Type of Stock Plan Crucial to Compliance


Payroll professionals should be familiar with the terms of employer stock plans to ensure they properly assess the tax and withholding liability incurred by employee stock purchases, two representatives from KPMG LLP said May 16.

“How many of you have copies of your plans?” Fred Basehore, KPMG senior manager, said to a room of about 70 payroll professionals. Two participants raised their hands.

“Look at your plans and read them,” Basehore said at the annual American Payroll Association Congress in Orlando, Fla. “You have to really educate yourself on what these different rules are, and what kind of plan you have.”

How much and when to report and withhold compensation derived from employee stock purchases depends on the type of plan offered by the employer, said Terri Stecher, a  director at KPMG LLP.

Under a restricted stock transfer plan, an employer places stock in an employee’s name, generally with provisions attached to it that determine when the employee takes full control of the stock. For example, the employee may need to work for three years to own the stock outright, Stecher said.

Withholding on stock granted under a restricted stock transfer plan occurs when the employee comes into full ownership of the stock and no longer has a substantial risk of forfeiting the stock, unless the employee elects to have taxes withheld and paid at the time the stock was granted, Stecher said.

To withhold on the stock, the employer may sell a portion of the employee’s stock, accept a check from the employee to cover the amount or initiate a brokerage transaction, Stecher said. 

“This is the one and only time you are allowed to accept a check from an employee to cover taxes,” said Basehore, who is a member of the Bloomberg BNA Payroll Library advisory board.

Payroll professionals should not confuse restricted transfers with restricted unit plans, Stecher said. Unit plans qualify as deferred compensation and reported differently, she said.

Under a nonqualified stock option plan, an employee may buy company stock at a guaranteed price for specific window of time, even if the stock price increases, Stecher said. 

With a nonqualified plan an employee’s taxable income is difference of the fair-market value of the stock at time of purchase and the amount the employee paid, Stecher said.  Withholding on that amount is required at the time of purchase.

Depending on the employer’s plan, an employee may be able to buy stock at the price guaranteed by a stock option even after leaving the company, Stecher said. Payroll professionals should remember issue Form W-2, Wage and Tax Statement, to a former employee even if the stock option is exercised after the employee leaves the company, she said.

Incentive stock-option and employee stock-option purchase plans are similar in that they must meet strict requirements to be considered valid, and they ease the tax burden for employees, Stecher said.

The employer is not required to withhold under either plan, but may be required to report compensation on an employee’s W-2 if the stock is sold before a certain amount of time, Stecher said.

Under the two plans, the difference between the fair market value at time of purchase and the price the employee paid through the stock option plan is not considered compensation, and does not need to be reported by the employer, if the employee does not sell the stock before a specific date, Stecher said. If the employee sells the stock before the appointed time, the difference in value and price paid is considered compensation and must be reported, she said.

However, if the employer offers a stock at a discount under an employee stock option purchase plan, the discount is considered compensation and must be reported on the employee’s W-2 when the stock is sold, Stecher said.

Take a free trial of Bloomberg BNA’s Payroll Decision Support Network, your one-stop resource for reliable, up-to-date guidance and analysis in every area of payroll administration and compliance.

Follow Bloomberg BNA on Twitter @BloombergBNA and join the Bloomberg BNA U.S. and Global Payroll group on LinkedIn.