Understanding Stock Administration Related to PAYROLL

1. Understanding Stock Administration Related to PAYROLL Suzie Bentley, CPP, NVIDIA Corp. Christine Zwerling, CEP, Stock & Options Solutions Gustavo Dalanhese, CEP, E*TRADE Financial Corporate Services, Inc. October 9, 2015

2. Agenda • Overview – Common equity awards and their life cycles • Employee Stock Purchase Plans (ESPP) • Stock Options • Stock Appreciation Rights • Restricted Stock • Tips on streamlining processes • Working together! • Appendix of other interesting info…

3. A day in the life of Payroll…

4. A day in the life of Stock Admin…

5. ESPP – What is it? • Purchase of Company Stock typically at a discount • Contributions collected through Payroll each pay period, (calculated before tax, deducted after tax) • At the end of the purchase period, contributions are used to purchase company stock at a discount • Common Terms: • Grant Date / Offering Period Start Date / Purchase Period Start / Enrollment Date • Exercise Price, Strike Price, Grant Price, Purchase Price, FMV • Exercise / Purchase • Dispositions • Qualified / Disqualified • Section 423 ESPP / Non-423 • Example: Look back and 15% Discount • First Day (enrollment date) January 1; FMV $10/share • Last Day (purchase date) June 30; FMV $12/share • Purchase Price $10 * 85% =$8.50

6. Stock Plan Basics – ESPP w/ Look-Back 40 Shares Purchased $20 $15 15% Purchase Price Contribution Amount $510 15% Discount Enrollment Date Purchase Date

7. ESPP – Enrollment • Plan documents govern the program and define: • What compensation is eligible • Who is eligible to participate • Deadlines • Enrollment • Changes and • Withdrawals • Limits • Purchase period (accumulator assistance) • Calendar or Rolling 12 month-IRS $25,000 limit • READ the PLAN Document!

8. ESPP – Contributions • Plan documents govern and define: • How contributions are made • Lump Sum Contributions • Payroll Deductions • How contributions are calculated • Gross pay • Deducted from net pay • Excess contribution distribution - refunded or rolled forward • Timing of refunds

9. ESPP – Administrative Corrections Considerations: Transferred or Mobile employees • Plan documents govern and define: • Correction Type • Over or Under contributed • Correction Methodology • Offering Period vs. Purchase Period • Verify against plan document, discuss with Legal Counsel and/or Administrator • Collection from employee – lump sum • “Catch-up Contribution” – through payroll • Gain adjustment – payroll payment • Others?

10. ESPP – Changes • Employment changes • Termination • Ineligibility • Withdrawal • Contribution rate changes • Process • Effective date • 401(k) Hardship Withdrawal • If 401(k) contributions cease due to hardship, so should the ESPP contribution (not always known by stock administration)

11. ESPP - Purchase • Contribution file to Stock Admin (Timing is critical!) • Per pay period OR One Time (end of purchase period) • Prior to purchase – Adjustments or Test Run • Multiple payroll groups sending contributions – global program • Currency conversion • No reporting or tax in U.S. at purchase! Exception……Pennsylvania! • Foreign Countries tax at purchase • Carry forwards • Refunded • Remain in the plan until the next purchase • Who tracks? • What happens with Terminations • Participation? • Company?

12. ESPP • Pennsylvania • Report state income taxes at purchase • No Federal or Local tax due

13. ESPP –Dispositions • Reporting Dispositions for 423 plans • How often - monthly, quarterly, annually? • Compensation income recognized on Disposition of shares in U.S. • Terminated employee Dispositions • ESPP sale income exempt from FICA/FUTA under the American Jobs Creation Act of 2004

14. ESPP Dispositions –Disqualifying vs. Qualifying • DISQUALIFYING: Statutory holding period notmet - recognize income equal to the spread in the stock when the shares were purchased versus when they were sold 2/1/13 2/1/14 2/1/15 Enrollment 2 Years 1 Year Purchase • QUALIFYING: Statutory holding period met - recognize lesser of • 1) the discount offered under the plan as computed on the participant's offering date, or • 2) the actual gain on the sale (Sale Price minus Purchase Price)

15. ESPP – W-2 Reporting • Form W-2 reporting: • Box 1 (Wages, tips, and other compensation) • Box 16 (State wages, tips, etc.), if applicable • Box 18 (Local wages, tips, etc.), if applicable • Just for fun! • Regulation §1.6041-2(a)(1) requires Form W-2 even if those payments are not subject to withholding: • Disqualified Disbursements (also receive Corporate Tax Credit) • Qualified Disbursements • IRS Publication 15-B: Employer’s Tax Guide to Fringe Benefits

16. 2015 W-2

17. Form 3922 – Informational Only

18. Reconciling W-2 with Broker 1099 Source: Equity Edge Online(r).  Hypothetical data for illustrative purposes only.

19. Options/SARs – What are they? • Stock Option • Contractual right to purchase shares of the company's stock • A specified number • A specified price (the exercise price) and • A specified period of time • Value grows as stock price appreciates • Two Types • Non Qualified (NQ) • Qualified (ISO – Incentive Stock Option) • Stock Appreciation Right (SAR) • Only pays out the appreciation in the stock price

20. Options/SARs – What are they? • Definitions • Grant / Award • Grant Date, Date Of Grant, Award Date • Exercise Price, Strike Price, Option Price, Grant Price, Purchase Price, FMV • Vest • Exercise / Purchase • Cash • Cashless / Same-Day Sale • Disposition / Sale • Qualified or Disqualified • Section 421 ISO

21. Options/SARs – At Vesting • Payroll usually doesn’t have to do anything! • UNLESS… • Exercise of unvested shares – Early Exercise • Granted at a discount • Look out for 409A!

22. Options/SARs – W-2 Reporting • NOTE: Taxes withheld should be aggregated with employees’ other withholdings for the year and reported in Boxes 2, 4, 6, 17, and 19, as appropriate • NQ (non qualified) or SAR • Recognize compensation when shares are Exercised • Market Value minus Exercise price • Form W-2 reporting: • Box 1 (Wages, tips, and other compensation) • Box 3 (Social Security wages), if applicable • Box 5 (Medicare wages and tips). • Box 12, with code V • Box 16 (State wages, tips, etc.) if applicable • Box 18 (Local wages, tips, etc.) if applicable

23. 2015 W-2 tax reporting

24. Form 3921 – ISO -Informational Only

25. Stock Options – Exercise (ISOs) • No Tax Withholding or Reporting at Exercise • UNLESS… • Pennsylvania • Then the state income taxes are due (withheld and reported) upon exercise

26. Stock Options – Disposition (ISOs) • May be subject to tax at sale (disposition) • Meet required statutory holding periods (qualified) • No reporting or withholding obligations at sale • Do not meet the required statutory holding period (disqualified) • The compensation income recognized is equal to the lesser of: • 1) the spread at exercise (difference between the market value of the stock at that time and the exercise price) or • 2) the actual gain realized on the sale (the difference between the sale price and the exercise price)

27. Restricted Stock – What is it? • Restricted Stock (RSA) / Restricted stock units (RSUs) • Outright grant of company stock to employees or other service providers • Known as “Free Shares” • No cost to grantee • “Restricted" • Subject to a vesting schedule • Time Based or Performance Based • May be governed by other limits on transfers or sales imposed by the company

28. Restricted Stock - Grant • Payroll usually doesn’t have to do anything! • UNLESS… • IRC Section 83(b) election filed, then taxed immediately. • Only available for RSA

29. Restricted Stock Unit- Vesting • Compensation income reported at vest • Market value • FIT / FICA / FUTA taxable at vest • unless the RSU is subject to deferral • Not reported in Box 12 • May voluntarily report income in Box 14 (Other)

30. Reconciling W-2 with Broker 1099 Source: Equity Edge Online(r).  Hypothetical data for illustrative purposes only.

31. Timely Tax Deposits • IRS requires tax receivables in excess of $100,000 per day to be deposited within one business day. • All receipts combined from all sources • Stock admin primary sources are stock option exercises and restricted stock vestings • Deposit date of T+1 for non broker stock option exercises • Deposit date of T+4 for stock option transactions via broker • Deposit date of V+1 for RSUs and RSAs • Calendar “known” transactions • Stock administration knows when RSU vest • Immediate notification for stock option exercises • Failsafe process to confirm/deny daily or periodic activity

32. Penalties for Late Remittance • If late 5 days or fewer, penalty is 2% of the tax due • If late 6 to 15 days, penalty is 5% of the tax due • If more than 15 days late, penalty is 10% of the tax due • Individuals in the company that are responsible to make these payments can also be found to be liable for the tax • If non-payment is deemed to be intentional, individuals can be held criminally liable

33. Yeah, we’re done! Here you go…

34. But what happens if…

35. Streamlining Processes This transaction will bring Social Security to annual maximum ($6,510 previously withheld + $744.00= $7,254.00) Settlement to occur T+3 (4/23/15) Payroll Deposit to occur T+4 (4/24/15) Same-day or close proximity transactions Example 1

36. Streamlining Processes Social Security maxed out in Transaction 1 Settlement to occur T+3 (4/23/15) Payroll Deposit to occur T+4 (4/24/15) Same-day or close proximity transactions Example 2

37. Streamlining Processes + YTD income surpasses $200,000 (Medicare threshold) and $1,000,000 (Supplemental Income threshold); part of transaction to be taxed at 2.35% Medicare rate and 39.6% Federal rate. Medicare: ($66,700.00 taxed at 1.45% and $883,300.00 taxed at 2.35%) Federal: ($866,700.00 taxed at 25% and $83,300.00 taxed at 39.6%) Same-day or close proximity transactions Example 3

38. Streamlining Processes #1 Entered First #2 Entered Next #3 Entered Last Payroll data entry needs to match stock system and employee confirmations Example Data Entry Sequence

39. Payroll and Stock Admin: Working Together • Both need to understand: • Who to tax • Employees vs. non-employees, jurisdictional requirements • What tax rates to apply • Income reporting and tax withholding triggers • Timing of reporting transactions • Solutions: • Regular calls/meetings or trainings • Multiple states/jurisdictions • Employees and former Employees • Create a matrix of taxability of various transactions • Include in Year End Payroll Planning/Reconciliation

40. Appendix

41. Sample Taxability Matrix: U.S. RSU and NQSO

42. Sample Matrix: U.S. ESPPTaxable Values Prepare matrices to explain taxability and timing to Payroll

43. Terminated Employees • Transactions by former employees are generally subject to the same withholding and reporting requirements that apply to current employees. • Under Regulation §31.3401(a)-1(a)(5) any payment for services constitutes wages regardless of whether or not the employment relationship exists at the time the payment is made: • “Remuneration for services, unless such remuneration is specifically excepted by the statute, constitutes wages even though at the time paid the relationship of employer and employee no longer exists between the person in whose employ the services were performed and the individual who performed them. • Thus, excluding the exceptions described below, compensation income recognized by a former employee should be reported on a Form W-2 and should be subject to withholding. • W-2s need to be prepared for terminated employees and may need to be reactivated in payroll system • Address changes • See if changes can be forced through company (e.g. broker doesn’t unilaterally change in their own system) • Explore messaging ability on vendor sites to remind former employees to change their address if necessary • Advance communication about transactions for terminated employees • Develop batch process for communicating post termination activity to Payroll • Don’t wait until the very end of the year = during crunch time

44. Christine Zwerling, CEP Manager – Stock Administration Twitter, Inc. czwerling@twitter.com 510.735.4487 tel Gustavo Dalanhese, CEP Senior Account Executive E*TRADE Financial Corporate Services, Inc. Gustavo.dalanhese@etrade.com 801.556.7120 tel Suzie Bentley, CPP Director , Stock Admin & 401(k) NVIDIA Corp. sbentley@nvidia.com 408.566.6591 tel Thank you and please remember to complete your evaluation for this session. The information presented herein is of a general nature and has been simplified for presentation to a large audience. It is not a complete discussion of all aspects of the laws, rules, regulations, standards, and principles that govern equity compensation plans. The contents are neither designed nor intended to be relied upon, and should not be considered, as legal, tax, or accounting advice. Your specific situation may involve circumstances that cause the laws, rules, regulations, standards and principles described herein to apply differently. Consult your own advisors before deciding what, if any, course of action to take in your own particular situation.