In February 2022, the Securities and Exchange Commission (SEC) announced proposals that the U.S. will be moving to a shorter securities settlement cycle from T+2 to T+1. This change is scheduled to occur in May 2024 and follows an earlier reduction five years ago from T+3 to T+2. The SEC indicated that the amended rule was designed to enhance efficiency, reduce risk, and ensure a coordinated and expeditious transition by market participants to a shortened standard settlement cycle (87 Fed. Reg. 10436 [February 9, 2022]).
In parallel, financial institutions have developed more efficient trading platforms, with enhanced technology that allows them to settle trades earlier. While a compressed settlement window may not pose a challenge to those institutions, it does pose challenges to U.S. employers operating large-scale global equity plans, who are required to be tax compliant globally and across a diverse population of domestic and cross-border employees, requiring automated program integrations with brokerage firms to remain compliant. Because the IRS through a nonenforcement policy has adapted the federal employment tax reporting and withholding system to accommodate the required settlement cycle, the further compressed settlement window directly affects the timetables for the related wage payment processing. Further complexities will arise and adjustments to processes will be needed to ensure timely deposits of U.S. employment taxes, in particular when the next-day deposit rules apply. Given the additional time pressures caused by T+1, companies are urged to consider a comprehensive review of their processes to ensure compliance with the next day deposit rules, and to make other enhancements where necessary.
This article discusses the application of Generic Legal Advice Memorandum (GLAM) dated May 18, 2020 (https://www.irs.gov/pub/lanoa/am-2020-004.pdf) and the nonenforcement policy relief provided under the Internal Revenue Manual (IRM) Procedural Update dated May 26, 2020 (sbse-20-0520-0642) to address issues that have arisen for companies in applying the relevant guidance in practice, in particular with respect to restricted stock units (RSUs).