Nasdaq and NYSE Guidance on Equity Plan Amendments Increasing Share Withholding

David M. Kaplan is partner and co-chair of the Employee Benefits Practice Group and Andrew J. Rudolph is a senior partner at Pepper Hamilton LLP. This post is based on a Pepper publication by Mr. Kaplan and Mr. Rudolph.

Earlier this year, the Financial Accounting Standards Board (FASB) issued new guidance (ASU 2016-09) regarding equity-based compensation. Among other things, this guidance will enable employers to increase share withholding on equity awards. Now Nasdaq and the NYSE have clarified that equity plan amendments implementing this increased share withholding will not require stockholder approval.

Under current accounting standards, an equity award is subject to liability-based (i.e., “variable”) accounting if it permits the withholding of shares to satisfy taxes associated with that award in excess of the minimum withholding legally required. Most employers want to avoid variable accounting, and, accordingly, most equity plans expressly limit share withholding to the minimum amount required by law.

Most employers apply flat-rate withholding to income arising from equity awards and other supplemental wages (e.g., bonuses). For the first $1 million of supplemental wages received by an employee in any calendar year, the minimum required federal withholding rate is generally 25 percent. [1] Accordingly, for higher-income employees, the minimum required federal withholding is potentially less than the employee’s actual federal income tax liability for their first $1 million of supplemental wages. As a result, those employees may need to raise cash to fund the difference between the taxes withheld in connection with their equity awards and their actual tax liabilities. In some instances, this may necessitate the sale of shares subject to the equity awards, which may be undesirable (or even impossible) in light of investor relations considerations, stock ownership guidelines, insider trading rules or short-swing profit rules.

ASU 2016-19 seeks to address this problem by allowing share withholding up to the maximum individual income tax rate in the applicable jurisdiction. While early adoption of the standard is permitted, to avoid interim period adjustments, most employers interested in adopting this new standard will do so at the start of their next fiscal year.

In anticipation of the new standard’s adoption, some commentators questioned whether equity plan amendments implementing this change would require stockholder approval. The question arises because many equity plans provide that shares withheld to satisfy tax obligations are “recycled” back into the pool of shares available for future issuances under the plan. Under NYSE and Nasdaq rules, an increase in the shares available for issuance under an equity plan requires stockholder approval. Thus, it was argued, increasing the permitted share withholding rate could require stockholder approval. Both Nasdaq and the NYSE have now issued guidance dispelling this concern and clarifying that no stockholder approval is required for equity plan amendments permitting increased share withholding, provided that any additional recycling of withheld shares is limited to unissued shares. [2] Therefore, employers are now free to adopt these equity plan amendments with only board approval. [3]

Employers that wish to implement increased share withholding will need to address some practical considerations. First, because share withholding is effectively a cash settlement of a portion of an equity award (with the cash being remitted directly to the applicable taxing authorities), any increase in share withholding will impose a greater demand on the employer’s cash resources. Therefore, employers with limited cash resources should think carefully before implementing this change.

Second, employers that want to implement increased share withholding will need to revise their payroll processes. Employers that wish to withhold on the first $1 million of supplemental wages other than at the 25 percent flat rate must instead withhold based on each employee’s W-4 election then in effect, taking into account the employee’s other wages during the applicable payroll period. This will require additional coordination between the employer’s stock plan administrator and payroll vendor and may give rise to processing challenges.

While the new FASB guidance provides welcome latitude, careful coordination between legal, accounting, HR and payroll personnel will be required to implement any change in share withholding.


1The current maximum federal income tax rate—39.6 percent—is the required federal withholding rate for supplemental wages of more than $1 million in any single calendar year.(go back)

2The issued versus unissued share distinction is relevant for restricted stock awards. Unlike restricted stock units, shares of restricted stock are legally outstanding from the date of grant. Thus, a plan that allows the recycling of restricted shares may constitute a “formula plan” under exchange listing rules. In that case, to avoid the need for stockholder approval, any plan amendment to increase share withholding should provide that issued shares in excess of the minimum required amount will not be recycled.(go back)

3Amendments may be prospective only, or may also apply to already outstanding awards. On November 17, the FASB proposed additional guidance to clarify that the amendment of outstanding awards to permit increased share withholding will not be considered a modification for accounting purposes (and will therefore not require remeasurement of the accounting expense associated with already outstanding awards).(go back)

Both comments and trackbacks are currently closed.