Employment Tax Considerations for Equity Plans as T+2 Settlement Cycle Rule Takes Effect
On 22 March 2017, the Securities and Exchange Commission (SEC) adopted an amendment to its securities transaction settlement rule to shorten the standard settlement cycle for most broker-dealer securities transactions from three business days after the trade date (T+3) to two business days (T+2).1 The new settlement cycle rule takes effect on 5 September 2017, and is lauded by the SEC as a change that "will increase efficiency and reduce risk for market participants."2 Although that is likely true, the change hits close to home for US public companies maintaining equity compensation plans, many of which are spending the summer ramping up their equity award administration systems in preparation for the day (right after Labor Day weekend) when they will have one day less in which to settle equity plan transactions that involve a sale on the market. A question that frequently comes up is the impact of the new settlement cycle on the timing of tax withholding and deposit of taxes with the IRS. In this article, Sinead Kelly and Anne Batter address this issue and other related equity award administration, tax withholding, and tax calculation topics, with a particular focus on stock options and restricted stock units (RSUs).