February 6, 2023

Volume XIII, Number 37

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February 03, 2023

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New Financial Accounting Standards Board (FASB) Rules on Equity Compensation Withholding: Summary

The Financial Accounting Standards Board (FASB) recently issued an Accounting Standards Update relating to share-based payment transactions (which typically involve equity compensation plans). The new FASB standards deal with a number of issues of great interest to people involved in accounting for equity compensation plans, including accounting for income taxes on vesting or settlement of awards, classification of excess tax benefits on cash flow statements, accounting for forfeitures, and issues relating to nonpublic entities. The FASB did not take action on proposed changes relating to awards with repurchase features.

We will limit this post’s discussion to a general review of the new standards’ relaxation of the current requirement under US Generally Accepted Accounting Principles (GAAP) that, in order to maintain equity classification for a share-based award, partial cash settlement of the award for tax withholding purposes may not exceed the minimum applicable statutory tax rate. A second blog post will follow that will go into further detail on implementation issues. Under US GAAP as currently in effect, withholding at a rate higher than the minimum applicable statutory tax rate causes the associated award to be subject to liability classification (i.e., subject to variable accounting), as opposed to the more favorable equity classification. The new standard permits equity classification for partial cash settlement of a share-based award for tax withholding up to the maximum statutory tax rate in the applicable jurisdictions. Although withholding typically is mandatory in most jurisdictions, the new standard appears to provide companies with greater flexibility, for financial accounting purposes, to address the preferences of the award recipients with regard to the amount to be withheld.

For example, under current US GAAP, as a general matter, the federal income tax rate for stock withholding without triggering liability classification for supplemental wages below $1 million could not exceed the supplemental wage withholding rate of 25%; under the new standard, the tax withholding through a properly completed Form W-4 could be an amount up to the maximum applicable marginal federal and state income tax rate in an employee’s jurisdiction. Stated differently, an employee should not request additional amounts of withholding on line 6 of Form W-4 that would increase the employee’s withholding to rates higher than the highest marginal tax rate—which for affected US employees will be a federal income tax rate of 39.6%, plus the applicable state rate.

Copyright © 2023 by Morgan, Lewis & Bockius LLP. All Rights Reserved.National Law Review, Volume VI, Number 112
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About this Author

Mims Zabriskie, Employment lawyer, Morgan Lewis
Partner

Mims Maynard Zabriskie advises on complex executive compensation and employee benefit plan matters, including the design, negotiation, and implementation of executive compensation, equity compensation, and tax–qualified retirement plans and shareholder approval of equity plans. She counsels large publicly and privately owned businesses, including Fortune 500 enterprises, technology companies, and universities on a range of legal issues related to executive compensation governance, and employee benefit plans. She also advises on benefits and executive compensation issues...

215-963-5036
Alan Singer, Corporate securities lawyer, Morgan Lewis
Senior Counsel

Alan Singer advises companies on a wide range of securities and corporate law matters. He counsels public companies on annual and periodic US Securities and Exchange Commission (SEC) filings, proxy statements, executive compensation disclosure, and beneficial ownership reporting. He also provides advice regarding corporate governance, compliance with stock exchange listing standards and other SEC regulatory and corporate matters.

215-963-5224
Mary Hevener, tax lawyer, Morgan Lewis
Partner

Mary B. “Handy” Hevener helps US and multinational enterprises minimize corporate payroll taxes and maximize benefits–related tax deductions. She focuses her practice on the tax treatment of employee and independent contractor benefits outside qualified retirement plans, including stock options and other stock-based compensation; executive income deferrals; golden parachutes; and fringe benefits that range from health and life insurance, to employee loans, cars, planes, and prizes.

202.739.5982
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