Understanding Stock Administration Related to

PAYROLLSuzie Bentley, CPP, NVIDIA Corp. Christine Zwerling, CEP, Stock & Options SolutionsGustavo Dalanhese, CEP, E*TRADE Financial Corporate Services, Inc.

October 9, 2015

Agenda Overview – Common equity awards and

their life cycles◦ Employee Stock Purchase Plans (ESPP)◦ Stock Options ◦ Stock Appreciation Rights◦ Restricted Stock

Tips on streamlining processes Working together! Appendix of other interesting info…

A day in the life of Payroll…

Payroll

Global / Sub / Other

Payrolls

Legal / Compliance

Policies

Human Resources

Payroll Provider

Stock Admin

Tax Dept

Finance –G/L and A/P

IRS, State and Local Agencies

Employees

A day in the life of Stock Admin…

Stock Admin

Securities Exchange

Commission

Legal / Compliance of

Plan

Human Resources

AdministrationSystem

Brokerage Firm

Payroll – U.S. & Global

Transfer Agent

Financial Reporting

Finance - G/L and A/P

Tax Dept

Employees

ESPP – What is it? Purchase of Company Stock typically at a discount Contributions collected through Payroll each pay period,

(calculated before tax, deducted after tax) At the end of the purchase period, contributions are used

to purchase company stock at a discount Common Terms:

◦ Grant Date / Offering Period Start Date / Purchase Period Start / Enrollment Date

◦ Exercise Price, Strike Price, Grant Price, Purchase Price, FMV◦ Exercise / Purchase◦ Dispositions◦ Qualified / Disqualified ◦ Section 423 ESPP / Non-423

Example: Look back and 15% Discount◦ First Day (enrollment date) January 1; FMV $10/share◦ Last Day (purchase date) June 30; FMV $12/share

Purchase Price $10 * 85% =$8.50

$15

$20

Enrollment Date Purchase Date

$510

15% Discount

15%

Stock Plan Basics – ESPP w/ Look-Back

40 Shares Purchased

Contribution AmountPurchase Price

ESPP – Enrollment Plan documents govern the program

and define:◦ What compensation is eligible◦ Who is eligible to participate◦ Deadlines

Enrollment Changes and Withdrawals

◦ Limits Purchase period (accumulator assistance) Calendar or Rolling 12 month-IRS $25,000 limit

READ the PLAN Document!

ESPP – Contributions

Plan documents govern and define:◦ How contributions are made

Lump Sum Contributions Payroll Deductions

◦ How contributions are calculated Gross pay Deducted from net pay

◦ Excess contribution distribution - refunded or rolled forward

◦ Timing of refunds

ESPP – Administrative Corrections

Plan documents govern and define:◦ Correction Type

Over or Under contributed◦ Correction Methodology

Offering Period vs. Purchase Period Verify against plan document, discuss with Legal

Counsel and/or Administrator Collection from employee – lump sum

“Catch-up Contribution” – through payroll Gain adjustment – payroll payment Others?

Considerations: Transferred or Mobile employees

ESPP – Changes‣ Employment changes

o Termination o Ineligibility o Withdrawal

‣ Contribution rate changeso Process o Effective date

‣ 401(k) Hardship Withdrawal ‣ If 401(k) contributions cease due to hardship, so

should the ESPP contribution (not always known by stock administration)

ESPP - Purchase Contribution file to Stock Admin (Timing is critical!)

◦ Per pay period OR One Time (end of purchase period)◦ Prior to purchase – Adjustments or Test Run◦ Multiple payroll groups sending contributions – global program◦ Currency conversion◦ No reporting or tax in U.S. at purchase! Exception……

Pennsylvania!◦ Foreign Countries tax at purchase

Carry forwards◦ Refunded◦ Remain in the plan until the next purchase

Who tracks? What happens with Terminations

Participation? Company?

ESPP Pennsylvania

o Report state income taxes at purchaseo No Federal or Local tax due

ESPP –Dispositions Reporting Dispositions for 423 plans

◦ How often - monthly, quarterly, annually?◦ Compensation income recognized on

Disposition of shares in U.S.◦ Terminated employee Dispositions

ESPP sale income exempt from FICA/FUTA under the American Jobs Creation Act of 2004

1 Year

2 Years

2/1/14 2/1/152/1/13

Enrollment

Purchase

ESPP Dispositions –Disqualifying vs. Qualifying

QUALIFYING: Statutory holding period met - recognize lesser of

1) the discount offered under the plan as computed on the participant's offering date, or2) the actual gain on the sale (Sale Price minus Purchase Price)

DISQUALIFYING: Statutory holding period not met - recognize income equal to the spread in the stock when the shares were purchased versus when they were sold

ESPP – W-2 Reporting

Form W-2 reporting: ◦ Box 1 (Wages, tips, and other compensation) ◦ Box 16 (State wages, tips, etc.), if applicable ◦ Box 18 (Local wages, tips, etc.), if applicable

Just for fun!◦ Regulation §1.6041-2(a)(1) requires Form

W-2 even if those payments are not subject to withholding: Disqualified Disbursements (also receive Corporate Tax

Credit) Qualified Disbursements

IRS Publication 15-B: Employer’s Tax Guide to Fringe Benefits

2015 W-2

Form 3922 – Informational Only

Reconciling W-2 with Broker 1099

Source: Equity Edge Online(r).  Hypothetical data for illustrative purposes only.

Options/SARs – What are they?

Stock Option ◦ Contractual right to purchase shares of the company's

stock A specified number A specified price (the exercise price) and A specified period of time Value grows as stock price appreciates

◦ Two Types Non Qualified (NQ) Qualified (ISO – Incentive Stock Option)

Stock Appreciation Right (SAR)◦ Only pays out the appreciation in the stock price

Options/SARs – What are they?

Definitions◦ Grant / Award

Grant Date, Date Of Grant, Award Date Exercise Price, Strike Price, Option Price, Grant

Price, Purchase Price, FMV◦ Vest◦ Exercise / Purchase

Cash Cashless / Same-Day Sale

◦ Disposition / Sale Qualified or Disqualified Section 421 ISO

Options/SARs – At Vesting Payroll usually doesn’t have to do anything!

◦ UNLESS… Exercise of unvested shares – Early Exercise Granted at a discount

Look out for 409A!

Options/SARs – W-2 Reporting

NQ (non qualified) or SAR◦ Recognize compensation when shares are Exercised

Market Value minus Exercise price ◦ Form W-2 reporting:

Box 1 (Wages, tips, and other compensation) Box 3 (Social Security wages), if applicable Box 5 (Medicare wages and tips). Box 12, with code V Box 16 (State wages, tips, etc.) if applicable Box 18 (Local wages, tips, etc.) if applicable

NOTE: Taxes withheld should be aggregated with employees’ other withholdings for the year and reported in Boxes 2, 4, 6, 17, and 19, as appropriate

2015 W-2 tax reporting

Form 3921 – ISO -Informational Only

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

◦ Pennsylvania Then the state income taxes are due (withheld and

reported) upon exercise

Stock Options – Disposition (ISOs)

May be subject to tax at sale (disposition)◦ Meet required statutory holding periods

(qualified) No reporting or withholding obligations at sale

◦ Do not meet the required statutory holding period (disqualified) The compensation income recognized is equal to the

lesser of: 1) the spread at exercise (difference between the market

value of the stock at that time and the exercise price) or 2) the actual gain realized on the sale (the difference

between the sale price and the exercise price)

Restricted Stock – What is it?

Restricted Stock (RSA) / Restricted stock units (RSUs)◦ Outright grant of company stock to employees or

other service providers◦ Known as “Free Shares”◦ No cost to grantee

“Restricted" ◦ Subject to a vesting schedule

Time Based or Performance Based May be governed by other limits on transfers or sales

imposed by the company

Restricted Stock - Grant Payroll usually doesn’t have to do anything!

◦ UNLESS… IRC Section 83(b) election filed, then taxed

immediately. Only available for RSA

Restricted Stock Unit- VestingCompensation income reported at vest◦Market value ◦FIT / FICA / FUTA taxable at vest

unless the RSU is subject to deferral

◦Not reported in Box 12◦May voluntarily report income in Box 14 (Other)

Reconciling W-2 with Broker 1099

Source: Equity Edge Online(r).  Hypothetical data for illustrative purposes only.

Timely Tax Deposits

IRS requires tax receivables in excess of $100,000 per day to be deposited within one business day.◦ All receipts combined from all sources◦ Stock admin primary sources are stock option exercises

and restricted stock vestings Deposit date of T+1 for non broker stock option exercises Deposit date of T+4 for stock option transactions via

broker Deposit date of V+1 for RSUs and RSAs

Calendar “known” transactions◦ Stock administration knows when RSU vest◦ Immediate notification for stock option exercises

Failsafe process to confirm/deny daily or periodic activity

Penalties for Late Remittance

32

‣ If late 5 days or fewer, penalty is 2% of the tax due

‣ If late 6 to 15 days, penalty is 5% of the tax due

‣ If more than 15 days late, penalty is 10% of the tax due

‣ Individuals in the company that are responsible to make these payments can also be found to be liable for the tax

‣ If non-payment is deemed to be intentional, individuals can be held criminally liable

Yeah, we’re done! Here you go…

But what happens if…

Same-day or close proximity transactions Example 1

Streamlining Processes

This transaction will bring Social Security to annual maximum ($6,510 previously withheld + $744.00= $7,254.00)

Settlement to occur T+3 (4/23/15)Payroll Deposit to occur T+4 (4/24/15)

Transaction 1 - NQSO Exercise - 04/20/2015Transaction Details Exercise Confirm to Employee

YTD Supplemental Income: $105,000.00 $24,000.00 YTD Total Income: $105,000.00 Federal (25%): $6,000.00 YTD FICA: $6,510.00 State (10.23%) $2,455.20

YTD Medicare: $1,522.50 Social Security (6.2% subject to annual limit): $744.00

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

FICA to Withhold: $744.00 Total Withholdings: $9,547.20Medicare to Withhold: $348.00 Net Amount to Employee: $14,452.80

Streamlining Processes Same-day or close proximity transactions Example 2

Social Security maxed out in Transaction 1

Settlement to occur T+3 (4/23/15)Payroll Deposit to occur T+4 (4/24/15)

Transaction 2 - NQSO Exercise - 04/20/2015Transaction Details Exercise Confirm to Employee

YTD Supplemental Income: $129,000.00 $4,300.00YTD Total Income: $129,000.00 Federal (25%): $1,075.00YTD FICA: $7,998.00 State (10.23%) $439.89

YTD Medicare: $1,870.50 Social Security (6.2% subject to annual limit): $0.00

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

FICA to Withhold: $0.00 Total Withholdings: $1,577.24Medicare to Withhold: $62.35 Net Amount to Employee: $2,722.76

Streamlining Processes Same-day or close proximity transactions Example 3

YTD income surpasses $200,000 (Medicare threshold) and $1,000,000 (Supplemental Income threshold); part of transaction to be taxed at 2.35% Medicare rate and 39.6% Federal rate.

Medicare:($66,700.00 taxed at 1.45% and $883,300.00 taxed at 2.35%)

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

Transaction 3 - RSU Vest - 04/20/2015Transaction Details Vest/Release Confirm to Employee

YTD Supplemental Income: $133,300.00 $950,000.00YTD Total Income: $133,300.00 Federal (25% and 39.6%): $249,661.80YTD FICA: $7,054.00 State (10.23%): $97,185.00

YTD Medicare: $1,932.85 Social Security (6.2% subject to annual limit): $0.00

Taxable Income at Vest: $950,000.00 Medicare (1.45% for wages up to $200,000): $21,724.70FICA to Withhold: $0.00 Total Withholdings: $368,571.50Medicare to Withhold: $21,724.70 Net Amount to Employee: $581,428.50

Streamlining Processes Payroll data entry needs to match stock

system and employee confirmations Example Data Entry Sequence

#1Entered First

#2Entered Next

#3Entered Last

Payroll and Stock Admin: Working Together

‣ Both need to understand:o Who to taxo Employees vs. non-employees, jurisdictional

requirementso What tax rates to applyo Income reporting and tax withholding triggers o Timing of reporting transactions

‣ Solutions:o Regular calls/meetings or trainingso Multiple states/jurisdictionso Employees and former Employeeso Create a matrix of taxability of various transactionso Include in Year End Payroll Planning/Reconciliation

Appendix

Sample Taxability Matrix: U.S. RSU and NQSO

Sample Matrix: U.S. ESPPTaxable Values

Prepare matrices to explain taxability and timing to Payroll

Terminated Employees Transactions by former employees are generally subject to the same

withholding and reporting requirements that apply to current employees.◦ Under Regulation §31.3401(a)-1(a)(5) any payment for services constitutes wages

regardless of whether or not the employment relationship exists at the time the payment is made: “Remuneration for services, unless such remuneration is specifically excepted by the

statute, constitutes wages even though at the time paid the relationship of employer and employee no longer exists between the person in whose employ the services were performed and the individual who performed them.

◦ Thus, excluding the exceptions described below, compensation income recognized by a former employee should be reported on a Form W-2 and should be subject to withholding.

W-2s need to be prepared for terminated employees and may need to be reactivated in payroll system◦ Address changes

See if changes can be forced through company (e.g. broker doesn’t unilaterally change in their own system)

Explore messaging ability on vendor sites to remind former employees to change their address if necessary

Advance communication about transactions for terminated employees◦ Develop batch process for communicating post termination activity to Payroll◦ Don’t wait until the very end of the year = during crunch time

Thank you and please remember to complete your evaluation for this session.

Suzie Bentley, CPP Director , Stock Admin & 401(k)NVIDIA Corp.sbentley@nvidia.com408.566.6591 tel

Christine Zwerling, CEP Manager – Stock AdministrationTwitter, Inc.czwerling@twitter.com510.735.4487 tel

Gustavo Dalanhese, CEP Senior Account ExecutiveE*TRADE Financial Corporate Services, Inc.Gustavo.dalanhese@etrade.com801.556.7120 tel

The information presented herein is of a general nature and has been simplified for presentation to a large audience. It is not a complete discussion of all aspects of the laws, rules, regulations, standards, and principles that govern equity compensation plans. The contents are neither designed nor intended to be relied upon, and should not be considered, as legal, tax, or accounting advice. Your specific situation may involve circumstances that cause the laws, rules, regulations, standards and principles described herein to apply differently. Consult your own advisors before deciding what, if any, course of action to take in your own particular situation.