T+3 Becomes T+2—But What Does It Mean?
Following recent changes to Securities and Exchange Commission (SEC) and NASDAQ Stock Market rules, most standard broker-dealer securities transactions will have to be settled within two business days after the trade date, effective September 5, 2017. A settlement cycle extending the trade date plus two business days is commonly referred to as a “T+2” settlement. Prior to the rule change, investors generally had three business days after the trade date to settle securities transactions, known as a “T+3” settlement cycle.
Under the new T+2 rule, an investor who buys securities must in general make payment to the facilitating broker-dealer no later than two business days after execution of the trade. On the other side of the transaction, a selling investor generally must deliver the securities to the facilitating broker-dealer no later than two business days after execution of the trade.
This rule change may have federal employment tax implications for many employers that compensate employees through nonqualified stock option or stock award programs because any employer that accumulates $100,000 or more in payroll taxes is required to deposit those taxes with the Internal Revenue Service (IRS) by the close of the next banking day following the “liability date” (commonly referred to as the “Next-Day Deposit Requirement”). Employers who fail to meet the Next-Day Deposit Requirement may be liable for failure to timely deposit penalties under Section 6656 of the Internal Revenue Code. Per IRS guidance, the liability date for equity compensation is calculated by reference to the “settlement date,” which is why the SEC’s one-day acceleration of the settlement date may also accelerate the payroll tax deposit deadline for large accumulations of payroll taxes, unless another basis exists for delaying the deposits.
This deposit deadline change may also affect state-level payroll tax deposits for states (such as California) that apply next-day deposit rules.
To avoid potential late deposit penalties from an increasingly aggressive IRS audit program, employers should consider accelerating their scheduled deposit dates for equity compensation by a single day in light of this new T+2 rule. This review should be in conjunction with a broader review of payroll deposit procedures and possible alternative positions for delayed deposits for equity compensation.