on myStockOptions.com, we could quibble with the IRS-speak and some inaccurate interpretations of the IRC in the audit guide. However, for now, let us simply highlight some issues the guide instructs IRS examiners to focus on in their search for tax errors:

• Loans to exercise options to ensure that they are recourse loans (i.e. you personally pay should you default) and whether they were forgiven/canceled or reduced.
• Qualifying and disqualifying dispositions for incentive stock options (ISOs) and tax-qualified ESPPs. These are shares from ISO exercises or ESPP purchases that were sold either before or after the statutory holding periods of two years from grant and one year from exercise/purchase that provide the best tax treatment.
• Annual limits on the size of ISO grants (only $100,000 can be vesting/first exercisable in one year) and ESPP purchases ($25,000 annual limit). While your company probably has a stock plan administration program to help it adhere to these limits (which are not adjusted for inflation), company mistakes can change your tax treatment by turning your ISO grant and ESPP into nonqualified stock options.
• Restrictions on transferred stock that create a substantial risk of forfeiture (SRF) which needs to lapse before taxes apply. The SRF concept is standard, for example, with most grants of restricted stock or RSUs, which must vest before you recognize taxable income and could be forfeited if you were to leave the company before the vesting date. A stock buyback right for your company at job termination is not seen by the audit guide as an SRF that postpones income recognition, as it defines those as “non-lapse restrictions.”
• Transfer of stock options to related persons, which makes them a “listed transaction” and could be an abusive tax shelter.
• Company reporting requirements for your ISO exercises (on Form 3921) and ESPP purchases (on Form 3922).
• Form W-2 reporting, including special reporting and codes for nonqualified stock options and other grants.
• Appropriate amounts and timely deposits of withholding for federal income tax, FICA (Social Security and Medicare), and FUTA.
• Timely IRC Section 83(b) elections for the early-exercise stock options used by private companies. Also for startups, whether any elections were made under IRC Section 83(i) to defer income.

IRS Collection Efforts Have Intensified, Including Audits

The updated audit guide also reflects the ways in which the IRS directs more audit attention toward higher-income taxpayers. The IRS has intensified its efforts in that area during recent years.

In 2023, the IRS announced a special focus on ensuring that large corporations and rich individual taxpayers pay taxes owed. In particular, the IRS said it is “ramping up efforts” to pursue high-income, high-wealth individuals who have not paid their taxes. The agency is concentrating in particular on roughly 1,600 US taxpayers with more than $1 million in annual income and over $250,000 in federal tax debt. Simultaneously, the IRS reassured middle-class taxpayers that audit rates would not increase for yearly incomes of under $400,000.

The initiative to collect past-due taxes from delinquent millionaires has paid off significantly. In early 2024, the IRS revealed that it had recovered more than $482 million in previously unpaid taxes. Just this month, the IRS reported that it had collected over $1 billion in past-due taxes from the target group. The agency stated that the revenue to that point represented payments from over 1,200 of the 1,600 targeted millionaires.

These efforts are funded by the $80 billion in additional multi-year funding that the IRS received under the 2022 Inflation Reduction Act. The agency wants to reduce the embarrassingly wide $688 billion gap between estimates of the amount of tax owed each year and the amount that is voluntarily paid.

Likelihood Of Getting Audited: Data On IRS Audit Activity

In general, the more you make, the more likely you are to be audited by the IRS. Sudden income spikes, such as income from a stock option exercise or the vesting of RSUs, are a red flag that can trigger an audit.

The IRS periodically publishes information about its general audit activity. The latest update, the 2023 IRS Data Book, covers the IRS fiscal year from October 1, 2022, through September 30, 2023. It reveals the following facts:

• Over the decade preceding 2023, the IRS examined tax returns filed by 8.7% of taxpayers with income of more than $10 million; 3.1% of taxpayers with income of $5–10 million; and 1.6% of those with income of $1–5 million.
• In 2023, the IRS completed 582,944 tax-return audits, resulting in nearly $32 billion of extra tax revenue.
• Most audits in 2023 (77.3%) were conducted via correspondence; 22.7% were conducted “in the field.”

Increasingly, IRS computers automatically check tax-return accuracy. The Automated Underreporter Program compares income in tax returns with IRS data. When the computers find a discrepancy, they automatically issue a notice (CP-2000) requesting an explanation.

CP-2000 Notice For Not Reporting Company Stock Sales Accurately

For example, when you immediately sell all shares acquired from a vesting of restricted stock or exercise of stock options, you may think you do not have taxable income beyond the ordinary income reported on your W-2, as there was no capital gain upon the stock sale. However, even in this situation, you must report the stock sale on IRS Form 8949 and Schedule D of your Form 1040 tax return, as the IRS still receives Form 1099-B from your brokerage firm to report the sale. If the sale is not also reported on your IRS forms, the IRS will send you a CP-2000 notice looking for you to pay taxes on the full amount of the sale proceeds!

Additional Tax Resources

For additional tax resources on all types of equity compensation and ESPPs, including tax-return reporting, see the Tax Center on myStockOptions.com.

myStockOptions Webinars

See the myStockOptions Webinar Channel for upcoming webinars and past webinars on demand. Each webinar offers CE credits for CFP, CPWA/CIMA, CEP, EA (live webinars only), and CPE (live webinars only), plus CFA self-determined credits. Featured experts present real-world case studies. On-demand webinars are listed below. Click on the links to register now!

FUNDAMENTALS

• Equity Comp Masterclass (Part 1): Stock Options

• Equity Comp Masterclass (Part 2): Restricted Stock/RSUs & ESPPs

• Stock Compensation Bootcamp For Financial Advisors

• Stock Comp Tax Essentials: Crash Course

ADVANCED

• Equity Comp Masterclass (Part 3): Best Ideas From Top Advisors

• Restricted Stock & RSU Financial Planning: Insights From Leading Advisors

• Stock Option Exercise Strategies: Managing Risk & Building Wealth

• Year-End Financial & Tax Planning For Equity Comp

• Preventing Tax-Return Mistakes With Stock Comp & Stock Sales

SPECIALIZED

• Stock Comp Financial Planning For Private Company Employees: From Startup To IPO Or Acquisition

• 10b5-1 Trading Plans And Other SEC Rules Advisors Must Know

• Strategies For Concentrated Positions In Company Stock

• Negotiating Equity Comp At Hire & Protecting It In Job Termination

Federal Noncompete Ban: 7 Key Points For Employees And Executives

The Federal Trade Commission (FTC) has issued a final rule banning noncompetes for employees, independent contractors, and executives. This federal ban on noncompete arrangements is currently scheduled to become effective in early September.

The noncompete ban may affect stock compensation, as equity awards sometimes include noncompete covenants that may no longer be enforceable under the new rule. However, the federal noncompete ban is far from settled. Legal challenges have already been lodged against it, and many experts predict it will not survive.

Below we summarize the key points for employees and executives.

1. How The FTC Defines Noncompetes

The final rule defines a noncompete as a “term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker” from either taking a different job or operating a business after the end of employment.

An analysis of the final rule from the law firm Morgan Lewis asserts that the scope of the noncompete ban “will include standalone noncompete agreements, but will also pick up many executive agreements, including noncompete covenants in equity grants, employment agreements, and severance agreements.” 

Since the rule voids post-employment noncompete covenants, the ban may extend beyond basic noncompete clauses. For example, with stock options and restricted stock units (RSUs), it may prohibit any provision that stops vesting if you leave to work for a competitor. In an analysis of the final rule, the law firm Seyfarth Shaw explains that “this will depend on the terms of the equity compensation plan and agreements and the scope of the applicable restrictive covenants.”

2. Exceptions To The Noncompete Ban

While the ban is fairly sweeping, it does contain some exceptions.

Not All Noncompetes Go Away For Executives

While no new noncompetes are allowed, existing noncompetes for senior executives can remain. The FTC’s final rule defines “senior executive” as a worker who earns more than $151,164 per year and is in a “policy-making position.”

Notably, this is different than the broader definition of a senior executive used by the Securities & Exchange Commission for securities disclosure regulation and reporting by executives. The requirement of “policy-making” considerably narrows the FTC’s definition of a senior executive. According to a commentary from the law firm Trucker Huss, “this narrow definition excludes many highly paid employees such as sales and investment professionals or executives without policy-making authority.”

Certain Industries Excluded

The noncompete ban does not apply to nonprofit organizations. It also carves out industries not covered by the Federal Trade Commission Act: banks, savings-and-loan institutions, federal credit unions, common transportation carriers, air carriers, and any individual or business subject to the Packers and Stockyards Act.

M&A Noncompetes Still Allowed

The rule does not apply to noncompetes that are part of a corporate acquisition or sale of business interests. The final rule defines such transactions as “a bona fide sale of a business entity, of the person’s ownership interest in a business entity, or of all or substantially all of a business entity’s operating assets.”

3. Your State Laws May Still Apply

The federal noncompete ban overrides any state rules on noncompetes that are weaker or at odds with it. This is explained by an analysis of the noncompete ban from Wagner Law Group: “The final rule supersedes state laws to the extent, but only to the extent, that such state laws conflict with the final rule or would otherwise permit or authorize conduct prohibited under the final rule.”

State bans against noncompetes that are even tougher than the federal ban, such as the strict anti-noncompete rules of California, remain in force.

4. Nondisclosure Agreements May Be Restricted Too

Law firms believe the noncompete ban may apply to similar worker arrangements, such as nondisclosure agreements (NDAs), if they, in the final rule’s words, “function to prevent” a worker from taking a new job or starting a new business. According to a memo on the final rule from the law firm Jackson Lewis, “nondisclosure agreements, training repayment agreement provisions, and nonsolicitation agreements that are overbroad…could be barred by the final rule.”

In their commentary, attorneys at the law firm Seyfarth Shaw agree. They observe that, under the noncompete ban, NDAs could be deemed to operate as noncompetes if they “span such a large scope of information that they function to prevent workers from seeking or accepting other work or starting a business after they leave their job.”

5. Lawsuits Enforcing Prior Noncompetes Do Not Go Away

Is your former company going to court to enforce a noncompete against you? The federal noncompete ban does not stop the lawsuit. The FTC’s final rule states that if the alleged breach of the noncompete happened prior to the effective date of the new rule, the litigation can start or continue.

6. What Your Company Must Tell You

If you have a noncompete, whether with a current or former employer, the company must inform you that the noncompete is no longer enforceable. The final rule says the company must give you a “clear and conspicuous notice” that the noncompete clause will not be and cannot be legally enforced.

7. Legal Challenges Will Severely Test The Noncompete Ban

Legal challenges to the noncompete ban are already under way from a variety of plaintiffs. One high-profile litigant is no less than the United States Chamber of Commerce. It filed a lawsuit seeking injunctive relief that would stop the ban from coming into force, or at the very least would postpone its effective date.

A more aggressive challenge is coming from Ryan LLC, a provider of tax services and software. It filed a lawsuit seeking to vacate and set aside the noncompete ban. The lawsuit claims that the FTC lacks the authority to issue the rule and that the rule itself is unconstitutional.

In its commentary, the law firm Seyfarth Shaw predicts that some of the lawsuits against the noncompete ban will prevail. “We expect at least some of the challenges to be successful,” write the attorneys, “because any final rule in which the FTC claims authority to ban restrictive covenants is not likely to withstand constitutional scrutiny” under various legal doctrines. They note, however, that even after successful challenges, the appeals process may take 12 to 18 months to play out before any Supreme Court decision.

Equity Comp Masterclass: Special Three-Part Webinar Series

Join us for our three-part Equity Comp Masterclass webinar series and earn a certificate showing you are "myStockOptions Educated"!

You can register for the whole series of three webinars at a special package price or any individual webinar in the series. Watch either live or on demand.

Part 1: Stock Options
May 2 (1pm to 2pm ET, 10am to 11am PT)
1.0 CE credit for CFP, CPE, EA, CPWA/CIMA, and CEP/ECA

Part 2: Restricted Stock/RSUs & ESPPs 
May 22 (1pm to 2pm ET, 10am to 11am PT)
1.0 CE credit for CFP, CPE, EA, CPWA/CIMA, and CEP/ECA

Part 3: Best Ideas From Top Advisors 
June 12 (1pm to 2:40pm ET, 10am to 11:40am PT)
2.0 CE credits for CFP, CPE, EA, CPWA/CIMA, and CEP/ECA

Details and registration are available at the webinar homepage.

RSU And Stock Option Negotiations: Key Points

Are stock option and restricted stock/RSU grants negotiable? What terms are negotiable at hire? Depending on how much the company needs you, especially if it's competing for you with other companies, you may be able to negotiate your equity compensation when you are hired or get promoted.

A recent myStockOptions webinar on negotiating equity comp, now available on demand, featured three advisors with experience in helping clients negotiate compensation (including a compensation attorney). While everyone’s situation is unique and requires personal advice, the general guidance these experts provided offers some helpful knowledge going into the discussions.

1. Be Realistic And Informed Before Attempting Negotiations

The ability to negotiate compensation depends on your importance to the hiring company, observed webinar panelist Art Meyers, an employment and executive compensation lawyer and the founder of Meyers Law Firm in Naples, Florida. “It doesn’t mean you have to be in the C-suite,” he added. “You can be a very talented engineer in an area in high demand. It depends.”

However, unless you are a C-level executive, “most of the time there is not a ton that is negotiable in the actual grant offer,” cautioned financial advisor AJ Ayers, co-founder of Brooklyn FI in New York City. “You can ask for more shares, but a lot of time these grant documents are ‘take it or leave it.’ If the company makes a change for one person, it has to make the change for everyone else, go through a board review, it’s messy. So don’t waste your time in trying to ask for things that are not going to be granted.”

AJ’s view was echoed by webinar panelist Beata Dragovics, a financial advisor and the founder of Freedom Trail Financial in Boston. “You have to be VP-level, in my opinion, and C-level to really start negotiating,” she explained. For clients with that degree of clout, she suggests going directly to HR, especially in a public company, to find out what they can negotiate in the hiring offer. “HR is expecting you to negotiate. I coach clients to ask HR what’s negotiable.”

Having that realistic and informed perspective is vital, the webinar panelists agreed. If you overplay your hand and ask for too much, your approach may backfire. Both Beata and AJ said they have seen employment offers actually rescinded after negotiating ploys that were too aggressive, leading the hirers to reconsider whether the person was the right fit for the company.

2. Understand Compensation Trends In Your Industry

What are the factors and features to focus on in negotiations? First, research the trends in your industry, suggested Beata Dragovics. “I find for us that trends are significant,” she said. This is one area, in fact, where consulting with an advisor can offer a key advantage. Over the years, her firm has amassed significant knowledge of compensation practices among the biotech and pharma industries in which most of her firm’s clients work.

“You learn from clients, you learn from recruiters, you learn from attorneys. You learn every time you negotiate. Companies want to stay competitive, so they will pretty much offer the same kind of equity compensation. The trends are very consistent.”

Art Meyers observed that with a public company it’s easier to research trends. You can review corporate SEC filings, which are public, to see what they do with executives and key employees. He said he finds information on the company’s grant guidelines in that way or from consulting or recruiting firms. “With a good stock comp calculator,” he added, “you can see what those equity awards may realize.”

3. Evaluate Equity Grants You Are Leaving Behind

When considering negotiation leverage, Art advises clients to factor in equity awards granted by their current employer that they would forfeit by leaving to work for the hiring company. “I would ask for make-whole awards if you’re leaving something on the table. You can ask for, and often you will receive, an additional award, typically RSUs, in which you have a short vesting schedule: six months, a year, something that mirrors the remaining vesting schedule at the other company.”

4. Know The Best Times To Negotiate

What are the best times to try to negotiate equity compensation? “I would say before hire and before promotions,” said Art. “Those are leverage points.”

For annual stock grants or special off-cycle grants that happen later, it all depends on your performance at the company, he explained. “What’s the value to the company? Can you be easily replaced? What’s the history or culture at the company or in the industry? All of these things play into whether you can get annual grants or off-cycle grants.” With public companies, Art recommends making your case 60 days in advance of the normal grant cycle.

5. Choose What To Focus On In Negotiation

Whether or not to negotiate compensation often comes down to whether the initial offer is adequate, observed AJ Ayers. “Does this offer match your financial needs?” she asks clients. “If someone is a solo breadwinner supporting a family of three, maybe taking a pay cut and some incentive stock options (ISOs) in a startup company is too much risk, in my opinion. As their advisor, I’m going to advise them to look at a more steady salary with RSUs instead, where we can see the historical stock price and get a sense of what that compensation is going to look like.”

One method that AJ likes to use with clients is to make a list of all the things that are important to them: “401(k)s. Salary. Is there a nice up-front bonus? If you’re cash-poor right now, that might be really helpful.”

She noted that some tech companies now offer exceptional benefits. “Is there fertility support? If you have a client who is having trouble getting pregnant, a $50,000 fertility support could be way more valuable than an additional RSU grant. What’s right for the client, what do they need to support their family: that’s how we come to the offer table and start evaluating these different offers.”

Similarly, Beata picks just a few attributes that are most important to her clients and negotiates on them. She emphasized that the current market environment in an industry will determine the extent of potential negotiations.

6. Seek Protections At Termination

Protecting equity awards in the event of job termination triggered by various reasons is a crucial point to consider in negotiations and in any severance provisions. AJ suggests that her clients have an attorney review the employment agreement. “There’s this nasty clause we see in some of these agreements involving at-will firing, in which a company can fire someone at any point for any reason,” she warned. “The vesting stops and you forfeit stock options. It is a good idea to have these employment agreements reviewed by an attorney.” Any clause deemed problematic can be addressed in negotiations, she explained.

For more guidance on your equity compensation in layoffs, see another Forbes.com article that I wrote: Protect Your Stock Options And RSUs In Job Loss: 3 Key Actions.

7. Know How Private Companies Differ

With a private company, noted Art Meyers, getting insights into trends and expectations for negotiating compensation is more difficult. “What you really want to do is to convert the number of shares at grant to a percentage of ownership on a fully diluted basis and ask for either a transaction value, a current accounting value, or the current Section 409A valuation they presently have to get for some sense of what that’s worth.”

A Section 409A valuation is an appraisal of private company stock to determine its fair market value using various methods allowed by IRS regulations under Section 409A of the Internal Revenue Code. Importantly for stock options, the 409A fair market value “should be the exercise price that you’re offered,” said AJ Ayers. “But they may not tell you that when you’re looking at job offers. So you need to go find the 409A on your own.”

The 409A valuation is a very useful piece of information to track down, along with any information on preferred stock sold to investors, AJ asserted. She warned that you’ll want to ignore any spreadsheet illustrations boasting that the startup will be “the next Amazon” and keep your expectations realistic.

Early-stage startups tend to offer stock options rather than the double-trigger RSUs that have become popular for later-stage pre-IPO companies. That means you need to ponder the option exercise price. With stock options in a startup, AJ Ayers urges clients to consider whether the exercise price is affordable enough for the options to make sense as compensation.

“If the price is less than a dollar, that’s probably doable for a family who’s got some savings or who could sell some investments to do that,” she explained. “But if we’re talking about ISOs or even nonqualified stock options (NQSOs) with a $5 or $10 exercise price, we start to lose any tax arbitrage that’s possible with exercising and then holding those shares. I’m not going to ever advise you to exercise and hold those. That’s too much risk.”

Further Resources

The webinar in which these experts spoke, Negotiating Equity Comp At Hire & Protecting It In Job Termination, is available on demand at the myStockOptions Webinar Channel. In addition, myStockOptions has a website section with resources on negotiating equity compensation at hire or promotion.

Equity Comp Masterclass: Special Three-Part Webinar Series

Join us for our three-part Equity Comp Masterclass webinar series and earn a certificate showing you are "myStockOptions Educated"!

You can register for the whole series of three webinars at a special package price or any individual webinar in the series. Watch either live or on demand.

Part 1: Stock Options
May 2 (1pm to 2pm ET, 10am to 11am PT)
1.0 CE credit for CFP, CPE, EA, CPWA/CIMA, and CEP/ECA

Part 2: Restricted Stock/RSUs & ESPPs 
May 22 (1pm to 2pm ET, 10am to 11am PT)
1.0 CE credit for CFP, CPE, EA, CPWA/CIMA, and CEP/ECA

Part 3: Best Ideas From Top Advisors 
June 12 (1pm to 2:40pm ET, 10am to 11:40am PT)
2.0 CE credits for CFP, CPE, EA, CPWA/CIMA, and CEP/ECA

Details and registration are available at the webinar homepage.

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.

 

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.

Alert: Newly Issued 2020 IRS Qualified Retirement Plan Limits Affect NQDC Participants

Over at our sibling website myNQDC.com, all about nonqualified deferred compensation (NQDC) plans, an important annual development has just dropped for NQDC participants who are starting to think about how much of next year's salary to defer into their plan's piggy bank.

In November and December, many executives and key employees eligible to participate in NQDC plans must decide how much, if any, of next year's salary to defer. Factors in this decision about nonqualified plans include the IRS limits that apply to qualified retirement plans. The IRS just set these limits for 2020.

The contribution limits of qualified plans are the major reason for the existence of nonqualified plans: to allow executives and key employees to save additional amounts for retirement with an elective nonqualified plan or an excess 401(k) plan. The changes in limits from 2019 to 2020 are slight. If you've already maxed out your qualified plan contributions for 2019, you will probably do the same in 2020, so you will need NQDC plans to defer any salary and bonus increases you expect in 2020.

Contribution type/limit	2019	2020
Compensation allowed in qualified deferral and match calculation	$280,000	$285,000
Elective compensation deferrals	$19,000	$19,500
Catchup contributions for people aged 50 or older	$6,000	$6,500
Total defined contribution limits (employee and employer contributions)	$56,000 + catchup contribution	$57,000 + catchup contribution
Defined benefit plan payout limits	$225,000	$230,000
Income threshold defining key employees for the purposes of top-heavy plans and the six-month delay on payout upon separation	$180,000	$185,000
Income threshold defining highly compensated employees for the purposes of nondiscrimination testing; this also applies to the income point where companies can exclude employees from a tax-qualified ESPP	$125,000	$130,000

Set by the Social Security Administration, the Social Security wage cap will rise in 2020 to $137,700, a slight increase from $132,900 in 2019. With the 6.2% rate of Social Security tax, the maximum possible Social Security withholding is $8,239.80 in 2019 and will rise to $8,537.40 in 2020. Social Security tax (up to the yearly limit) and Medicare tax (uncapped) are withheld at the time of deferral, as shown by an FAQ at myNQDC with an annotated diagram of Form W-2 showing where these amounts are included.

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

Premium Memberships And Corporate Licensing

myNQDC is available through individual subscriptions to premium membership or through corporate licensing. To start or renew your Premium Membership at myNQDC, please contact us (617-734-1979, [email protected]). Our online payment system is undergoing technical modifications. We can process your membership directly by phone or email you an invoice.

To learn about our corporate services, see the About Us and Licensing sections of myNQDC. Please contact us (617-734-1979, [email protected]) to obtain more information about licensing content for your website, print materials, and/or newsletters, and for premium memberships at special bulk rates for your staff.

Need CE credits before year-end? Premium members have access to all of myNQDC, including the Learning Center, which offers up to 6 continuing education credits for CFPs, 6 PACE credit hours for CLU® and ChFC® professionals, and 12 CPE hours for ASPPA members.

Nonqualified Deferred Compensation: Impact Of Tax-Rate Changes On Deferral Decisions

It's one of the most frequent questions we get from hard-working executives and key employees who are eligible to participate in nonqualified deferred compensation plans, along with their financial advisors. Do the current lower tax rates make salary and bonus deferral less appealing? 

In short, the general guidance from the expert contributors to myNQDC.com, a sibling website of myStockOptions.com, is that you need to consider whether your tax rate at the time of distribution is likely to be lower or higher than it is at the time of deferral. If you think your rate will be lower and you feel secure about your company’s financial situation, then pre-tax deferrals make sense. Deferrals can also keep your income below the current triggers for higher taxes.

The 2020 presidential election, already constantly in the news, may be worrying you with the prospect of higher tax rates should the White House and Senate change parties. The following content from our financial planning and taxes sections has useful insights. (For full access to myNQDC.com, please email us at [email protected] to inquire about individual premium memberships.)

Tax Reform: Good Or Bad For Pretax Compensation Deferral?
David Hauptman
Tax reform has complicated the decision of whether to participate in your company’s NQDC plan. This article provides a perspective on how to decide whether or not to defer pretax compensation.

Tax Reform And The Impact On Nonqualified Deferred Compensation Plans
Michael Nolan
Tax changes have spurred an unprecedented level of curiosity about NQDC plans. The timing for these plans could not be better for high earners and their employers. This article presents some key deferred compensation trends to watch.

Advantages To Pre-Tax Deferral Of Income After Tax Reform
Steve Broadbent and Chris Nyland
Employees who once routinely deferred compensation are now rethinking those habits after tax reform under the Tax Cuts and Jobs Act. One concern is whether it may be better to take income today because of uncertainty about tax increases in the future. This article shows how you should consider tax changes and investment returns when analyzing whether to participate in your company's NQDC plan.

Future Higher Tax Rates Would Not Reduce The Current Appeal Of Nonqualified Plans
William L. MacDonald
NQDC arrangements remain a valuable planning tool for people with high incomes. This article discusses the reasons why current tax rates have made NQDC plans attractive. It also examines how certain features of plan design can cause you tax problems.

Tax Changes That Affect Your Planning For Nonqualified Deferred Compensation
Bruce Brumberg
The enhanced capacity for tax planning is one of the main attractions of nonqualified plans. When your tax rates increase, the advantages of NQDC plans grow. This article explains the impact of tax changes on your NQDC.

At year-end, when I am deciding on salary deferrals into my nonqualified plan for the year ahead, what should be the top issues in my decision-making?
In NQDC plans, the fourth quarter is the most common period for electing salary deferrals in the year ahead. One ongoing issue for deferral planning is the need to consider the tax changes of recent years, including the additional Medicare taxes for high earners.

Licensing And Bulk Premium Memberships

Want to license readable, high-quality content on NQDC to distribute to plan participants, clients, and prospects? Find out about our corporate services in the About Us and Licensing sections of myNQDC. Please contact us (617-734-1979, [email protected]) to obtain more information about licensing content for your website, print materials, and/or newsletters, and for premium memberships at special bulk rates for your staff.

myStockOptions Financial-Planning Conference Delivers Practical, Specialized Knowledge With Engaging Style

To register for our expanded 2020 financial-planning conference, with all new sessions and a pre-conference stock comp bootcamp, see the conference website. Discounted price for early registrations until April 20!

"The only conference of its kind: a tremendous opportunity to learn from the best in executive comp financial planning."

"Opened my mind to new ways to manage stock comp!"

"One-stop conference to learn everything about long-term incentive comp."

These were just some of the glowing attendee responses to our one-day conference Financial Planning for Public Company Executives & Directors, held on June 18 in the San Francisco and Silicon Valley area. The event attracted financial advisors from all over the United States: professionals who work with or seek to advise executives, directors, and key employees who have stock compensation, holdings of company stock, and other company benefits, such as nonqualified deferred compensation. With its delivery of practical expertise, the conference was approved to offer 8.0 continuing education credits for CFP® professionals and for the CIMA® and CPWA® certifications of the Investments & Wealth Institute®. Certified Equity Professionals (CEPs) who attended earned 7.0 continuing education credits.

Attendee Evaluations: "Wisdom, Expertise, And Good Easygoing Vibes"

The event received many positive reviews from attendees. "I thought it was lot of diverse information from very reputable sources," said one attendee afterwards. "It was good to hear about trends in the industry and learn from colleagues." One advisor, from a major brokerage firm, particularly liked "the networking" and "appreciated the opportunity to meet with RIAs we work with and ones we do not." 

"I would definitely recommend this conference to anyone on the advisory side of working with public-company executives," asserted another attendee. "myStockOptions.com is still the best resource I've found as an advisor who serves this niche market."

A selection of other attendee comments:

• "Wisdom, varied perspectives, expertise, and good easygoing vibes."
• "Great content and timely for my practice."
• "Eight hours of CFP continuing education in one day—very time-efficient."
• "The presenters were at the highest level."

The enthusiastic feedback and constructive suggestions we received will help to shape similar events in the future. The 2019 conference built upon the sold-out success of our 2018 conference, which was held in Boston.

We at myStockOptions.com thank those who attended, our speakers, and the conference's sponsors: Columbia Threadneedle Investments, Fidelity Charitable, StockShield, Charles Schwab, StockOpter, UC Berkeley Extension, Social Security Solutions, and the National Association of Stock Plan Professionals. The conference location, the Hilton San Francisco Airport Bayfront, was an excellent, convenient venue for the event.

Conference Sessions: Engagement With Expertise

With an engaging range of practical topics, the talks and panel discussions of the 2019 conference featured a distinguished speaker lineup of top industry experts. Many are leading advisors involved with financial, tax, and legal planning for stock compensation, holdings of company shares, and executive retirement plans.

In a focused yet relaxed environment for learning and networking, attendees enjoyed the following sessions:

• Leading Financial Advisor Reflects On His Career Working With Executives: Tim Kochis, Founder and CEO of Kochis Global (former CEO of Aspiriant)
• Tax Myths And Facts With Equity Compensation
• Trends In Stock And Executive Compensation: What Stock Plan Participants Need And Want, And How Advisors Can Help
• Important SEC Rules And Legal Developments Impacting Financial Planning For Stock And Executive Compensation
• Attracting And Retaining Individuals Who Receive Company Stock And/Or Options
• Planning Strategies For Stock Options, Restricted Stock/RSUs, Performance Shares, And Company Stock Holdings
• Estate Planning And Charitable Giving With Company Stock And Equity Comp
• Rule 10b5-1 Trading Plans: Cornerstone Of Legal Protection For Stock Diversification
• Strategies For Concentrated Positions In Company Stock
• Stock Grant, Employment, And Severance Agreements: Key Documents For Advisors To Understand And How To Help Clients Avoid Big Mistakes
• Donor Advised Funds Versus Charitable Foundations: What’s Best For Your Client
• Nonqualified Deferred Compensation: What Advisors Must Know To Advise Executives
• Pre-IPO Company Financial Planning

myStockOptions Conference Meets A Strong Need Among Advisors

Based on feedback from financial planners and wealth advisors who use the content, tools, and advisor directory at myStockOptions.com, our financial-planning conference meets a strong but previously unmet need for guidance in these subject areas. Moreover, a recent national survey of 1,000 stock plan participants by Charles Schwab found that while half understand the long-term value of their equity compensation, many are hesitant about exercising stock options or selling shares because of anxiety that they will make a costly mistake. The survey suggests that improved education and guidance would reduce this fear factor.

"Financial-planning clients and their families look to equity comp or company stock holdings to fund important life goals," observes Bruce Brumberg, the editor-in-chief of myStockOptions.com (pictured). "They rely on advisors for help in how to maximize, preserve, and transfer their wealth and how to prevent them from making big mistakes."

Accordingly, our conference team selected stock comp topics that are especially important for advisors to understand in serving financial-planning clients and public and pre-IPO companies. Our speakers and panelists shared a wide range of knowledge, insights, and experiences that completely met our high expectations and the goals of the conference. We hope that our conference attendees found the event a boost for their professional development, helping them deepen client relationships, further develop their reputations, gain more client referrals, and advise more employees with stock comp in ways that help them achieve their financial and life goals.

The mission of the conference is also one of our perpetual missions at myStockOptions.com: to provide an independent, unbiased source of educational content and tools on all types of equity compensation. Full access to our website is available via our Premium or Pro membership levels. Additionally, our extensive and engaging educational content on all aspects of equity compensation can be licensed by stock plan providers and companies for their plan participants. The content includes not just our easy-to-understand articles and FAQs but also our videos, podcasts, modeling tools, and fun quizzes on many different topics.

Performance Share Grants: Equity Approaches At Apple And Uber Help Illustrate 5 Key Features

At most public companies in the United States, when you reach the executive ranks you are more likely to receive grants of performance shares than stock options. While stock options may still appear in the mix of grants you get, with the potential to create substantial wealth, major surveys show that other types of stock awards have overtaken options in popularity.

Popular With Both Established Public Companies And IPO Companies

At Apple, executives receive restricted stock unit (RSU) grants that increase or decrease in target size according to how the company’s total shareholder return (TSR) ranks relative to the TSR of other companies in the S&P 500. An illustration of this is in the terms of a grant to Apple’s COO that eventually paid out handsomely (detailed in the footnotes in the Form 4 SEC filing). If Apple ranked at the 85th percentile, 200% of the target number of RSUs would vest. For performance at the 55th percentile, 100% of the target number of RSUs would vest, while performance at the 25th percentile would cause 25% of the target number of RSUs to vest. No RSUs would vest if Apple's performance ranked below the 25th percentile.

These types of grants are not limited to long-established public companies. The Form S-1 registration statement that Uber filed with the SEC for its IPO states the following (page 236):

"As we transition to become a publicly traded company, we expect that the mix of service- and performance-based components of our equity compensation will shift. To help us achieve our objectives of rewarding our executive officers for their experience and performance and motivating them to achieve our long-term strategic goals following this offering, we anticipate that performance-based vesting conditions applicable to RSUs granted to our executive officers will become more prevalent."

Five Key Features Of Performance Share Grants

These types of performance-based equity awards can be highly customized to match a company’s compensation approach and goals. While the terminology and features vary by company, these grants most often pay out in shares rather than cash and tend to have at least five common features, detailed below.

1. Performance-based awards are often made as grants of restricted stock or restricted stock units (RSUs) that vest or pay out only if specified company performance goals have been reached by the end of the measurement period cycle. For regular stock options and RSUs, time-based vesting is the most common type of vesting (e.g. 25% of the grant vests yearly). In performance-based awards, vesting is both time-based (“service-based” in Uber’s SEC filing) and also dependent on the attainment of company or individual goals.

In stock awards to senior executive that deliver huge compensation, such as those listed in New York Times and Wall Street Journal reports about the highest-paid CEOs, the vesting of the grants is based almost entirely on performance criteria. That is the main way in which these stock grants for senior executives can be made acceptable to big institutional investors and the proxy advisory firms. By contrast, these types of vesting criteria are not common for stock options, which have their own built-in performance goal of requiring a stock price increase from grant to have any real value. The performance criteria in the huge and complex stock option grants to Elon Musk at Tesla are a rare exception.

2. A wide range of goals or metrics is possible, tied in some way to your company’s stock price and/or internal financial measures. The most popular are TSR (typically relative to the TSR of an index or competitors, as in the Apple example above); return on capital; earnings per share; and revenue. Companies often use multiple targets for the stock award. For example, 50% of the grant’s payout may be based on one goal, the remaining 50% on another.

3. The performance period for measuring whether the goal is reached is often three years. While a stock option grant may have a ten-year term and an RSU grant a four- or five-year vesting period, performance share grants with a three-year term are still considered a form of long-term incentive (LTI) compensation. Often you have multiple outstanding performance share grants with three-year cycles. This makes it complicated to track them all and follow how you’re doing against the performance criteria.

For tax purposes, you are likely to receive the shares only after the board certifies whether the performance goals were reached when the period ended (usually a cumulative calculation and not based on yearly measurements). The award is then paid out in the year after the cycle ends. It’s in that year when you’ll have taxable income from the grant. Some companies have started adding a post-payout, time-based holding period, at least for the shares net of taxes owed.

4. Grants tend to have sliding scales or multipliers that can give you a bigger payout. For meeting a goal, you may get the target award size (e.g. 10,000 shares). Falling below the goal could result in no payout or a minimum amount. Should your company exceed the goal by 100%, you may get a maximum payout of 200% of the target (e.g. 20,000 shares). The grants at Apple described above illustrate this potential upside.

5. Leaving your company for another job during the vesting period will end your rights to any payment, regardless of how well your company is doing during the performance cycle and your role in contributing to it. Retirement, death, or disability under your plan may allow for pro rata distribution at the end of the performance period, depending on how long you worked for your company during the cycle (or a full payout, if your grant’s terms permit that). Should your company get acquired, technically triggering a “change in control” as defined by your grant agreement, you may still get the full payout under the terms for an M&A transaction.

Further Resources On Performance Shares

To learn more about these types of equity awards, see the section Restricted Stock: Performance Shares at myStockOptions.com, including an FAQ on the top 10 questions to ask about your performance share grant.

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Register For Our National Financial-Planning Conference

Our special one-day conference is coming up soon: Financial Planning For Public Company Executives & Directors.

Date: June 18, 2019
Place: Hilton San Francisco Airport Bayfront
Time: 8:00am–6:00pm

In a fresh lineup of talks and panel sessions, attendees will hear from leading experts on many topics:

• Equity compensation planning challenges relating to taxes, wealth preservation and transfer, and charitable giving
• Significant tax, legal, and SEC compliance pitfalls to avoid, and new developments
• Financial planning for equity comp in pre-IPO companies
• Strategies for concentrated stock positions and for nonqualified deferred compensation
• Rule 10b5-1 trading plans
• Grant, employment, and severance agreements
• Case studies and other examples of successful planning strategies
• Methods for attracting and effectively advising high-net-worth clients
• And much more!

Continuing education credits, including 8.0 CFP® credits and 7.0 CEP credits, are available. You can register and make hotel reservations now at the conference website, where you can also read praise from attendees for last year’s sold-out conference. Please feel free to contact us for more information (617-734-1979, [email protected]).

Leading Financial-Planning Experts Will Speak At myStockOptions.com National Conference

Organized by myStockOptions.com, the one-day conference Financial Planning for Public Company Executives & Directors is a must-attend event for professionals working with or seeking to advise executives, directors, and high-net-worth employees who have stock compensation and holdings of company stock. Being held in the San Francisco–Silicon Valley area on June 18, 2019, this unique conference is sponsored by some of the leaders in the financial-planning industry, including Fidelity Charitable, Charles Schwab, Columbia Threadneedle Investments, StockShield, and StockOpter. Continuing education offerings include 8.0 CFP® credits and 7.0 CEP credits.

Date: June 18, 2019
Place: Hilton San Francisco Airport Bayfront
Time: 8:00am–6:00pm
Register: https://www.mystockoptions.com/conference

Registrations by May 18 receive a $300 early-bird discount. The Hilton San Francisco Airport Bayfront is conveniently located at the San Francisco International Airport (SFO). Rooms at a specially discounted rate have been reserved for June 16–20 at the hotel, which offers free airport shuttle transportation.

Praise From Past Attendees

The 2019 conference follows the sold-out success of the 2018 conference, held in Boston. "The [2018] conference was excellent—packed with information and lessons for advisors to apply in their practices," said William Baldwin of Argent Wealth Management (Waltham, MA), a past national chair of the National Association of Personal Financial Advisors (NAPFA). "In many other conferences I attend, the presenters only scratch the surface of their topics," said Aaron R. Petersen of Capital Group Private Client Services (Los Angeles, CA), another 2018 attendee. "It was refreshing to see that many of the presenters went the next step or two deeper into their topics."

2019 Conference: Fresh Topics, New Speakers

The 2019 conference is by no means a repeat performance of the 2018 event. With a fresh range of topics, talks and panel discussions will feature a distinguished speaker lineup of top industry experts. Many are leading advisors involved with financial, tax, and legal planning for stock compensation and holdings of company shares. The conference agenda comprises the following sessions:

• Leading Financial Advisor Reflects On His Career Working With Executives, an interview of Tim Kochis, Founder and CEO of Kochis Global (former CEO of Aspiriant)
• Tax Myths And Facts With Equity Compensation
• Trends In Stock And Executive Compensation: What Stock Plan Participants Need And Want, And How Advisors Can Help
• Important SEC Rules And Legal Developments Impacting Financial Planning For Stock And Executive Compensation
• Attracting And Retaining Individuals Who Receive Company Stock And/Or Options
• Planning Strategies For Stock Options, Restricted Stock/RSUs, Performance Shares, And Company Stock Holdings
• Estate Planning And Charitable Giving With Company Stock And Equity Comp
• Rule 10b5-1 Trading Plans: Cornerstone Of Legal Protection For Stock Diversification
• Strategies For Concentrated Positions In Company Stock
• Stock Grant, Employment, And Severance Agreements: Key Documents For Advisors To Understand And How To Help Clients Avoid Big Mistakes
• Donor Advised Funds Versus Charitable Foundations: What’s Best For Your Client
• Nonqualified Deferred Compensation: What Advisors Must Know To Advise Executives
• Pre-IPO Company Financial Planning

"This is the only conference addressing and focused solely on financial planning for executives and directors," says Kent T. Hickey of Legacy Planning Partners (Allentown, PA). "My practice significantly changed as a result of the valuable information shared by industry leaders. Since I returned from the 2018 conference, fellow planners and clients have sought my input on executive compensation. Already looking forward to the next conference!"

"Excellent content," adds Madeline Van Hoorickx of UBS Financial Services (San Jose, CA). "I haven’t come across anything else that is geared toward advisors like this."

"The sold-out success of our 2018 conference shows the need for this type of specialized, exclusive conference and education for advisors," explains Bruce Brumberg, the editor-in-chief of myStockOptions.com, the creator and organizer of the conference. He encourages attendees to register as soon as possible. "It's the truth, not a mere marketing ploy, when we say that space is limited and filling quickly!"

You can register and make hotel reservations now at the conference website, where you can also read more praise from attendees for last year’s sold-out conference. Please feel free to contact us for more information (617-734-1979, [email protected]).

What To Know About Tax Reform And What To Expect From The 'Tax Reform 2.0' Proposals

"Tax Reform 2.0" has hit the headlines, a month after this blog predicted a major buzz about followup tax cuts in the wake of the Tax Cuts and Jobs Act (see our related commentary, Tax Reform Developments: Making Provisions For Individuals Permanent; Capital Gains Indexing). Many of our talking points are now being echoed in the national news media, e.g. in The New York Times this week.

One of the most significant proposed tax cuts, the indexing of capital gains for inflation, is a long-recurring idea that has yet again been reintroduced. As explained in the tax-developments session at the recent myStockOptions financial-planning conference, capital gains indexing would routinely increase the cost basis of investments, such as company stock, for inflation. That would reduce the size of your taxable proceeds at sale, as only the inflation-adjusted capital gain would be taxed.

It must be acknowledged that the proposed additional tax cuts, especially if made by executive order, are politically controversial. As the NYT article bluntly puts it, the White House "is considering bypassing Congress to grant a $100 billion tax cut mainly to the wealthy, a legally tenuous maneuver that would cut capital gains taxation and fulfill a long-held ambition of many investors and conservatives." Nevertheless, the indexing of capital gains for inflation would, in particular, also make stock compensation more attractive for employees by reducing the amount of tax paid on the gains when shares are sold. It would, however, complicate the related brokerage recordkeeping, cost-basis calculation, and tax-return reporting. 

Tax-Reform Guidance At myStockOptions.com

After the Tax Cuts and Jobs Act, which took effect at the start of 2018, and with the current focus on more tax changes, tax planning remains at the forefront of public attention in the United States. Taxpayers remain concerned about the most effective ways to minimize taxes and prevent tax mistakes. This year the new tax law added potential confusion to the already complex arena of taxation for stock options, restricted stock, restricted stock units, ESPPs, and other forms of equity compensation.

The Tax Cuts and Jobs Act has several provisions that directly and indirectly affect equity compensation, whether in personal financial planning or in company stock plan administration. While the core tax treatment of stock compensation has not been altered, the new law's changes in the income tax brackets have a big impact on taxpayers who receive additional income during the tax year from an equity award or cash bonus.

At myStockOptions.com, the impact of tax reform on individuals is clearly explained in a variety of easily understandable content:

• Interactive quiz: Tax Cuts & Jobs Act

• Podcast: How Tax Reform Affects Your Stock Compensation And Financial Planning

• myStockOptions Blog: Tax Reform Developments: Making Provisions For Individuals Permanent; Capital Gains Indexing

• Article: Six Ways Tax Reform Affects Your Stock Compensation And Financial Planning

• FAQ: How does tax reform affect stock compensation?

• FAQ: Has recent legislation changed the taxation of incentive stock options (ISOs)?

• FAQ: How does tax reform affect restricted stock and RSUs?

• Article: Private Company Stock Options And RSUs: 10 Facts To Know About The New Tax-Deferral Opportunity

• Our patented calculators and modeling tools

"Tax reform affects financial planning for everyone, even strategies for estate planning and charitable giving," says Bruce Brumberg, the Editor-in-Chief of myStockOptions.com. "When you have stock compensation and holdings of company stock, you layer on an additional set of complex tax rules. With our content and tools, we help our site members and licensing clients make sense of it all."

Pro Membership: Crucial Edge For Advisors With Clients Who Have Equity Compensation

Beyond the Basic and Premium Memberships at our website, myStockOptions.com Pro is a special membership level for financial advisors, CPAs, and other professionals who have clients with stock compensation. It gives full access to the whole website plus special features in the tools, where advisors can track and model stock grants for multiple clients. Access to the vast library of content at myStockOptions.com puts answers to tough client questions right at the fingertips of advisors, who can create PDFs of crucial content with their logo on it for distribution to clients.

Leading Industry Experts Speak At Sold-Out myStockOptions Financial-Planning Conference

Organized by myStockOptions.com and held on June 18, the one-day conference Financial Planning for Public Company Executives & Directors attracted financial advisors from all over the United States. These professionals work with or seek to advise executives, directors, and high-net-worth employees who have stock compensation, holdings of company stock, and other company benefits, such as nonqualified deferred compensation.

The conference was a big success. All available space was sold out, and the event received glowing reviews from attendees. myStockOptions thanks those who attended, our speakers, and the conference's sponsors: Eaton Vance, Fidelity Charitable, StockShield, StockOpter, Social Security Solutions, and the NASPP.

The enthusiastic feedback and constructive suggestions we received will help to shape similar events in the future. “Excellent content,” said an advisor after the event. “I haven’t come across anything else that is geared toward advisors like this.” Many attendees told us that the coverage of the presented topics was just right: “Technical but not too basic or overly technical,” wrote one. Another praised the event as the “only conference addressing and focused solely on financial planning for executives and directors,” and one advisor even called it the “best conference focused on executive/equity comp.”

A selection of other attendee feedback:

• “A huge amount of practice-relevant information in a very efficient and engaging format.”
• “The speakers were very informative and didn’t focus too much on the basics—got into deeper conversations.”
• “Consistently high quality.”
• “It’s hard to find seminars that provide this much detail.”

Conference Sessions: Engagement With Expertise

Leading Investment Manager Reveals Current Strategies for High-Net-Worth Clients (Paul Bouchey, Parametric Portfolio Associates, interviewed by Bruce Brumberg of myStockOptions.com)

Trends in Stock and Executive Compensation: What They Mean for Financial Advisors (Richard Friedman, Ayco Company)

Important Tax, SEC, and Legal Developments Impacting Financial Planning for Stock and Executive Compensation (Bruce Brumberg, myStockOptions; Susan Daley, Perkins Coie)

Leading Financial Advisor Reflects on His Career Working with Executives (Tim Kochis, Kochis Global, interviewed by John Barringer of Executive Wealth Planning Partners)

Financial & Tax Planning Strategies for Stock Options, Restricted Stock/RSUs, Performance Shares, and Company Stock Holdings (Caroline Emswiler, Wealth Financial Consultants; William Baldwin, Argent Wealth Management; Jackie Kunkel, UBS Financial Services; Kristin McFarland, Darrow Wealth Management; moderator: Bill Dillhoefer, Net Worth Strategies)

Estate Planning & Charitable Giving With Company Stock & Equity Comp (Geoff Zimmerman, Mosaic Financial Partners; Kirsten Howe, Absolute Trust Counsel; Matthew Connor, Fidelity Charitable)

Rule 10b5-1 Trading Plans: Cornerstone of Legal Protection for Stock Diversification (Michael Andresino, Posternak Blankstein & Lund; Mark Bach, Morgan Stanley)

Retirement Distribution Planning for Executives: Key Role for Stock Compensation and Holdings of Company Stock, Executive Retirement Plans, and NUA (Chuck Steege, SFG Wealth Planning Services)

Strategies for Concentrated Positions in Company Stock (Dave Gordon, Eaton Vance; Bob Gordon, Twenty-First Securities; Brian Yolles, StockShield; moderator: Tim Kochis, Kochis Global)

Pursuing the Equity Compensation Opportunity: Attracting and Retaining Individuals Who Receive Company Stock and/or Options (John Barringer, Executive Wealth Planning Partners; Bill Dillhoefer, Net Worth Strategies)

Conference Met A Strong Need Among Advisors

From our experience with financial planners using the content, tools, and advisor directory at myStockOptions.com, we sensed a strong need for this type of event. Moreover, a recent national survey of 1,000 stock plan participants found that while half understand the long-term value of their equity compensation, many are hesitant about exercising stock options or selling shares because of anxiety that they will make a costly mistake. The survey suggests that improved education and guidance would reduce this fear factor.

"Financial-planning clients and their families look to equity comp or company stock holdings to fund important life goals," said Bruce Brumberg (pictured at the right), the editor-in-chief of myStockOptions.com, during his introductory remarks. "They rely on advisors for help in how to maximize, preserve, and transfer their wealth and how to prevent them from making big mistakes."

Accordingly, our conference team selected stock comp topics that are especially important for advisors to understand in serving their financial-planning clients. Our speakers and panelists shared a wide range of knowledge, insights, and experiences that completely met our high expectations and the goals of the conference. We hope that our conference attendees found the event a boost for their professional development, helping them deepen client relationships, further develop their reputations, gain more client referrals, and advise more employees with stock comp in ways that help them achieve their financial and life goals.

The mission of the conference is also one of our perpetual missions at myStockOptions.com: to provide an independent, unbiased source of educational content and tools on all types of equity compensation. Full access to our website is available via our Premium or Pro membership levels. Additionally, our extensive and engaging educational content on all aspects of equity compensation can be licensed by stock plan providers and companies for their plan participants. The content includes not just our easy-to-understand articles and FAQs but also our videos, podcasts, modeling tools, and fun quizzes on many different topics.

Nonqualified Deferred Compensation: Planning Affected By 2018 Contribution Limits For Qualified Retirement Plans

Today we bring some news from our sibling website, myNQDC.com. November and December are the months when many participants in nonqualified deferred compensation (NQDC) plans must choose how much of next year's salary to defer. Influencing this decision about nonqualified plans are the contribution and benefit limits that apply to qualified retirement plans. Importantly, the contribution limits of qualified plans form the major reason for the existence of nonqualified plans: to allow executives and key employees to save additional amounts for retirement with an elective nonqualified plan or an excess 401(k) plan. (See also the FAQ at myNQDC.com on the top NQDC-related year-end-planning issues, which may change in upcoming years with tax reform.)

The contribution limits for qualified plans are provided under Section 415 of the Internal Revenue Code, and every autumn the IRS announces figures for the following year. The limits are adjusted annually for inflation. While there are slight increases in some limits for 2018, in others the 2017 figures continue.

What this means: The changes in limits from 2017 to 2018 are slight. If you have already maxed out your qualified plan contributions for 2017, you will probably do the same in 2018, so you will need to rely on NQDC plans to defer any salary and bonus increases you expect in 2018.

The table below presents the qualified plan limits for 2017 and for 2018 (increases marked in red). See also the IRS release announcing the 2018 figures.

Qualified Plan Contributions: Annual Limits That Affect NQDC Plans

Contribution type/limit	2017	2018
Compensation allowed in qualified deferral and match calculation	$270,000	$275,000
Elective compensation deferrals	$18,000	$18,500
Catchup contributions for people aged 50 or older	$6,000	$6,000
Total defined contribution limits (employee and employer contributions)	$54,000 + catchup contribution	$55,000 + catchup contribution
Defined benefit plan payout limits	$215,000	$220,000
Income threshold defining key employees for the purposes of top-heavy plans and the six-month delay on payout upon separation	$175,000	$175,000
Income threshold defining highly compensated employees for the purposes of nondiscrimination testing	$120,000	$120,000

Set by the Social Security Administration, the Social Security wage cap will rise in 2018 to $128,700, a slight increase from $127,200 in 2017. With the 6.2% rate of Social Security tax, the maximum possible Social Security withholding in 2018 is $7,979.40.

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.

myNQDC.com Is Available By Individual Membership Or Corporate Licensing

myNQDC.com is available through individual premium memberships or through corporate licensing. Premium members have access to all of myNQDC.com, including the Learning Center, which offers up to 6 continuing education credits for CFPs, 6 PACE credit hours for CLU® and ChFC® professionals, and 12 CPE hours for ASPPA members. To learn about the corporate services offered by myNQDC.com, please see the website's About Us and Licensing sections.

Stock Compensation And The Secretary Of State Nominee

President-Elect Trump has nominated many company executives, directors, and founders for cabinet positions. Not surprisingly, they have substantial experience with equity compensation and its wealth-building potential. As we mentioned in a blog commentary soon after the election, Trump himself has received stock options grants in the past, though they eventually became worthless.

Stock compensation has emerged most prominently in the news in relation to Rex Tillerson, Trump's nominee for Secretary of State. Tillerson is a 40-year employee at ExxonMobil and is its outgoing CEO. His substantial holdings of company stock and unvested stock grants have raised many issues for the company and for him, as discussed by a recent article in Fortune magazine. This is the type of situation that requires a company to tread carefully while balancing its stock compensation philosophy and its commitment to reward a successful executive. In addition, the company must consider the executive's need to avoid conflicts of interest and his or her desire to minimize taxes.

Special Feature Of ExxonMobil Stock Grants

Incentive compensation awards for senior executives at ExxonMobil are not paid out until 10 years after retirement and cannot be accelerated for any reason except death, a rare requirement that strongly encourages (or even forces) long-term alignment between shareholders and executives. (For more on stock retention guidelines, see the related FAQ at myStockOptions.com.) There is a tax-code provision, IRC Section 1043, that allows political appointees to sell stock and defer capital gains taxes on investments that they need to divest, assuming the money is reinvested within 60 days into diversified mutual funds or government securities. (For more details on that provision, see an article about it by three accounting professors in the publication Tax Notes.) However, for Tillerson, that would merely defer gains on company shares he owns, not the income from his unvested RSUs.

Grants Surrendered While Trust Created

According to the related 8-K filing by ExxonMobil, Tillerson will surrender about 2,026,000 restricted stock and RSUs. In exchange for the surrender and the cancellation of these grants, the company will make a cash payment into an irrevocable ethics-compliance trust equal to the value of the company stock under a market-based formula, discounted by about $3 million under guidance from federal ethics authorities. The trust will receive around $180 million. The payout under the trust follows the terms that would apply to the unvested grants if he were still at the company, while also adhering to conflict-of-interest requirements. For example, distributions to Tillerson will happen only in a way that is consistent with the 10-year payment schedule that would apply if he were keeping the stock grant. The trust also has an interesting type of clawback provision that will be triggered if Tillerson ever again works in the oil and gas industry while there are still undistributed funds in the trust. Any remaining funds in the trust would then be forfeited, and "the money would be distributed to one or more charities involved in fighting poverty or disease in the developing world" (see Section 2g of the cancellation and exchange agreement).

Tillerson will also give up $3.9 million in an unpaid deferred cash bonus, and he will divest his ExxonMobil shares within 90 days of his confirmation. For additional details on the arrangement for his stock and executive compensation and his company stock holdings, see the letter that Tillerson sent to the Office of the Legal Advisor for the Department of State on various ethics undertakings.

It's Decision Time For Nonqualified Deferred Compensation: The Top Issues In Choosing Salary Deferrals For The Year Ahead

This is a high-traffic time of year for our sibling website myNQDC.com, a comprehensive resource on nonqualified deferred compensation (NQDC). The fourth quarter of the year, and especially November and December, is the most common period during which salary deferrals are elected through NQDC plans for the year ahead. Participants in NQDC plans choosing how much of next year's salary to defer can find plenty of financial-planning guidance at myNQDC.com, including an FAQ with year-end issues to consider.

We predict that year-end financial and tax planning will be more peaceful and certain in 2015 than it may be during the next few years. The likelihood of tax changes in 2016, a presidential election year, is very low, so tax-rate increases or decreases are not big factors in decisions at year-end 2015. However, before year-end 2016, a new president will have been elected on a platform probably including major tax reforms. Anticipated tax changes (and uncertainty around them) may then affect your decision-making.

Year-End Issues To Consider

In the analysis for deferrals to make in 2016, one ongoing issue stems from the tax increases that took effect in 2013, including the additional Medicare taxes for high earners. Other points to consider include the following.

1. Maximizing the amount you can contribute to your 401(k) plans.You should participate in the NQDC plan only if you can also afford the maximum annual contributions to your qualified deferral plans, as those are fully funded and protected by ERISA.

2. Cash needs for the year ahead and multi-year projections for your income. At a minimum, these considerations will tell you whether you have extra cash to defer. Your cash-flow projections should factor in all sources of income, including equity compensation, against spending needs in the near future to help you decide how much to defer.

3. The financial security of your company, and your job security.If you have concerns about your company's solvency, you may want to avoid contributions to nonqualified plans because of the risks presented by corporate bankruptcy. Any potential for job loss may also make NQDC deferrals unwise. If you lose your job during the deferral period, the income in the plan will be distributed to you immediately, triggering taxes you may not want to pay at that time.

4. Company match. Though company matches are not as common in NQDC plans as they are in 401(k) plans, if a company match requires you to contribute a certain amount to your NQDC plan, you will need to consider deferring at least that minimum.

5. The thresholds for higher taxes and rates. Higher tax rates make deferring income appealing. Consider whether the tax rate at the time of distribution is likely to be lower or higher than it is at the time of deferral. If you think the rate will be lower, then pre-tax deferrals can make sense. Deferrals can keep your income below the current triggers for higher taxes.

To make projections for current and future tax rates, and to compare returns both through deferrals and through not deferring income, try the calculator at myNQDC.com.

Alert: Because of the NQDC election rules, participants should carefully consider elections. The rules of IRC Section 409A severely restrict the ability to make changes in NQDC deferrals.

Consider Limits On Contributions To Qualified Plans

Influencing year-end decisions about nonqualified plans are the contribution and benefit limits that apply to qualified retirement plans. These limits are provided under Section 415 of the Internal Revenue Code, and every autumn the IRS announces inflation-adjusted figures for the following year. Importantly, the contribution limits of qualified plans form the major reason for the existence of nonqualified plans: to allow executives and key employees to save additional amounts for retirement with an elective nonqualified plan or an excess 401(k) plan. If you have already maxed out your qualified-plan contributions, you will need to rely on NQDC plans to defer any salary increases you expect in 2016.

The contribution limits for qualified plans are provided under Section 415 of the Internal Revenue Code, and every autumn the IRS announces figures for the following year. The limits are typically adjusted annually for inflation. However, no cost-of-living increase has been detected by the US government during the past year. Consequently, in 2016 the limits for contributions to qualified plans are the same as in 2015. (See the IRS release announcing the figures for 2016.)

Contribution type/limit	2015	2016
Compensation allowed in qualified deferral and match calculation	$265,000	$265,000
Elective compensation deferrals	$18,000	$18,000
Catchup contributions for people aged 50 or older	$6,000	$6,000
Total defined contribution limits (employee and employer contributions)	$53,000 + catchup contribution	$53,000 + catchup contribution
Defined benefit plan payout limits	$210,000	$210,000
Income threshold defining key employees for the purposes of top-heavy plans and the six-month delay on payout upon separation	$170,000	$170,000
Income threshold defining highly compensated employees for the purposes of nondiscrimination testing	$120,000	$120,000

Set by the Social Security Administration, the Social Security wage cap also has not been increased for 2016 and remains at $118,500. With the 6.2% rate of Social Security tax, the maximum possible Social Security withholding in 2016 is $7,347.

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.