I have blogged before on suggested stock plan amendments (see, among others, Another Stock Incentive Plan Revision for 2016? and Another “Heads-Up” for Companies and Committees Making (or Preparing to Make) Performance Awards). Today we suggest a minor revision that may not be obvious, but if you are revising your stock plan for shareholder approval in 2016, now may be a good time to make this change.
By now, you surely have read about the pending modifications to simplify ASC 718, Compensation – Stock Compensation. (The November-December 2015 issue of The Corporate Executive includes a thorough discussion of all the modifications likely to ASC 718.) One of our favorite modifications is the expansion of the exception to the dreaded liability accounting provided under the standard for shares tendered to cover tax withholding. As readers may know, currently, to avoid triggering liability treatment, any shares withheld to cover the taxes due at settlement of an option or award must be limited to the minimum required statutory withholding of the award holder. In its recent meetings, the Financial Accounting Standards Board affirmed its decision to broaden this provision to allow shares to be withheld for taxes up to the maximum individual tax rate in the applicable jurisdiction.
Because most companies seek to avoid any risk of dreaded liability accounting, companies and their counsel have hardwired the minimum required statutory tax-withholding requirement into their stock plan documents. Given the liberalization of this requirement, however, most companies (and many executives) will want to preserve the flexibility to withhold taxes at a higher rate in some circumstances.
The modifications are not final, and even when they are, public companies will not have to adopt the updates until their first fiscal year beginning after December 15, 2016. So why amend your stock plan now? Remember, we are only suggesting this for companies that are revising their stock plans this year for shareholder approval. The rest of you can wait until next year.
Withholding taxes at a rate higher than the minimum may not appeal to many companies, which then would have to come up with cash to pay the tax, and we don’t know exactly what the final rule will say. However, we are suggesting simple language that gives the company flexibility in tax withholding within the confines of ASC 718’s liability accounting provision.