As a part of the Inflation Reduction Act, one of the areas that has increased scrutiny is high-wealth taxpayers. The IRS is working to ensure that taxpayers with the highest income pay what is legally owed under federal law. In July, the IRS announced that the agency had surpassed the $1 billion mark in additional collections from high-wealth taxpayers due to the continued enforcement. As a part of their focus, in June of 2024, the IRS released the “Equity (Stock) – Based Compensation Technique Guide” which provides additional guidance around equity-based compensation.
In the review of individuals, the guide leverages multiple layers of evidence to use in the review that is often coordinated by the company. For instance, compensation committee minutes, SEC filings as well as W-2s are all areas that could be leveraged in a review.
As your employees inquire related to the company’s diligence, what types of questions can you either be asking your stock plan provider or your internal team tracking stock awards?
Questions to ask your provider or compensation team
What types of controls or configurations do you have in place to ensure certain IRS limits are adhered to when granting stock?
A good example is Incentive Stock Options (ISOs). If an employee receives more than $100k worth of exercisable incentive stock options in a calendar year, the amount over the $100k threshold is treated as non-qualified stock options by the IRS. Many providers will include systematic warnings to ensure you don’t exceed the limit.
For instance, at Fidelity Private Shares the platform checks whether a grant of incentive stock options exceeds the IRS's $100,000 limit (exercisable is a given year) and therefore needs to be re-allocated between incentive stock options and non-qualified stock options.
How do you ensure all the grant documentation in Employment contracts or SEC filings match to the actual grants?
There are various sources of information where grant documentation is included. Are you periodically reviewing the documentation as well as what was granted to ensure that it matches what was approved by the compensation committee, board of directors or management? Performing an internal audit or leveraging reporting from your Stock Plan Service provider could be helpful to ensure that the compensation provided matches what is approved.
This is where an Automated Data Room comes into play. Fildelity Private Shares has an Automated Data Room to store all of your company’s relevant documents. This facilitates a much easier review if you are checking your documentation with your grants.
How do you track the grant date? Do you know for each award when it was granted?
The IRS has certain rules around holding periods or types of awards. For instance, a qualifying disposition occurs when the employee holds the stock for at least two years from the date of grant and one year from the date of exercise. Informal tracking via spreadsheet or decentralized documentation could make it difficult to prove the holding period if your high wealth individual is trying to make a qualified distribution. By ensuring that your grant dates are diligently tracked, it can help the employee ensure that they are following IRS rules.
How detailed are your Board of Director and Compensation Committee minutes and approvals?
Insight related to stock-based compensation is often discussed during those meetings. Are the awards appropriately approved? Is there documentation to support the approval?
It’s important that the request approvals from board and stockholders are happening at the time that actions are being taken, and also that they are tied to the documentation.
Fidelity Private Shares makes the approval process easier. You can request and track signatures directly through the platform. When a board consent is created, the appropriate parties are automatically notified to sign the generated consent. You can also see who has already approved a consent and which parties still need to sign.
By having detailed documentation, it can ensure that awards were approved and accurate.
What type of reporting or compliance checks does your stock plan service provider or internal compensation have in place to catch potential errors?
As share grants often span across many years, often the best way to find an anomaly is through compliance checks and flags along the way, as well as to review exception-based reporting. Finding a provider that provides this type of reporting can be instrumental in finding errors prior to the errors reaching your employees.
Fidelity Private Shares has Rule 701 and $100k limit constraint checks built in when granting shares to help you stay compliant.
How Fidelity Can Help
As cap table management becomes more difficult to track internally, you should consider leveraging a cap table provider. For instance, Fidelity Private Shares can simplify the company's data and document management and provide a single source of truth. The Fidelity Private Shares platform also simplifies date tracking, gives a warning when you are exceeding thresholds like the $100k ISO limit, and can track all your essential documentation in a single hub. This attention to the detail can assist your stockholders as they need additional information to track their shares and awards for tax purposes.
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