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Life Changes (LOAs, Terminations, Death / Disability)

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One of the biggest sleeper issues (in my opinion) for US companies when granting equity awards to non-US employees or other service providers is the fact that their heirs may be assessed with US estate tax and be required to file an estate tax return in the US if the individual dies while holding equity awards or shares. US Estate Tax Exemptions Individual US taxpayers (i.e., US citizens and non-US citizens who are domiciled in…

When we are asked to review equity plans and related agreements governing equity awards and share purchase rights granted to participants in the United States and abroad, they often contain beneficiary designation provisions. While nice in theory, beneficiary designations are administratively burdensome and fraught with pitfalls, particularly outside the United States. As we’ve recently been helping several companies work through the ins and outs of the treatment of awards upon the death of a participant,…

It is common practice for US-based multinational companies to adopt executive severance plans to provide for additional benefits to be paid to executives in the event of certain specified termination events, including those in connection with the change of control of the parent. These benefits may consist of cash payments, favorable treatment of equity awards, and/or other benefits (e.g., payment of health insurance premiums). These types of plans help companies recruit and retain talent and…

SECURE 2.0 Act of 2022 (the “Act”) was signed into law by President Biden on December 29, 2022, as part of the year-end omnibus spending bill known as the Consolidated Appropriations Act of 2023. The Act follows the Setting Every Community Up for Retirement Act of 2019 (often referred to as “SECURE Act 1.0”) and makes numerous changes affecting retirement plans which are intended to strengthen the US retirement system. Below are some of the…

Over the years, we have advised many companies on the considerations related to suspending vesting of equity awards and/or suspending participation in an employee stock purchase plan while an employee is on a leave of absence. This seems like a relatively straightforward concept. In practice, however, it can be difficult to get right and a challenge to administer. When determining whether to adopt a leave policy, companies will want to consider: If your company has…

Employers considering COVID-19-related layoffs and RIFs right now should add one more item to their checklist of considerations: the possibility of inadvertently triggering a “partial termination” of their tax-qualified retirement plan. Where plan participant numbers decrease substantially, the plan may incur what’s known as a “partial termination.” This is significant because, once triggered, the IRS requires the benefits of all “affected employees” be fully vested. Failure to provide such vesting could put the plan’s tax-qualified…

Pursuant to Department of Labor guidance, a “statement of investment policy” provides fiduciaries responsible for plan investments with written guidelines or general instructions concerning various types of investment management decisions.  Typically, an investment policy will establish criteria and procedures for the selection, monitoring, removal, and replacement of plan investments. Unlike the “funding policy” required for plans under Section 402(b) of ERISA, there is no requirement under ERISA that a plan have a written investment policy…

It is not uncommon for an equity plan or a leave of absence policy to provide that vesting of awards will be suspended during any unpaid leave of absence.   The intent is clear: companies do not want their employees to continue to vest in and earn awards if they are not rendering services (e.g., because they are on a sabbatical).  However, these types of provisions can be problematic.

Is Suspension Legal and Administratively Feasible?

First, by suspending vesting during an unpaid leave of absence, companies are assuming that such leaves are not protected by law.  (Often, the provision goes on to provide that vesting during paid leaves will also be suspended, but only to the extent such leaves are not protected by law or by contract.)  However, there may also be unpaid leaves outside the U.S. during which suspension will not be permissible.   The provision also raises the question of what is considered an unpaid leave.  Is it a leave during which the company does not pay the employee, even if the employee is paid by a government agency (for at least a portion of his/her regular salary)?  If the employee is paid by the government (as may be the case in some countries for employees on maternity or parental leaves), it will be quite common for the leave to be protected under local law.

It has been common practice in certain industries to provide favorable equity award treatment to employees who terminate due to retirement.  Often, retirement is defined with reference to reaching a certain age, or a certain age plus a certain number of years of service with the company (e.g., 55 years and 10 years of service).  Employees who meet the definition of retirement will be allowed to continue to vest in awards after termination, have vesting of their awards be accelerated, or be allowed a longer post-termination exercisability period (for options).

As traditional retirement plans become less common, more and more companies are considering these provisions in order to provide additional benefits to employees who are nearing, or have reached, retirement.

With respect to U.S. employees, it is well understood that allowing retirement-eligible employees to continue to vest in awards after termination can cause accounting and tax issues (i.e., compliance with Section 409A as well as an accelerated social security tax liability).

For non-U.S. employees, the same accounting considerations apply, but in addition, companies also need to consider age discrimination concerns and changes to the taxable event of awards.