Job Loss And Your Stock Grants (Part 1): Options, Restricted Stock, And ESPPs
After reading this article, test your knowledge with a fun, interactive quiz on this topic
Whether it is expected or not, job loss is an upheaval that gives you a lot to think about. However, as you clear off your desk, don't forget your stock compensation. Too many departing employees have lost valuable potential gains because they were unaware of the post-termination rules—or even the vesting dates—of their stock grants. Post-termination rules are especially important for vested stock options, which expire forever if they are not exercised within a certain brief timeframe after the end of employment. It would be a shame to miss a chance to take some extra income on board as you go, especially if you are setting sail into a horizonless sea of unemployed job-hunting or if you are retiring.
This article series aims to inform you about common corporate practices with stock compensation when employees lose their jobs. Part 1 explains the specifics of restricted stock/RSUs, stock options, and employee stock purchase plans. Part 2 covers general important aspects of job termination that apply to all stock grants. When you're ready, test your knowledge of job-termination issues with our quick quiz on stock compensation and job loss.
Above all, you must know your company's rules. After reading these articles, you should study your stock grant documents and put any questions to your stock plan administration.
Alert: Examine your stock grant agreement, any offer letter or employment agreement, and other company materials about your stock plan, such as FAQs. Watch for anything confusing or inconsistent, and look for noncompete provisions. Direct questions about these things to your stock plan administrators.
Restricted Stock, RSUs, And Performance Shares: All About Vesting
With restricted stock and restricted stock units, upon job termination you almost always forfeit whatever stock has not vested. Exceptions can occur, depending on the vesting terms of your employment agreement or stock plan, such as special provisions for disability, retirement, or an acquisition.
You keep any shares that vested before your termination date. If you are planning to leave your job, you may want to stick around long enough to get any valuable chuck of restricted stock/RSUs that may vest in the near future.
In certain situations where you paid for the restricted stock, as may be the case at a privately held company where you exercise options to get restricted stock, the company may choose to repurchase your shares. The capital gains tax rules apply to any gain or loss on the purchase. If you forfeit the shares, tax withholding will not be refunded, and the forfeit itself will not trigger any tax loss. The situation is similar if you made a Section 83(b) election (unavailable for RSUs) and paid taxes on the value at grant.
Vesting is also the crucial factor for performance share grants upon job termination, but of course with performance shares the payout depends on the achievement of stated performance goals rather than on a stated length of employment. When you leave your job for standard reasons (e.g. going to work for another company, being laid off) before the end of the performance period, you usually lose all rights to receive the grant, even if the goal appears very obtainable. If you have overlapping or concurrent grants that are outstanding, you forfeit the value of them all.
Other structures sometimes apply in termination situations related to retirement, disability, or death (i.e. not standard job termination). Instead of making you ineligible for any part of the payout because you are not employed by the end of the performance period, the plan can provide that any payouts under outstanding awards may be based on the actual results at the end of the performance period as if you were employed throughout the period. It is also possible that the date for measuring performance may change to the date you terminate, so in that case you still receive some pro rata portion of the award according to either actual performance as of that date or performance at the end of the period. You would then lose any payout from the grant that corresponds to the portion of the performance period occurring after termination. If your grant has a sliding scale (i.e. you can get fewer or more shares than the target number, depending on the results), then hopefully your plan specifies at what level performance will be considered to have occurred.
Stock Options: Know The Post-Termination Exercise Rules And Deadlines
In general, you have rights only to stock options that have already vested by your termination date. If the options have a graded vesting schedule, you are allowed to exercise the vested portion of the option grant, but most commonly you forfeit the remainder.
Example: You are granted options to buy 1,000 shares of your company's stock with a four-year graded vesting schedule (25% vesting per year). You leave the company two and a half years after grant. You are allowed to exercise 50% of your options. The rest will never become exercisable.
With cliff vesting, in which options or restricted stock/RSUs vest all at once rather than on an incremental schedule, you forfeit the entire grant if you leave before vesting.
Alert: If you are planning to leave your job, you should become familiar with the details of your vesting schedule. You may want to delay your departure, if possible, to accommodate a valuable chunk of options that will vest in the near future.
How Much Time Will You Have To Exercise?
The importance of your post-termination exercise period cannot be stressed enough. While the typical timeframe is 90 days after termination, your period for exercise will be dictated by your employer's plan design and the reason for your termination. If the options are not exercised by the specified date, they expire and are canceled. While some companies send registered letters to outgoing employees with the number of shares they can buy and the cost, along with how many days they have to exercise the options, no law requires this. It is your obligation to know your personal grant information and the terms of your stock plan.
Alert: See your stock option plan, grant agreement, and other informational materials for the rules and procedures of vesting and post-termination exercise.
Companies And Courts Strictly Follow Rules
Companies uphold these rules, procedures, and deadlines very strictly. Court cases reinforce the fact that keeping track of your stock compensation when you leave your job is entirely your obligation. If you're curious, see the following rulings:
- Porkert v. Chevron Corporation (US 4th Circuit Court of Appeals, No. 10-1384, Dec. 2011)
- Mariasch v. Gillette (US 1st Circuit Court of Appeals, No. 07-1549, Mar. 2008)
- Sheils v. Pfizer (US 3rd Circuit Court of Appeals, No. 04-3724, Sept. 2005)
It does not matter if you made an honest mistake or only narrowly missed a deadline. Furthermore, you should not rely on spoken information about your post-termination exercise period. Your stock plan documents and related statements are the only reliable and binding sources that determine how long you have to exercise options after termination.
Alert: Be sure you know what your official termination date is considered to be, as this will start the post-termination exercise period. In addition, this post-termination exercise period cannot go beyond the natural term of the option.
Which Date Applies?
When measuring the post-termination exercise period, most companies' stock plans start the clock on the date of termination, meaning the actual end of employment status, not the date you give notice. Look at how (or whether) your plan defines termination, employment, and continued service. You should also look for details in your stock plan to get clear answers on the rules of post-termination exercise. For example, do you lose your vested stock options on the day you terminate, or do you have a given number of days after termination to exercise them?
Employee Stock Purchase Plans
At job termination, you continue to own stock purchased under an ESPP during your employment. However, your eligibility for participation in the plan ends. Any funds withheld from your salary but not used to purchase shares before the end of your employment will be returned to you, normally without interest, within a reasonable period.
For plans that are tax-qualified under IRC Section 423, the tax code lets your company keep the pre-termination payroll deductions in the plan to purchase shares when the purchase period ends (and purchase occurs) no more than three months after the termination date. However, most plans do not permit this, because the ESPP is intended to be a benefit for current employees. This means that if your employment ends before the purchase date, under most plans shares are not purchased for you on a pro rata basis.
Example: Before you left your company, salary deductions occurred for two months, with a six-month ESPP offering period. The money that you paid is not saved for purchase to the six-month point.
Elsewhere on this website, the FAQs on job termination provide further details on some of the situations and topics presented in this article. You may want to consult them as well when you dig out your stock grant documents.
Following this article's details on specific types of stock compensation, Part 2 covers general important aspects of job termination that apply to all stock grants, such as changes in employment relationship, the post-termination tax treatment, and severance issues.
Matt Simon is the copyeditor and content-manager at myStockOptions.com.