Moving to Trade Date +2: What you need to know

This video focuses on how the rule change affects employment tax and broker-dealers’ and equity administrators’ programs.

John Montgomery

John Montgomery

Partner, Global Mobility Services, Employment Tax, KPMG LLP

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The Securities and Exchange Commission recently issued rules changing the settlement period for broker-dealer trades to two days (T +2) from the date of the transaction (it used to be trade date plus three business days (T+3)).

KPMG’s global mobility services practice professionals John Montgomery and Reagan Aikins discuss how the rule change affects employment tax and broker-dealers’ and equity administrators’ programs and processes.


John Montgomery:  Hi! I’m John Montgomery and I’m here with Reagan Aikins to share some information with you about some new rules from the US Securities and Exchange Commission that would change the settlement period for broker-dealer trades from three days from the trading date, commonly known as T+3, to two days from the trading date, T+2.  Reagan, thanks for being a part of this discussion today.

Reagan Aikins:  It's my pleasure to be here with you today, John.

John Montgomery:  So let’s talk about changes in the rules and how they relate to employment tax withholdings and deposits on equity compensation.  Proper withholding and remitting of employment taxes for regular compensation is a significant administrative challenge for many companies, not to mention the added complexities that are generated by equity awards.

Reagan Aikins:  I agree John. Why don’t we begin with a little background.  Not many people know that it’s the SEC, not the IRS, that's the governing body that mandates the amount of time brokers have to deliver shares or case to employee plan participants. This is known as a settlement period.

For many years, the settlement period has been trade date plus three days. The broker handling the deal has three days plus the trade day to deliver the cash or shares to the employee, and then the employer must withhold and remit the proper employment taxes.

The IRS borrowed the T+3 concept from the SEC related to withholding taxes, using a T+4 concept. So the broker has four days to deliver the shares or cash to the employer, so the employer can then withhold and remit the appropriate employment taxes and deposit them in a timely manner.

What complicates the situation is that the IRS generally expects employers that have a payroll tax liability in excess of $100,000 to remit those taxes, including FIT, FICA and Medicare, on the next day. However, the IRS has informally suggested that agents need not challenge the timeliness of deposits so long as employers deposit the next day after the T+3 rules have been met by the broker.

John Montgomery:  What about non-compliance? What has been the approach to that?

Reagan Aikins:  Well, John, the IRS has successfully assessed interest and penalties on employers' failure to withhold and remit timely on equity compensation. We anticipate increased enforcement with the new rules that have been in place since September 5, 2017.

John Montgomery: What are the new rules?

Reagan Aikins:  Earlier this year, the SEC proposed a rule change in the length of time the brokers have to deliver the shares to the employee plan participants. This is called the settlement period.

As I noted earlier, the previous SEC rule was a T+3. In March, the SEC proposed a T+2 timeframe for brokers to deliver the shares. This was put in effect on September 5, 2017. You can see on your screen which types of securities the rule applies to.

John Montgomery:  How will the new rules affect companies?

Reagan Aikins:  Under the new rules, the employers’ settlement period will be reduced by one day, which could accelerate the next day deposit rules should the payroll tax liabilities exceed $100,000. This will result in employers having to receive the information from the brokers and deposit the taxes one day quicker than under the previous rules.

Employers may need to revise their processes and procedures in order to come into compliance with the change in the timeframe from T+3 to T+2.

John Montgomery:  I see. So why is this important to companies?

Reagan Aikins:  Well, as you noted earlier, John, many companies cite an administrative burden as it relates to equity compensation withholding requirements. Reducing the amount of time that employers and companies have to make timely deposits on the equity compensation will only increase their administrative burden.

Depending on the amount of payroll tax liability associated with the equity compensation, employers who are not in compliance could be faced with large interest and penalties assessed by the IRS.

John Montgomery:  That is very important to bear in mind, absolutely.  So what should companies be thinking about on this topic?

Reagan Aikins:  Companies might wish to consider changing their policies and procedures in order to come into compliance with the T+2 settlement period. Companies should also think about speaking with their service providers on the broker side to discuss how the brokers are handling this change.

John Montgomery:  Okay. So just to recap. Under the previous rules, T+3, if you sold shares of Acme on a Monday, the transaction would settle on a Thursday. Now, under the new T+2 rules, if you sold shares of Acme on a Monday, the transaction would settle on a Wednesday. So investors will receive their funds one day prior under the new rules.

Also as a result, the employers’ settlement period could be reduced by one day, which could accelerate their deposit requirements if the liability exceeds $100,000. This could require employers to update and change their processes and procedures.

In addition, penalties and interest could be attracted. Did I get that right?

Reagan Aikins:  Yes. That encapsulates it nicely. For additional information and assistance, companies should be reaching out to their qualified tax professionals.  Additionally, they can visit the SEC website and review the updated investor bulletin, which was posted in August 2017.

John Montgomery:  Thank you, Reagan, for your insights on this topic.

Reagan Aikins:  It was a pleasure to be here with you, John. Thank you. 

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