Companies Need to Take the T+1 Settlement Cycle Seriously

If you're administering your company's equity compensation plans, then you probably know about a major change coming in the Spring of 2024. I’m talking about the shift to a “T+1” trade settlement cycle. This will have major repercussions, especially if your team isn’t prepared well in advance. The team here at CompIntelligence has been working with our clients to help prepare for T+1. Here’s the key details you need to know.

What is the T+1 settlement cycle? 

In case you need to be caught up on the jargon: Currently, the settlement of stock transactions operates on a T+2 basis, meaning that it takes two days after the trade date for a transaction to be fully settled. However, a significant change is set to take place on May 28, 2024, as the market transitions to a T+1 settlement cycle. On the trade date, known as T, a transaction (i.e; cashless stock option exercise) is executed and subsequently recorded in the stock plan recordkeeping system that the company utilizes for its equity programs.

After the market closes for the day, the stock plan administration team—whether it operates in-house or through a third-party—begins the intricate process of processing these transactions same day. The team will need to confirm all taxes and make any updates as necessary and send the share issuance request to the transfer agent on trade date in order for the share delivery to happen on T+1. 

Is T+1 a big deal?

Yes, it is a big deal! Not only is it the law, but it’s also going to be a better experience for your employees and shareholders. But if that isn’t incentive enough, there will also be serious monetary benefits to making sure your company is compliant with T+1. If the settlement of a trade does not occur by T+1, it impacts the final processing of equity transactions, creating a delay in reports going to your payroll team. If payroll doesn’t submit the taxes by the deadline for an equity transaction(s), it could trigger late deposit penalties that will add up quickly.

IRC Section 6656 deals with penalties related to the failure to make timely deposits of taxes. This section is particularly relevant for businesses and entities that are required to deposit various federal taxes, including payroll taxes, excise taxes, and corporate income taxes, among others. The penalties are imposed when these entities fail to deposit the required taxes by the prescribed deadline, deposit less than the required amount, or do not follow the proper deposit procedures as outlined by the Internal Revenue Service (IRS).

The penalty amount under Section 6656 can vary depending on the length of the delay and the circumstances surrounding the failure to deposit. The structure of the penalties is designed to encourage compliance and ensure timely tax payments. The penalties are typically calculated as a percentage of the underpaid taxes, increasing incrementally the longer the delay in making the required deposit.

Here's a breakdown of the penalty rates under Section 6656:

2% for deposits made 1 to 5 days late.
5% for deposits made 6 to 15 days late.
10% for deposits made more than 15 days late.
15% for amounts that should have been deposited but instead were not paid directly to the IRS within 10 days of the first notice from the IRS demanding payment, or for amounts that were not paid with the tax return.

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How to get ready for T+1

As companies anticipate the transition to a T+1 settlement period, it's crucial to evaluate current processes for potential bottlenecks that could become more pronounced with the accelerated timeline. A key area of focus is tax validation. You want to complete as much validation on tax profiles from your stock plan system with your internal and/or external payroll provider now in order for minimal changes to occur  at the time of the equity transaction event (i.e; cashless stock option exercise or RSU/PSU release).  It's important to note the challenge posed by the US's next-day deposit rule and the timing deadlines of other countries, which many companies are not currently equipped to meet efficiently.

To mitigate these challenges, companies can implement several proactive measures. One approach is to adjust the Fair Market Value for RSU releases to the previous day's close, allowing for the processing of RSU releases ahead of the actual vest date. This early preparation can alleviate time pressures. Furthermore, companies can estimate taxes based on pre-release reports for RSUs from the stock plan provider, ensuring timely submission to the government and later reconciling with the payroll provider once details are finalized.

Addressing cross-border mobility transactions also requires attention. Ensuring that processes with tax advisors are expedited to accommodate the T+1 schedule is vital for the timely sourcing of income and tax information in the stock plan system. Effective file integrations play a critical role in facilitating this process.

Automation like CompXchange can help

Every step matters in T+1 and you want to minimize or eliminate any step that relies on a single individual. Platforms like CompXchange can provide an unbroken chain of your HRIS system passing on the transaction data to your stock plan provider, who then passes it on to CompXchange after logging it. CompXchange can then send it along to your tax advisor and/or payroll team.

CompIntelligence can help 

If you’d like a free readiness assessment from our team during a 15-minute consult, you can reach out to us here. We have a combined experience of decades, and we’ve companies of all sizes manage,, implement, and optimize their equity programs.