September 26, 2014

1. The Treatment of Equity Awards Upon Termination September 26, 2014

2. Death Beneficiary designations, exercise periods, accounting and tax issues Leaves of Absence Types of leave, best practices, tax consequences , ESPP considerations Divorce Tax issues, asset distributions Terminations Global plan issues, tax considerations Today’s Discussion

3. Retirement 409A, Tax issues, 162(m) Overall Process and System Considerations Best Practices Today’s Discussion

4. Death Beneficiary • Issues • Problems with beneficiary designation forms • Enforceability outside the US • Employees failing to update their beneficiary designation • Overriding state law • Community property law, simultaneous death rule, killer statute • Specifyingbeneficiaries in the plan document • Requires interpretation by plan administrator • Does “children” include adopted children and step children? • Meaning of “spouse” after U.S. v. Windsor • Considerations • Automatic transfer to the estate • State in plan document that upon death options would be exercisable by representative of the estate

5. Exercise Period After Death • Considerations • Allow time for probate process • 12-month exercise period after death is most common • 51% of companies according to 2010 NASPP domestic survey • Consider Section 409A limit when extending exercise period • Extending in-the-money option beyond original term or 10 years after grant date may cause Section 409A to apply to option • Modification • If change in terms, then Type I modification • Calculate incremental expense for outstanding shares

6. Vesting Acceleration • Performance awards • Common provision for vesting upon death • Pro rata vesting based on portion of period completed • Payout at the end of performance period based on actual performance • 28% of companies according to 2010 NASPP survey • Payout upon death based on an assumed performance level, or • 16% of companies according to 2010 NASPP survey • Modification • If change in terms, then Type III (Improbable to Probable) • Calculate change in value for the accelerated shares only

7. Accounting Treatment • Vesting or forfeiture upon death • Impact on expense and estimated forfeiture • Forfeiture upon death • Reverse expense • Cancellation at end of performance period • Nonattainment of performance condition – reverse expense • Nonattainment of market condition – expense is not reversed • Accelerated or pro rata vesting upon death • Vesting per original grant terms – fair value is not remeasured • Vesting due to modification – Type III

8. Tax Consequences • NQSO Exercise By Estate • Estate recognizes ordinary income equal to spread at exercise • Report gain on estate’s Form 1099-MISC (Box 3, not 7) • Tax withholding and reporting • Not required if exercise occurs after the year of employee’s death • If exercised in the year of employee’s death, only FICA is withheld • Apply FICA wage cap using employee’s wages • Report FICA/FUTA wages on employee's Form W-2

9. Tax Consequences • Transfer of ISO or ISO shares to estate • Transfer of option to estate • Does not disqualify ISO. Holding periods no longer applicable. • No tax withholding or reporting by company at exercise by estate • Gain upon sale by estate is capital gain • Stepped up basis = exercise price + fair value of ISO at employee’s death • Transfer of ISO shares to estate • Holding periods no longer applicable • Gain upon sale by estate is capital gain • Stepped up basis = exercise price + FMV of shares at employee’s death

10. Tax Consequences • Transfer of ESPP shares upon death • Transfer of ESPP shares upon death is a qualifying disposition • Ordinary income • Lesser of discount at grant or spread at employee’s death • Reported on employee’s final Form W-2 • Basis in shares for sale by estate is FMV of shares at employee’ death • Right to participate in ESPP ends upon death • Unused contributions are refunded to estate

11. Leaves of Absence • Types of Leave • Protected vs. Discretionary Leaves • Paid vs. Unpaid Leaves • Effects on Equity Compensation • Vesting • Continued vesting, suspension, or cancellation • Grace period • Exercisability and Share Release • Continued Participation in ESPP

12. Leaves of Absence for Global Plans • Differences globally • Protected leaves • Claims of indirect discrimination • Paid vs. unpaid leaves • Definition of disability • Best Practices • If feasible, allow vesting to continue • More than 85% of companies (2010 NASPP domestic survey) • If suspend vesting, specify in grant agreement • Maintain equity-related LOA policy at US parent level

13. U.S. Tax Consequences • ISO • Extended leaves • No impact if employee has guaranteed right to return to work • No impact on ISO if leave is not longer than 3 months • If both of the above do not apply • Termination due to disability • Plan may allow exercise up to one year after disability termination

14. Divorce – Tax Consequences • NQSO • Transfer of NQSO pursuant to divorce is not a taxable event • Ex-spouse recognizes ordinary income upon exercise • Report income and FIT withholding on Form 1099-MISC of ex-spouse • Box 3, not box 7 • Income tax and FICA must be withheld • FICA is based on employee’s income, attributed to employee, and reported on employee’s Form W-2 (but paid by ex-spouse) • Report FICA/FUTA wages on employee’s Form W-2 • Boxes 3 and 5 only, do not report in Box 1

15. Divorce – Tax Consequences • ISO • Transfer of Option • Transfer of ISO disqualifies the option from ISO treatment • PLR 200737009, 9/14/07 • Community property state – portion of ISO owned by spouse • Employee agrees to exercise ex-spouse’s ISO in the future if instructed • Neither the division of ISO nor transfer of shares to ex-spouse will disqualify the ISO • Transfer of Shares • Transfer of ISO shares does not disqualify shares • Statutory holding periods still apply • Report any ordinary income upon sale on Form 1099-MISC of ex-spouse

16. Divorce – Tax Consequences • Restricted Stock • Transfer of RSA pursuant to divorce • PLR 201016031, 4/23/10 * • Non-community property state • Divorce decree that employee transfers the shares upon vesting • Shares remain in the name of the employee until vest • Ex-spouse recognizes ordinary income upon vesting • Tax withholding & reporting at vest similar to NQSO exercise

17. Termination of Employment in General • Issues for Global Plans • Forfeiture on termination • Right to retain and continue to vest in award • Termination date (notice period, garden leave) • Continued vesting after qualified termination (e.g., retirement) • Age discrimination issues • Acceleration of taxable event • Impact on Severance Pay • May need to include value of award • Mitigate by separating equity awards and employment relationship

18. Tax Issues • Grant agreements with retirement acceleration provision • RSA • Income tax and FICA/FUTA at retirement eligible date • RSU • FICA/FUTA at retirement eligible date • FICA withholding • FICA reporting: Form W-2, Boxes 3, 5 and 11 • Income tax at release date • In no event can FICA/FUTA be later than income tax • Example: Employee eligible for retirement on 12/1/13. Shares released on 1/15/14. FICA/FUTA using short-term deferral rule would be based on FMV at 1/15/14.

19. Section 409A • RSU with retirement acceleration provision • Section 409A not applicable to RSUs if payable upon vesting • Common mistakes in design • Vesting upon retirement • Vesting upon termination for non-compliant “good reason” • If Section 409A applies (and for Phantom Stock) • Releases/payout must be tied to pre-established dates or a permissible event, including “separation from service”, death and disability • One release schedule for each permissible event • Erroneous determinations of “separations from service” may result in Section 409A violations • Must comply with short-term deferral rule

20. Tax Issues • PSU with retirement acceleration provision • FICA/FUTA accelerated at retirement eligible date only if payout is reasonably ascertainable • No FICA/FUTA if the award does not guarantee a minimum payout • Awards with accelerated/continued vesting on retirement and minimum payouts should be closely examined to minimize unforeseen tax consequences

21. Termination of Employment in General • PSU with retirement acceleration provision • Rev. Rul. 2008-13 • If the plan or an agreement provides for vesting upon retirement, • Exemption for performance-based compensation is not available, even if the accelerated vesting is never triggered • Best Practice • If performance-based RSU vests upon retirement • Limit payment to pro rata amount that would otherwise be payable on achievement of performance goals • Delay release until end of performance period

22. Process and System Considerations • Data capture • Administration – change in employment status date, termination reason, retirement eligible date, breaks in service (rehires), etc. • Accounting – accounting dates, post-termination substantive services • Processing changes in employment status • Effects on administration – vesting, exercise period, eligibility for plan • Effects on taxation – withholding, reporting, timing, ISO status • Flagging/relabeling administrative data for accounting purposes • Vesting – due to modification vs. “qualified termination” trigger • Cancellation – due to service condition vs. market condition • Effects on accounting – expense acceleration, types of modification • Documentation • Identify system limitations & document manual processes

23. Best Practices • Update employee data from HR system on periodic basis • Reconcile changes of employment status between the systems • Perform on monthly basis and before any major stock event • Include effective date of change of status in reconciliation • Develop and document process • Transferring awards upon death & divorce • Required documentation; notice to broker; SEC compliance • How to handle late notifications of change in status • Post-dated transactions report; notice to Finance • Action upon discovery of inappropriate releases and exercises • Notice to Legal

24. Q & A Discussion • Vince Alessi, CEP • Manager, Private Markets • +1-925-475-4398 • Vince.alessi@easiadmin.com • Equity Administration Solutions, Inc. • Compliance with Confidence • www.easiadmin.com • Nicole Dmitruchina, CEP • Consultant, Professional Services • +1-925-730-4229 • nicole.dmitruchina@easiadmin.com • Equity Administration Solutions, Inc. • Compliance with Confidence • www.easiadmin.com

25. Thank You! Questions?