Why do many companies prefer restricted stock and RSUs to stock options?
Do employees need to sell shares at the vesting of restricted stock or RSUs?
Articles on restricted stock and RSUs
IRS issues 83(b) election guidance: sample language and tax examples
New IRS regs clarify risk of forfeiture with restricted stock
Dividend equivalents with RSUs: an example at Apple


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This issue of our quarterly newsletter showcases some of our award-winning content on restricted stock and restricted stock units (RSUs), along with new IRS activity relating to restricted stock. Below you will find FAQs, articles, and news items that give a taste of our expertise on this and every other topic in stock compensation. For much more, just click through to our main content section on restricted stock and RSUs and the related parts of the Tax Center. Thanks for reading!

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Why do many companies grant restricted stock and RSUs instead of stock options?

The compensation philosophies of companies are continually changing under the influence of many factors, including competitor practices, accounting rules, and economic conditions. Surveys indicate that restricted stock is now at least as popular as stock options, and many companies use a variety of grants. Companies granting stock options say the long-term potential upside of options—and the fact that options have value only if the stock price rises after grant—makes them better than restricted stock at focusing employees and executives on long-term corporate success. However, there are many reasons why companies may prefer restricted stock and RSUs:

  • These grants will always have tangible worth for employees (i.e. they do not go underwater), making them better for retaining employees.
  • The accounting is less complex, and there is less dilution.
  • Shareholders, especially institutional investors, view restricted stock more favorably, as the reputation of stock options has been tarnished, perhaps unfairly, by scandals such as backdating.
  • With restricted stock, it is easier to add vesting features that are based on corporate or external performance measures.

The question of whether you should prefer restricted stock over stock options depends on various factors.

Many companies now prefer RSUs to restricted stock. For the reasons why, see another FAQ. To find out whether restricted stock or RSUs are more popular, and to see key survey data on trends at companies, read a related FAQ.

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Do I need to sell my shares at the vesting of restricted stock, RSUs, or performance shares?

The vesting of restricted stock, RSUs, or performance shares is separate from the sale of the shares. Whether you sell the shares at vesting depends on various factors, some of which you can control:

  • Methods of tax withholding available to you through your company's stock plan, or any mandatory share surrender. The shares can be a source of the proceeds needed to pay the taxes.
  • Tax planning. Whether you hold the shares and for how long will affect your capital gains tax at sale. Any holding period after vesting does not affect the amount of income tax due for the value of the shares at vesting.
  • Your needs for the cash proceeds and other financial-planning goals, such as diversification, dividends paid on your stock, and alternative investments.
  • Whether your company is publicly traded or privately held. At public companies, be aware of blackouts when you can't trade or stock ownership/retention guidelines that require you to keep a certain amount of company stock. In a privately held company, you will not be able to sell the shares immediately at vesting because of restrictions that are likely to exist in your grant and/or because of the SEC rules on resales.
Alert: You should confirm that you have certified an IRS Form W-9 or Form W-8BEN for the account with your brokerage firm or transfer agent. If it does not have this form, you will be subject to backup withholding on the sales proceeds.

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Articles On Restricted Stock & RSUs

Below we list just some of the articles about restricted stock and RSUs in the award-winning content of Our extensive articles and FAQs on restricted stock and RSUs are also joined by a podcast, an interactive quiz, and a self-study course and exam for CFP and CEP continuing education credits. All of these are available for corporate licensing.

Restricted Stock 101: Five Essentials Of Restricted Stock & RSUs by Matt Simon
While restricted stock and RSUs are relatively straightforward, they have technical aspects you must understand to make the most of them. Learn the essential facts of restricted stock and RSUs, including basic concepts, vesting schedules, and tax treatment.

Restricted Stock: Tax, Financial, Estate, And Retirement Planning (Parts 1 and 2) by Richard Friedman
Understand financial planning for restricted stock and RSUs. Part 1 discusses the growing popularity of these grants, their special features, and the related tax planning. Part 2 covers complex issues in financial, estate, and retirement planning.

Stockbrokers' Secrets (Part 8): What I Tell My Clients About Their Restricted Stock And Performance Shares by W.E.B. Bantling
For many employees, receiving restricted stock, restricted stock units, or performance shares adds a new layer of complexity to their equity compensation. This article presents six common questions the author hears from his clients.

Restricted Stock Units Made Simple (Part 1): Understanding The Core Concepts by Matt Simon
Restricted stock units (RSUs) have become the most popular alternative to stock options. While RSUs share many of the same issues as restricted stock, there are differences, and it is important to understand the basics of RSUs in their own right. This article is available free!

Decisions At Grant With Restricted Stock (Part 1): Tax Fundamentals by Tom Davison
When your company grants you restricted stock, it promises to let you keep a set number of shares on a particular date in the future. The stock becomes yours if you still work for the company on the vesting date. In the typical case, you do not pay for the shares. This article series presents what you need to know at grant and the decisions you can make.

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IRS Issues Guidance On The Section 83(b) Election: Sample Language For Filing, Plus Tax Examples

When you receive a grant of restricted stock (or if you receive restricted stock upon an exercise of stock options), you can elect to be taxed on the value at grant instead of vesting. This move is known as a Section 83(b) election, named after the relevant section of the Internal Revenue Code (IRC). It is not available for a restricted stock unit grant, as RSUs are taxed under a different part of the IRC.

Strict rules dictate when this filing has to be made (e.g. within 30 days of the grant) and how it needs to be filed. Despite the fact that the filing must include specific information about the property (i.e. shares), such as its value and transfer date, the IRS has no form for the Section 83(b) election. IRS Revenue Procedure 2012-29 presents a sample of acceptable language for making the election. It also provides examples showing the election's tax impact when the stock is later sold after vesting or if the grant is repurchased or forfeited before vesting.

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When Does The Risk Of Forfeiting Stock Comp Delay Taxation? New IRS Regulations Clarify The Rules

Substantial risk of forfeiture (SRF) is a crucial concept in the tax code (Section 83), as it determines whether and when compensation is taxable. If there is a chance you can lose compensation, whether stock or cash, and thus you don't really own it in the traditional sense, it is not taxable to you. However, once that restriction lapses and the risk of loss disappears, the property is considered to be transferred to you. Its value at that time is then taxable.

In stock compensation, the most common example of a substantial risk of forfeiture occurs with restricted stock. For you to receive the underlying shares, the restricted stock grant must vest; otherwise, you lose the grant—i.e. a risk of forfeiture exists. If, for example, you were to leave your company before vesting, you would forfeit your right to receive the shares. Only when vesting occurs is the value of the shares taxable. The tax concept for restricted stock units is similar, although RSUs are taxed under a different code provision, and only the actual delivery of the shares triggers taxes. RSUs also can have a feature that lets you elect to defer share delivery, and thus the related income tax, until a future date.

In May, the IRS issued proposed regulations to clarify when a substantial risk of forfeiture exists for stock compensation. In general, the proposed regulations confirm and clarify previous IRS revenue rulings, private letter rulings, court decisions, and the generally accepted understanding of what constitutes a forfeiture risk. The proposed regulations do tweak the tax-code definition in areas that the IRS, we can perhaps assume, found concerning or potentially confusing. For example, the wording now makes it completely clear that the reason for the restriction creating the SRF must involve your job and the services you provide in your job. In other words, if your restricted stock vesting depends upon a World Series victory by the Chicago Cubs, that condition alone cannot defer taxation unless you actually work for the Cubs.

For further details of the proposed regulations, including their application to lockups and blackout periods, see our entry on this topic at the popular Blog (and be sure to subscribe to receive future blog entries by email).

Nonqualified Deferred Compensation:, A Complete Online Resource For Participants And Professionals

From the award-winning publishers of, features articles, FAQs, a glossary, podcasts, interactive quizzes, and a calculator, all to help you, your clients, or your executives understand and make the most of nonqualified deferred compensation.

  • Clear explanations of NQDC by experts
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For companies, education and communication are vital for ensuring NQDC plans work properly to motivate and retain vital executives, directors, and key employees. Companies can license our educational content and tools for websites, print materials, newsletters, and presentations.

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Dividend Equivalents With RSUs: An Example At Apple

Unlike holders of restricted stock, who receive dividends when they are paid to shareholders, employees with restricted stock units do not automatically receive dividends. However, companies may choose to issue dividend equivalents to holders of RSUs. An example at Apple shows how these work.

Starting in the company's 4th quarter, shareholders at Apple will receive a quarterly dividend of $2.65 per share. In conjunction with this, Apple filed an 8-K that discusses an amendment to Apple's outstanding RSUs. When the company pays the cash dividend on its common stock, each RSU will also be credited for the same amount. These dividend equivalents will not pay out until the underlying shares vest. At that time, the accumulated dividend equivalents either will pay out in cash or will be used to pay the taxes on the income from RSU vesting.

In the 8-K, Apple goes on to explain its reasons for adding this feature: "the crediting of dividend equivalents is intended to preserve the equity-based incentives intended by the company when the awards were granted and to treat the award holders consistently with shareholders." At his own request, Apple CEO Tim Cook will not take any dividend equivalents on his RSUs, and will thus forgo $75 million over the RSU vesting period.

IRS Guidance On Tax Deduction

In Revenue Ruling 2012-19, the IRS clarified the determination of when dividends and dividend equivalents paid to senior executives on restricted stock/RSUs are qualified performance-based compensation excluded from the $1 million deduction limit under Section 162(m). The IRS explained that the dividends and dividend equivalents are grants of compensation separate from the related restricted stock and RSU grants, and therefore they must satisfy the requirements. They can be excluded from the $1 million calculation only if they vest and pay out upon the meeting of pre-established performance goals.

See FAQs on for additional details on the issuance and tax treatment of RSU dividend equivalents and the tax treatment and reporting of dividends on restricted stock.

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