EisnerAmper Blog

May 8, 2013

Jim Hatch, CPA

Well, maybe; it depends. Sorry for the equivocation. On the other hand, there is a pretty straightforward two-question test that any new employee being offered restricted stock should take. First, ask “What is the growth potential of my new company?”  If the answer comes back strongly positive, the next question is “What’s my future with and commitment to my new company?” If the answer again is a strong “yes,” then taking the 83(b) election can make sense…even good sense from a tax savings point of view.

This post will not present the assumptions or provide the formulae required to determine your tax savings over a vesting period – that’s an exercise for you and your tax advisor. Suffice to say that your options are to take the 83(b) election and make an upfront ordinary income tax payment on the present day value of the stock but then pay only capital gains tax on the (assumed) increase in stock value as you vest; or to decline the election and pay higher ordinary income tax rates on your gains each time you vest. Doing the calculations based on reasonable growth in stock value along with the difference between ordinary and capital gains tax rates (even counting the cost of money over time) can lead to the conclusion that the election is worth a significant savings in tax over time.

The point is that even though many employers offer new employees restricted stock, most employees don’t take the time to understand the 83(b) election options, or shy away from the upfront tax payment. Experience shows that new employees (who don’t even have to be highly compensated senior executives) joining well-run, profitable companies should consider taking the election; and even consider borrowing or selling some shares from previous grants to cover the initial tax payment. It is also true that employees at pre-IPO companies should “do the math” and factor in the benefits of an 83(b) election when they anticipate the likelihood of their company experiencing a rapid stock value gain at the time it goes public.

So, you see, it depends. The IRS has made the 83(b) election possible – saying in effect, “pay me 35% now and when you do well over time I’ll only ask for 15% on the appreciation later.”  It comes down to how you view your new company’s prospects for growth and your commitment to its future.

Want more 83(b) Election informaton? Article: Revoking a Section 83(b) Election
 

May 1, 2013

Employees who receive unvested or restricted property as part of their compensation or incentive packages need to be fully aware of the consequences connected to IRC section 83(b) elections, as revoking the election is a difficult process. Peter Alwardt, a tax partner with more than 20 years of experience focusing on employee benefits, recently wrote an article outlining the considerations involved. Please click here to find out more about the background, definition, and revocation process related to section 83(b).
 

April 29, 2013

By Brenda DeSaro, CPA 

The 408(b)(2) regulation that went into effect July 1, 2012 requires certain service providers to make written disclosure of their services and fee arrangements to a responsible plan fiduciary. If the disclosures are not made, the fees paid in relation to the agreement are prohibited; therefore the plan has entered into a prohibited transaction under ERISA, and an excise tax will be due.

Most Plan Sponsors received the disclosures from the appropriate Covered Service Providers (“CSPs”) by the deadline of July 1, 2012 and had the required written contracts in place.

Now it’s late April 2013 and many question if the new transparency helped. In addition, are all the requirements of 408(b)(2) being met? Are Plan Sponsors assuring the disclosures are adequate, or is there still too much bling? 

I believe that anytime the Plan Sponsor can get clearer and better information about fees it is a good thing. I just hope they really understand the information and understand just receiving the disclosures is not the end of compliance, it is the beginning.

Going forward, Plan Sponsors need to address this requirement anytime a new qualified agreement is proposed for the plan from a CSP. The hope is, as time passes these service agreements are clearer – free of bling. The Plan Sponsor will be able to identify any conflicts of interest, determine the adequacy of the disclosures, and more easily determine if the fees are reasonable. These agreements are now being read, questioned and ultimately understood better than in the past. This should lead to better decisions by plan management regarding which CSP to retain which will benefit plan participants. This new requirement could lead to a more even playing field where comparing fees is much easier to do. 

April 10, 2013

By Peter Alwardt 

By now, virtually all employers have addressed compliance with Internal Revenue Code section 409A (‘section 409A’) as it relates to their nonqualified deferred compensation plans, phantom equity plans, stock option plans (for closely held businesses), and stock appreciation rights.  However, it appears that some employers still may not have reviewed their executive employment agreements with respect to compliance with section 409A.
 
As a reminder, failure to comply with section 409A results in expensive tax issues not for the employer but for the executive, including  income tax on any amounts deferred under the agreement retroactive to the first year the agreement violated section 409A, interest on the unpaid taxes, and an excise tax payable by the executive (not payable by the employer) of 20% of the income recognized.

Accordingly, it is imperative that existing employment agreements be reviewed for compliance with section 409A as IRS is actively reviewing executive plans and agreements as part of its corporate audit process.

For more information, please review the article  Beware of Section 409A Traps in Employment Agreements.
 

April 8, 2013

By Ken Weissenberg, CPA  

The Supreme Court heard the Windsor v U.S. case recently, challenging the constitutionality of the Defense of Marriage Act (DOMA).  If the Court rules that DOMA is unconstitutional, FICA taxes paid on employee benefits for same sex spouses, both the employer and employee share, will be refundable. The catch is that the refund claim has to be filed within three years of the return filing date. For 2009 taxes, employers who wish to protect their right to file claims at a later date for any FICA taxes associated with eligible benefit payments made in the 2009 tax year should file protective refund claims by April 15, 2013. The protective claim is filed on Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return, for each entity that made an eligible payment and each quarter in which the eligible payment was made. The protective claim is filed to preserve the employer’s and affected employees’ claim to a refund in case the Windsor decision is resolved in the taxpayer’s favor. A protective claim is straightforward to file, and does not have to state a particular dollar amount or demand an immediate refund. Further, an employer that files a protective claim by April 15, 2013 can later decide whether to file a full refund claim should the Windsor case be decided in the taxpayer’s favor.

April 3, 2013

By Denise Finney 

Plan sponsors change custodians of their 401k plans for various reasons.  Whatever the reason may be, there are numerous steps in the process to complete the transfer of plan assets and participant information, all of which should be carefully planned and timed.

Decide on the date of transfer upfront and consider choosing a date that does not correlate to the plan’s year-end.  For instance, if your 401k plan year-end is December 31, you may want to transfer the plan assets on October 31.   Plan sponsors and custodians tend to be busy on December 31.   In addition, there can be confusion as to which custodian holds the assets at year-end.  Questions can arise from this which leave the 401k plan sponsor trying to figure out the following scenario:  Did the transfer out of the prior custodian occur on December 31, but the transfer into the new custodian occur on January 1?  Is neither the prior nor new custodian taking responsibility for the assets as of December 31?  The point is: What may on the surface seem to be a clear transfer date, may not necessarily be so evident. 
     
Although you are ceasing your relationship with the predecessor custodian, remember not to burn bridges.  You’ll need assistance and cooperation from them throughout the transfer process and beyond.  Decisions will need to be made regarding how to transfer the investments.  Will the successor custodian accept the investments from the predecessor custodian or will they need to sell the investments?  Will the successor custodian map the investments to similar investments or will participants need to make a new allocation election?  In addition, who will be preparing and sending notices to the participants regarding the transfer and blackout dates? 

Once the transfer occurs, plan sponsors should ensure that the transfer in total and at the participant level was performed in a timely and accurate fashion.  This can be accomplished by confirming that the total assets transferred from the predecessor custodian agree to the total assets received by the successor custodian, with special attention to participant loan balances.  At the participant level, a selection of participants should be reviewed to ensure the participant account balance and allocations were also transferred accurately.  The plan’s 401k auditor typically will review the reconciliations as well.  This process sounds simple, and in most cases it is fairly straightforward; however, not incorporating control procedures may result in significant errors.

In addition to the transfer of assets, there is also a transfer of demographic data such as date of birth, date of hire, date of re-hire, deferral percentages and vesting information.   This information should also be reviewed for accuracy.  Plan sponsors access plan and participant information online.  Typically, once the relationship is terminated with the prior custodian, so is the online access.  That means years of historical data up to and including the transfer will no longer be available shortly after the transfer.  Care should be taken to obtain all necessary information before online access is terminated.  The trust statements provided each year that include all plan activity and participant activity should be secured through the date of the transfer from the predecessor custodian.  Additional suggested reports to obtain include deferral changes, allocation changes, plan assets and changes in plan assets, and distribution and loan details.  Plan sponsors will want to coordinate the transfer with their plan auditors so they can gather any pertinent information for the 401k audit while the information is still accessible.

Many plan sponsors have a prototype plan whereby they filled out an adoption agreement using a basic plan document provided by the custodian.   If this is your situation, a change in custodian means a change in adoption agreement and basic plan document.    Be sure to understand your plan’s provisions and make certain that the proper elections are selected in the adoption agreement.   Incorrect selections could potentially cause an operational failure by not following the provisions of the plan appropriately.   Consider having your ERISA attorney review the new adoption agreement prior to signing it. 

Remember: Coordination is key. We strongly suggest that you have a strategy in place and coordinate with all parties involved with the 401k plan to ensure a smooth and successful transition. 
 

March 25, 2013

By James A. Hatch, CPA 

With this post, the third in a series of common start-up compensation mistakes, we address the concerns regarding (the lack of) documentation.

Start-ups, by their very nature, often move at warp speed and proper documentation is frequently a victim of management going too fast and employees not asking the right questions.
This is especially true when it comes to offers of equity at the time of hire.

We’ve seen this one too often. A start-up company offers an executive equity and the only thing behind the offer is a handshake or maybe an employment offer letter. 

This isn’t nearly enough.

 If you are that new hire…get it in writing; and if you are the company owner you should have a well-defined equity offer. 

• Start with an Offer Letter that clearly cites the fact that an equity vehicle is part of the terms of employment
•  Develop a Stock Option Plan that spells out the number of shares being offered and what percentage of ownership they represent; the vesting period, termination before vesting, accelerated vesting, exercise price and how it is derived (e.g., from a third party or by a market event)
• Create a Shareholder Agreement that stipulates shareholder rights and covers items such as tag-along and drag-along rights.

Offer letters, stock option plans and shareholder agreements are key documents that deserve to be thoughtfully conceived and written by owners and thoroughly reviewed and understood by new hires. They are also financial and legal documents that should be prepared and reviewed by professional advisors.