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The Employee Ownership Update

Loren Rodgers

March 16, 2015

(Loren Rodgers)

New Data from NASPP on ESPPs

The 2014 Domestic Stock Plan Administration Survey, sponsored by the National Association of Stock Plan Professionals (NASPP) and Deloitte, contains data on how public companies are operating employee stock purchase plans (ESPPs). The study includes responses from 487 companies.

Several key findings stand out. Fifty-two percent of all responding companies have ESPPs, including 67% of technology companies but just 25% of manufacturing companies. Twenty-five percent of respondents had eliminated an ESPP, mostly over three years ago, but 17% had started new plans. Eighty percent of the plans were qualified under Section 423 of the Internal Revenue Code.

The percentage of employees who participate in the plan varied widely by plan type and the discount offered, with the median percentage participation rate in the low 30s for 423 plans and under 10%-20% for non-Section 423 plans:

Participation Rates, by Plan Types

% of companies with participation rates between423 PlansNon-423 Plans
Seventy-two percent of the 423 plans offer a 15% discount on the share price, but just 30% of the non-423 plans do. Similarly, 63% of the 423 plans with a discount offer it based on the lower of the beginning or end of the offering period price (a "look-back"), but just 33% of the non-423 plans do. Half the 423 plans have a six-month offering period, with the rest mostly divided between 3-month and 12 month periods.

Some critics of ESPPs say they do not create employee ownership because employees often sell their shares as soon as they exercise, but the data show only 11% do this, while 36% hold shares one to two years and 31% more than two years.

New Bill Would Ease Reporting Requirements on Companies with Employer Stock Plans

The Encouraging Employee Ownership Act would increase the current $5 million cap on the amount of stock closely held companies can award employees before triggering certain SEC reporting requirements to $20 million. The disclosures include information such issues as income statements and shareholder lists. The bill was introduced by Pat Toomey (R-PA) and Mark Warner (D-VA). ESOPs are already exempt from these rules because the ESOP is considered one shareholder, but companies with stock options, employee stock purchase plans, restricted stock awards, and similar plans all would be affected.

Australia Details Proposed Changes in Employee Share Tax Rules

The Australian government has provided details on new legislation to encourage companies to offer discounted share plans to employees. To qualify, companies must make the plan available to at least 75% of their employees. Employees can defer taxation on up to $1,000 per year of current benefit from a discount on shares or share rights (such as options) they purchase for up to 15 years or the actual point of share exercise, if sooner (it is currently 7 years or the point at which the shares or rights fist become exercisable, whether exercised or not). There are some additional tax concessions for start-up firms. Details on the new law can be found at this link.

New 1099-B Equity Plan Reporting Rules Will Cause Confusion

Now that people are filing tax returns, the new 1099-B reporting requirements may cause confusion and sometimes overpayment of taxes for recipients of equity awards, including participants in ESPPs. For all shares acquired under any compensatory awards starting January 1, 2014, brokers are required to report the purchase price for shares as the cost basis for tax reporting requirements.

The new rules state, however, that brokers are prohibited from including equity compensation income in the basis calculation. Normally, if an employee recognizes some compensation income on an award and pays ordinary income tax on it, that increases the basis for tax reporting. For instance, say an employee receives an award of 100 stock options at $50 per share. Five years later, they are exercised for $75 per share. The employee pays taxes on $25 per share as compensation income but does not sell the shares until they reach $90. The 1099-B reported cost basis is $50, for a $40 gain, but because the employee already paid income taxes on $25 per share, the true basis is $75 per share.

This can get even more complicated with ESPPs. An employee exercising an ESPP often will have a discount on the price of up to 15%, and that amount is considered ordinary income even if the shares are held for one year after exercise (note that if share prices fall after exercise, the calculations are more complicated). But the basis that is reported will not reflect taxes paid on this portion.

Brokers can go beyond the requirements to report the compensation element, but in comments on the new regulations, brokers said getting that information from the company was often very difficult. Companies offering awards, therefore, need to be very proactive in helping employees understand what taxes they actually owe to avoid employees overpaying capital gains.

San Francisco Chronicle columnist Kathleen Pender has written two excellent articles (here and here) that explain the issues raised by the new rule.

Talking About Employee Ownership

Does your company talk about employee ownership? Threaded Fasteners of Mobile, Alabama, wants prospective job candidates to know about employee ownership, so it has embedded an NCEO inforgraphic on the career opportunities page of its Web site.

The NCEO has started a project to create more embeddable resources so employee-owned companies can inform their customers, the public, and even their employee-owners about what employee ownership is and how it works. We'll cover core facts, basic definitions, and research highlights in simple, compelling graphics so you can easily integrate them into your company web site, printed materials, intranet, PowerPoint presentations, or any other format you'd like. If you are already talking about ownership, show us what you are doing; contact NCEO founder Corey Rosen at crosen@nceo.org.

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