February 6, 2023

Volume XIII, Number 37

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February 03, 2023

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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.

Copyright © 2023 by Morgan, Lewis & Bockius LLP. All Rights Reserved.National Law Review, Volume VII, Number 248
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About this Author

Patrick Rehfield, Morgan Lewis, Tax attorney
Partner

Patrick Rehfield focuses on matters related to executive compensation, payroll tax, and employee fringe benefits. He advises private and public companies on designing and implementing nonqualified retirement plans, equity compensation plans, and executive compensation arrangements. He also counsels publicly traded companies on reporting and compliance matters involving the SEC, with a focus on proxy and disclosure issues, executive compensation, and corporate governance. He advises public and private companies on employee benefit issues in mergers and acquisitions,...

202.739.5640
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
Steven Johnson, Tax Attorney, Morgan Lewis
Associate

With experience gained as a trial lawyer in the Tax Division of the US Department of Justice (DOJ), Steven P. Johnson advises clients on tax controversies and litigation matters involving complex tax issues. Before joining Morgan Lewis and working for the DOJ, Steven served as a law clerk to Judge Tucker L. Melancon of the US District Court for the Western District of Louisiana. He holds a Masters in Tax Law (LL.M.) from Georgetown Law School.

202-739-5741
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