Modifications to Equity Awards
(addressed below: Performance Awards; then Accelerated Vesting)
Acceleration of Vesting
Listed below are some of the primary issues that employers should consider before amending outstanding equity awards to provide for accelerated vesting due to retirement. Here are some of the key issues that warrant consideration:
(1) Securities Law Considerations: no issues should arise if the employer exercises its authority (if reserved in a plan or award) to unilaterally authorize accelerated vesting of equity awards
(2) Code §162(m): stock options and performance-based restricted stock or RSU awards will lose their exemption from Code §162(m)’s $1 million dollar deduction limit if vesting accelerates due to retirement. Revenue Ruling 2008-13 establishes that rule.
(3) Code §409A: no issues for stock options, because 409A expressly exempts modifications that neither reduce the exercise price nor extend the initial term of the grant. For restricted stock and RSUs, an employer’s discretionary acceleration of vesting upon retirement does not violate 409A (absent tax manipulation through substitution of other deferred compensation), but it could cause 409A’s six-month delay rule to apply due to loss of the short-term deferral exemption from 409A. Loss of that 409A exemption could also create complex issues if retirement involves a period of consulting services.
(4) Code §422: no issues for incentive stock options (aka ISOs) because Treas. Reg. 1.424-1(e)(4)(ii) provides that an amendment to accelerate vesting is not a material modification that would disqualify an option from tax-favored ISO treatment.
(5) FICA-Medicare: these employment taxes become payable on upon vesting (not necessarily bad but important to address in the planning).
(6) Financial Accounting: the modification of equity awards to provide for accelerated vesting would trigger a new “measurement date” for financial accounting purposes, based on my understanding of ASC 718 The modification could trigger unexpected expense. The Company’s accountants are best to consult in this regard.
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