Global Tax Guide
Restricted stock/RSU vesting: what you must do and decide
SPONSORS OF THIS ISSUE
StockShield Stock Protection Trust: Concentrated stock? Learn how Stock Protection Trusts reduce risk and preserve upside (see the ad below)
AdvisorFind Directory from myStockOptions.com: Search this resource for financial, tax, and legal advisors with experience in stock compensation (see the ad below)
Think Twice training videos for insider-trading prevention: Educate, entertain, and scare your employees and executives into compliance (see the ad below)
This issue of our quarterly newsletter showcases some of our award-winning content on restricted stock, restricted stock units, and performance shares. Although our trusted brand name is myStockOptions, we could just as easily be myRestrictedStock, given our extensive and engaging articles, FAQs, videos, podcasts, and quizzes on restricted stock/RSUs and the related financial planning. After sampling the information below, click through to the section about restricted stock and RSUs on myStockOptions.com and the related parts of our Tax Center.
We are preparing for our national conference, Financial Planning For Public Company Executives & Directors. In a fresh lineup of talks and panel sessions, leading industry experts will discuss many topics, including:
- trends of importance to advisors
- tax, estate, and SEC-related planning challenges
- methods for attracting and advising high-net-worth clients
- case studies and examples of successful financial-planning strategies
- special sessions on financial planning for clients at pre-IPO companies
For details, see our item on the conference in the newsletter below. The register at the conference website (www.mystockoptions.com/conference).
Don't want to wait for our quarterly newsletter updates? Subscribing to the myStockOptions.com Blog is a great way to stay informed about new developments in equity compensation. You can also follow us on Twitter and Facebook.
—Bruce Brumberg (Editor-in-Chief)
My restricted stock will vest soon. What must I do and decide?
When vesting occurs and the restriction on the shares lapses, you have some choices but fewer than you would with stock options, which require decisions about exercise timing and method. Restricted stock and restricted stock units do not impose these decisions as vesting approaches. Earlier, you may have had to accept the restricted stock/RSU grant, though that is not as common as with options.
Alert: If your company requires formal acceptance of the grant agreement, the delivery of the shares at vesting may be suspended until you accept it.
Open A Brokerage Account
Before the vesting date, when the restriction lapses and the shares are released, you will have to open an account with the brokerage firm or transfer agent that your company designates. At vesting or share delivery, the shares are then electronically deposited into your account from the transfer agent.
Alert: It is important that you open an account, as your company may have a policy of not delivering shares unless you have done so. You should also complete either IRS Form W-9 (for US tax residents) or IRS Form W-8BEN (for nonresident aliens) to certify your tax status.
The setup needed to activate this account may be all online, or you may have to send a paper document with your signature to the firm. With some brokers, your company may be able to establish an account for each plan participant, and then you merely need to accept yours.
Tax Decisions
You will owe taxes on the value of the shares at vesting, when the shares are delivered into your account. At least for federal tax purposes, most companies use the flat rate for supplemental wages (22%, but 37% for aggregate amounts above the level of $1 million during a calendar year). In addition, there will be Social Security tax up to the yearly maximum, along with Medicare (plus any state and/or local taxes on this type of income).
Alert: If this flat rate is insufficient to cover the tax imposed by your federal and state marginal tax rates, you may need to pay estimated taxes.
You will need to decide how you will provide the taxes that must be withheld. The choices may include using cash, selling enough shares to cover the taxes (a sell-to-cover), or share withholding (i.e. some of the shares are held back for the taxes). Your company may have a mandatory withholding method, in which case you don't have to make a decision, or it may have a default that it will use if you do not elect your withholding method by the deadline.
Some RSU plans have a deferral feature, which lets you decide when to receive the shares after vesting and thus lets you delay the ordinary income tax until the time of share delivery. These deferral plans must carefully follow the IRC Section 409A election rules for nonqualified deferred compensation.
Hold, Sell, Or Gift?
The decision about whether to sell or gift the shares, transfer them to another account, or change to joint ownership depends around your personal financial-planning situation, goals, and cash. A related FAQ presents some points to consider when making that decision.
Alert: If the brokerage firm does not have your completed IRS Form W-9 or Form W-8BEN for the account, you will be subject to backup withholding on the gains from any sale of shares or on other investment income in your account.
Return to table of contents
Can you calculate whether it is better to be granted stock options or restricted stock?
The outcome depends on two key variables:
- how well your company's stock price does in the years after the grant date
- the ratio of restricted stock shares you would get instead of options
Stock options are riskier than restricted stock but carry a greater capacity for gain, depending on the stock price and how long you hold the vested options before exercising. Restricted stock, on the other hand, is a safer bet in that it guarantees you at least some gain (unless the stock price plummets to zero).
Example: You receive $50,000 worth of equity compensation today when the stock is trading at $10 per share. The company gives you a choice between 5,000 shares of restricted stock and 20,000 stock options. The number of options is based on a Black-Scholes calculation which will consider the time value, as there is no intrinsic value (i.e. exercise spread) at grant because the exercise price is the fair market value (i.e. the stock price at grant).
Three years later, the awards vest.
Scenario when stock price drops: The stock price has declined and is valued at $5, so the restricted stock is worth $25,000 (before taxes). Currently the stock options are underwater and have no intrinsic value. Although they are worthless at this time, there is a possibility the stock price will rise before expiration.
Scenario when stock price rises: The stock price has increased to $20 per share. The restricted stock is worth $100,000 (before taxes). If the stock options are exercised and sold, you generate a pre-tax amount of $200,000. Note, as above, that you can continue to hold the options until expiration and can exercise them at any point until that time. If the price increases during this time, a later exercise may result in an even larger gain.
As you can see, there is greater upside (though more risk) with stock options. If you have a choice between these two types of awards, there are many factors you should consider.
| Restricted stock | Stock options |
| Low risk tolerance | High tolerance for risk |
| Need cash flow | Have sufficient cash flow |
| Concentrated position in the stock | Diversified portfolio |
| Neutral or bearish on the stock | Bullish on the stock |
| Nearing retirement or other event that could accelerate or forfeit awards | Younger and have a longer time horizon with the company |
| Expecting a significant increase in tax rates | Expect tax rates to stay the same or go down |
When you run the numbers on your situation (number of options granted, predicted stock appreciation, any dividends), you will see how well your company's stock price needs to perform to make you wealthier with options than with restricted stock. Your company may also take a portfolio approach to its stock grants, using options, restricted stock, and performance shares.
For an example of this calculation, see the full FAQ.
AdvisorFind Directory
Find a financial, tax, or legal advisor with experience in stock compensation
Stock compensation raises many questions.
- How much should you contribute to your ESPP?
- When should you exercise stock options?
- Should you sell or hold restricted stock at vesting?
- How can you diversify your company stock holdings?
- How can you minimize your tax bill?
- How do you negotiate for stock compensation in your employment agreement?
While myStockOptions.com is a good place to learn about concepts, issues, and general strategies in equity compensation, at some point you may need an advisor to help with your unique situation. Yet finding a good advisor can be hard when you are busy and don't know where to start. The AdvisorFind Directory from myStockOptions.com is for you.
- Identify and contact an expert who can provide specialized professional guidance on equity compensation.
- Search for advisors by geographical area, type of advisor, years of experience, minimum portfolio size, and other key criteria.
- Look up resources for performing background checks on advisors.
Searching AdvisorFind is free and does not require registration at myStockOptions.com.
Below we list articles, videos, podcasts, and interactive quizzes about restricted stock, RSUs, and performance share in the award-winning content of myStockOptions.com.
The extensive section on restricted stock and RSUs at myStockOptions.com is complemented by a self-study course and exam for CFP and CEP continuing-education credits. All of this content is available with Premium or Pro Membership or through corporate licensing.
ARTICLES
NEW! Ten Financial-Planning Rules You Should Know About Restricted Stock And RSUs by the myStockOptions Editorial Team
While grants of restricted stock and RSUs are conceptually simple, financial planning for them can be complex. This article presents the essential financial-planning points that you should consider before your restricted stock or RSU grant vests.
Restricted Stock Units Made Simple (Part 1): Understanding The Core Concepts by the myStockOptions Editorial Team
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!
Restricted Stock Units Made Simple (Part 2): Taxation by the myStockOptions Editorial Team
The taxation of RSUs generally resembles that of restricted stock but carries some important differences, as this article explains.
Restricted Stock 101: Five Essentials Of Restricted Stock & RSUs by the myStockOptions Editorial Team
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.
The Great Benefits Of Restricted Stock And RSUs by Richard Friedman
Podcast included! Your company may no longer be using stock options. Instead, it may be granting restricted stock, restricted stock units, or performance shares. While these grants don't carry the same upside as stock options, they have benefits you will surely appreciate once you understand their special features. This article is available free!
NEW! From Apple To Uber: 5 Key Features Of Performance Share Grants by the myStockOptions Editorial Team
At most public companies, whether established or just going public, when you reach the executive ranks you are now more likely to receive grants of performance shares than the more famous stock options. Examples of equity grant approaches at Apple and Uber help to illustrate five key facts about these awards.
Restricted Stock: Tax, Financial, Estate, And Retirement Planning (Parts 1 and 2) by Richard FriedmanPodcast included! 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.
Restricted Stock Versus Stock Options: Making A Rational Choice by Alan B. Ungar
In a growing trend, your company may let you choose between stock options and restricted stock. Which is better for you? Learn techniques to analyze your financial situation and goals so that you can make the right choice. Part 1 compares and contrasts the basic traits of restricted stock and stock options. Part 2 provides a method of analysis to help your decision-making.
Stockbrokers' Secrets: Restricted Stock And Performance Shares by John Barringer
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.
Performance Shares (Parts 1, 2, and 3) by Bruce Brumberg
Many companies now make stock grants that base your gains on more than just your continued employment or an increase in stock price. As companies take a "portfolio approach" to stock compensation, you may be granted performance shares, which you receive only upon the achievement of specified goals. Part 1 explains the basics of performance share grants. Part 2 explores their structure in depth, along with the concept of expiration and the impact of job termination. Part 3 explains the taxation of performance share grants and then goes on to discuss the special tax considerations that arise in corporate mergers and acquisitions.
Decisions At Grant With Restricted Stock (Parts 1, 2, and 3) 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. Part 1 presents what you need to know at grant and the decisions you can make. Part 2 discusses the risks of the Section 83(b) election. Part 3 explains ways to analyze your alternatives.
Decisions At Vesting With Restricted Stock (Parts 1 and 2) by Tom Davison
Vesting is another crucial time for making decisions about your restricted stock. Part 1 explores what tax-withholding method to use, whether you should hold or sell the stock, and what account to keep the shares or cash in after vesting. Part 2 looks at key vesting decisions.
VIDEOS
Restricted Stock & RSUs (Part 1): Key Aspects To Know
Editor-in-Chief Bruce Brumberg presents the fundamentals of restricted stock and RSUs to help stock plan participants make the most of these grants. The coverage includes key concepts, such as vesting schedules and understanding a grant's value. Running time: 4:37.
Restricted Stock & RSUs (Part 2): Taxes And Related Key Decisions
An engaging primer on the basic tax treatment of restricted stock and RSUs, including the tax rates, the timing of taxation, and withholding. Running time: 3:57
PODCASTS
Basics Of Restricted Stock And Restricted Stock Units
Running time: 8:05. In this audio interview, the editor-in-chief of myStockOptions.com explains how restricted stock and RSUs work, including grant, vesting, sale, and taxation.
Why Restricted Stock And RSUs Are A Good Deal
Running time: 11:37. Compensation expert Richard Friedman explains what makes restricted stock and restricted stock units valuable equity awards. This interview is a companion to Mr. Friedman's article on this topic in the Restricted Stock section of myStockOptions.com, where he also has articles on financial and tax planning for restricted stock and RSUs.
Restricted Stock Units After An Acquisition: Know What Could Happen
Running time: 13:36. When a company is merging or being acquired, its employees wonder what will happen to their unvested RSUs. In this interview, wealth advisor Kristin McFarland explains the potential outcomes for holders of unvested RSUs and current equity holders in an M&A deal. This interview is a companion to her article on this topic.
INTERACTIVE COURSES/EXAMS/QUIZZES
Learning Center: Course on Restricted Stock, RSUs, and Performance Shares for CE Credit
This course and exam, offering continuing education credits for CFPs, CEPs, CWPAs, CIMAs and other professional designations, weaves all of our key articles, FAQs, podcasts, and videos on restricted stock, RSUs, and performance shares into a dynamic, interactive learning tool that teaches the topics in a memorable way. The answer key for each exam also links to relevant content on the site for further reading and learning. This is one of six online self-study courses and exams in our Learning Center, which offers 100% of the CE requirements for CEPs and 50% of the requirements for CFPs.
You can also test your smarts with our free interactive quizzes on restricted stock and restricted stock units. In addition to being fun, the quiz is also a course of study. The answer key links to content on the topic for followup reading.
For the May 2019 issue of its newsletter Ayco Compensation & Benefits Digest, Ayco Company surveyed the structure and design of performance award plans at 350 companies.
- In 2019, the firm found that within the prior two years, more than 85% of the surveyed companies had made these awards, up from 70% in 2007.
- Within the prior three years, about 25% of the companies had modified the metrics and design of their performance share plans.
- Ayco found that the measurement period of performance plans is typically three years (at over 90% of the surveyed companies).
Most (61%) of the surveyed companies use two performance criteria. Only 17% of the companies use one performance metric, 19% use three, and 4% use four or more. The most common performance metrics that Ayco identified are the following (the figures add up to more than 100% because some companies use more than one metric):
| Performance measure | Percentage of companies |
|---|---|
| Total shareholder return (TSR) | 53% |
| Cash flow, revenue, or sales growth | 33% (up from just 17% in 2015) |
| Return on equity/net assets/income | 30% |
| Earnings per share (EPS) | 29% |
| Net income / economic profit | 19% |
| EBITDA | 6% |
| Economic value added (EVA) | 2% |
| Other criteria | 10% |
For more data from this survey and many other surveys on performance share grants, see the related FAQ.
Register Now For The myStockOptions National Financial-Planning Conference In San Francisco / Silicon Valley Area
Organized by myStockOptions.com, the national conference Financial Planning for Public Company Executives & Directors (www.myStockOptions.com/conference) is a must-attend event for professionals working with or seeking to advise executives, directors, and high-net-worth employees who have stock compensation and holdings of company stock.
Date: June 18, 2019
Place: Hilton San Francisco Airport Bayfront
Time: 8:00am–6:00pm
In a fresh lineup of talks and panel sessions, leading industry experts will discuss many topics, including:
- Equity compensation planning challenges relating to taxes, wealth preservation and transfer, and charitable giving
- Significant tax, legal, and SEC compliance pitfalls to avoid, and new developments
- Financial planning for equity comp in pre-IPO companies
- Strategies for concentrated stock positions and for nonqualified deferred compensation
- Rule 10b5-1 trading plans
- Grant, employment, and severance agreements
- Case studies and other examples of successful planning strategies
- Methods for attracting and effectively advising high-net-worth clients
- And much more!
Continuing education credits, including 8.0 CFP® and 7.0 CEP credits, are available! This unique one-day event is sponsored by some of the leaders in the financial-planning industry, including Fidelity Charitable, Columbia Threadneedle Investments, Charles Schwab, StockShield, and StockOpter. Rooms at a specially discounted rate have been reserved for June 16–20 at the hotel, which offers a free airport shuttle.
Register at the conference website (www.mystockoptions.com/conference) or contact us for more information (617-734-1979, editors@mystockoptions.com).
Insider Trading Prevention And Education: Think Twice Video And Intranet SeriesRequest free previews at the Think Twice website
Insider-trading prosecutions are a major priority of the SEC and the Justice Department. For two decades, the dramatic Think Twice video series has been a vital training and compliance resource for thousands of corporations and law firms trying to prevent insider-trading violations. The Think Twice videos are celebrated for enhancing the value of corporate education by entertaining viewers with compelling stories.
Used by over 1,000 companies and developed with input from the SEC Enforcement Division, these powerful and memorable story-lines will drive home key points on:
- what insider trading is
- the penalties and consequences
- how the SEC discovers illegal activity
- what happens if illegal tipping or trading is suspected
- how SEC investigations are conducted
For more information on the Think Twice video series, and a free white paper on insider trading prevention and education, see the Think Twice website. Both DVD and VHS formats are available. Qualified corporate buyers, including new IPO companies, can request free previews. Intranet licensing is available.
Professionals with continuing education requirements use myStockOptions.com and its sibling website myNQDC.com to earn CE through their convenient self-study courses and exams.
At myStockOptions.com, the Learning Center offers:
30 continuing-education credits for Certified Equity Professionals (CEPs): 100% of the total requirement
15 continuing-education credits for Certified Financial Planners (CFPs): 50% of the total requirement
15 continuing-education credits for Certified Private Wealth Advisors (CPWAs) and Certified Investment Management Analysts (CIMAs): 37.5% of the total requirement
CPE for Certified Public Accountants (CPAs) and CE for CFA Charter holders (see the Learning Center for details)
Each course of study features podcasts, articles, and FAQs from myStockOptions.com. They are woven into a dynamic, interactive learning tool that teaches the topics in a memorable way. The answer key for each exam also links to relevant content on the site for further reading and learning.
Built on a similar model, the the myNQDC.com Learning Center on nonqualified deferred compensation offers up to 6 continuing education credits for Certified Financial Planners, 6 Professional Achievement in Continuing Education (PACE) credit hours for CLU® and ChFC® certifications, and up to 12 CPE hours for credentialed ASPPA members.
If you found this update from myStockOptions.com useful, please share it with your friends and colleagues, but do not copy or customize the text itself for your company's use without express permission.
TO SUBSCRIBE: Visit https://www.myStockOptions.com and register as a new user. Be sure to check the box for our email newsletters.
TO LICENSE OUR CONTENT OR ADVERTISE IN THE NEWSLETTER: Send email to sales@mystockoptions.com.