Security, RSUs Among Benefits With Compliance Risks

Employer-provided security and restricted stock units are among those areas where Internal Revenue Service guidance exists but employers should ensure they are compliant, two practitioners said March 18.

Employer-Provided Security

Many employers provide security for their executives, and security while traveling can be excluded as a working condition fringe benefit, said Ligeia Donis, Esq., a partner at Baker & McKenzie.

The exclusion is outlined in Treas. Reg. 1.132-5(m), Donis said, and at a basic level applies when there are “bona fide business-oriented security concerns” because of someone’s position as an employee and not their status as, for example, a well-known public figure. The employer must provide an overall security program, including either 24-hour protection or by requesting and implementing the recommendations of an independent study, she said.

In practice, the recommendations of such a study are based on a back-and-forth with the employer about what the employee wants and what the employer is willing to provide, said Stephen Tackney, a principal at KPMG. Businesses should track that they are implementing the recommendations of the study, Donis said, and suggested obtaining a new study at least every three years or when the employee’s situation changes.

“This is really security on transportation,” and the business also has to show that the employee wants more than just a tax-free chauffeur and has a genuine security concern, Tackney said. The exclusion is intended to apply to the extra costs of security and does not apply to commuting expenses, he said. To be a secure driver and not a chauffeur, the driver must be trained in evasive driving techniques, Tackney said.

All business use should be documented for employer-provided means of travel in order to determine the portion of personal use, Donis said. When a secured car and driver is provided, she said, the driver’s time, including time spent on call, must be valued for personal use.

To substantiate business purposes when traveling, a record must show that the employee was at the given location and what was actually being done there, Tackney said.

“The IRS does tend to view things like golf trips as absolutely personal and it’s very hard to get the IRS to agree with you that, even if it’s teambuilding — and actually particularly if it’s teambuilding — that that is a business activity,” Donis said.

If a trip looks like entertainment, records need to show that a business reason was its primary motivation and that entertainment was secondary, Donis said. “So if you have a retreat in Bali, you should have business meetings every day, for example,” she said.

Donis and Tackney spoke at PayrollOrg’s Capital Summit in Arlington, Va.

Restricted Stock Units

Tackney said he worked with the team who wrote IRS Generic Legal Advice Memorandum 2020-004, which addresses when several types of equity compensation are included in income and when an employer must withhold and deposit taxes from those payments. He and Donis spoke about the memo’s guidance on restricted stock units.

“For income tax, vesting is not a tax event. There is no income tax that results from vesting,” Tackney said, with Donis adding that vesting is often confused with settlement and transfer. “Legally, when you pay the RSU, you do apply withholding,” he said. “When you hit the button and say ‘please deliver the shares,’ that day you do owe withholding.”

While the law says that withholding is owed when the payment is made, the Internal Revenue Manual requires same-day deposits when the payment settles in the employee’s account on the same day of payment. But if the payment settles the next day or the day after that, the tax deposit can be made up to the day after the settlement, Tackney said. Both presenters said an update to this guidance in the IRM is expected at some point.

The fair market value of the shares is based on their value on the payment date, which is the date an employer initiates delivery of the shares, Tackney said.

Internal Revenue Code section 3121(v)(2) and its regulations, Treas. Reg. 31.3121(v)(2)-1, allow an RSU to become taxable at vesting, and not again at payment, in situations where they are awarded at retirement eligibility, Tackney said. To take advantage, the payment date must be later than March 15 in the year following the year of vesting, he said.