The Advisors' Blog

In early 2023, the SEC announced the adoption of rules implementing a T+1 settlement system. The transition to the shorter settlement cycle will occur on May 28, 2024. Nasdaq and NYSE recently published alerts about this transition and its impact on distributions of cash, stock or warrants — in particular, NYSE reminded listed issuers to avoid consummation of corporate actions during this transition, to the extent practicable.

With this transition around the corner, this Morgan Lewis blog discusses the implications for stock plan professionals, noting that “employers will have one less day to calculate the withholdings owed with respect to employees’ equity compensation and deposit those withholdings with the IRS and state tax authorities.”

In the case of stock option exercises or vesting/settlement of other stock awards, the stock will need to be delivered to employees’ brokerage accounts no later than one day after the DWAC date. Accordingly, employers will need to make payroll deposits by the second business day after the DWAC date instead of the third business day.

See the blog for a detailed discussion of the required timing of these deposits and the consequences of doing so after the deadline. Here’s the example it provides:

For example, assume that an RSU vests on a Monday, July 1, and the DWAC is that day. The new settlement date is July 2 and the payroll tax deposits are due July 3. But assume that the employer is unaware of the settlement date change and does not make its deposits until July 9 (after the long holiday weekend).

These deposits are now six days late, and the deposit penalty would be 5% of all the late deposits. If these deposits were made on July 8 the penalty would be only 2%, but under either scenario it is clear that the reduction of the settlement date (and therefore the liability date) by one day can significantly impact an employer’s penalty exposure.

The takeaway?

To avoid potential deposit penalties, whether employers make their own payroll tax deposits or hire a third-party payroll service provider to make deposits, employers should check to be sure that their scheduled dates of deposit for equity compensation are accelerated to accommodate the new T+1 rule.

– Meredith Ervine