Tax planning with restricted stock in down markets
Restricted stock and performance shares: can they go underwater like stock options?
Podcast and articles on restricted stock topics
Important developments: Selling call options on vested employee stock options; Rule 10b5-1 trading plans; President Obama's tax proposals
Self-study course on restricted stock for CEP continuing-education credit


Think Twice insider trading prevention videos: educate, entertain, and jolt your employees and executives (see and information below)

Find out why E*TRADE Corporate Services is the stock plan provider of choice for a quarter of the S&P 500 (see and information below)


While has become our trusted brand name, we could just as well be called (in fact, we own the URL!). This is because we have articles, FAQs, podcasts, calculators, quizzes, and self-study courses for continuing education credits on restricted stock, restricted stock units (RSUs), and performance shares.

These features are highly popular. Whether you're new to these types of grants or experienced with them, on our site you will find education, guidance, and tools to help you maximize their value. This newsletter contains samples of two FAQs to help pull you into our content on these topics.

The end of June marks nine years since the launch of in 2000. Since then, we have won many awards and have even earned a patent. We thank you very much for your membership (particularly at the Premium or Pro levels), your content licensing, and your support in general through the years, particularly in this challenging economy. It's great to have you with us!

~ Bruce Brumberg, Editor-in-Chief, and the staff of


Below are two frequently asked questions (FAQs) about restricted stock and related types of grants. They are taken from the 700+ FAQs on, including those in our highly popular Tax Center. All of these FAQs are available for your company to license or by Premium or Pro Membership. Please do not copy or excerpt this information without our permission.

My company is now granting restricted stock, but the current share price is much lower than I think it will be in a few years. Any tax-planning ideas?

For restricted stock, you can make what the tax code calls a Section 83(b) election. This taxes the value of the award immediately at grant instead of taxing the value at vesting, when hopefully your stock price will be much higher (and the tax rates will be correspondingly higher).

Before you do the analysis, realize that you need to make the 83(b) election with the local IRS office within 30 days of grant, and that it is nearly impossible to rescind or revoke the election. Realize also that if you make the election, you cannot sell any of the stock to pay the taxes. Furthermore, if you leave the company before the vesting date and thus forfeit the grant, you will not get back the taxes that you paid. Therefore, there are risks.

However, the election can make sense for you if your stock price were to rise significantly between now and vesting.

Example: You will be granted 5,000 shares of restricted stock when the stock price is $17. If you're in the current 35% federal tax bracket, after making the Section 83(b) election your federal tax at the $17 price ($85,000 total grant value) will be $29,750. Instead, if you wait to pay taxes until the price per share at vesting is $50 ($250,000 total) three years from now, your tax bracket will probably be 39.6% (up from the current 35%), and thus you will owe $99,000 in taxes. Assuming you sell the stock at $50 per share, making the Section 83(b) election would allow you to convert $69,250 ($99,000 – $29,750) into capital gains that would be taxed at the probable rate of 20% ($13,800). Making the election would therefore result in $43,550 ($29,750 + $13,800) of total taxes: a savings, before considering the opportunity costs of paying taxes up front, of $55,450 ($99,000 – $43,550).

However, it is important to remember the risks and to be realistic about your company's stock price. For further details of this analysis, see a related article and the section of on the 83(b) election.

The 83(b) election to be taxed at grant is not available for restricted stock units.

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Can restricted stock and performance shares go underwater?

Not in the way stock options can. Restricted stock is worth the full market value of the stock when it vests (or, with restricted stock units, when the shares are delivered). It does not matter if the stock price has dropped since the grant date. However, the value of the grant goes down (or up) by the same percentage that your company's stock price does.

Example: You received a grant of restricted stock when the market price was $25 per share. The stock price has dropped 20% to $20 per share at vesting: the value of the stock you receive is $20 per share (at $20 per share, stock options granted at $25 would be $5 underwater). If the stock price increases 20% to $30 at vesting, your stock is worth $30 per share.

The grant may lose value if the stock price drops, but the value cannot fall to $0 (i.e. go underwater) unless the stock price does. Since restricted stock always has value and does not require you to purchase it (there is no exercise price as with options), companies grant fewer shares of restricted stock (or restricted stock units) than stock options, as another FAQ discusses.

At vesting (or at grant if you make a Section 83(b) election), you pay taxes on the value of the shares you receive. When you sell the shares, you will have a capital loss for any drop in value after vesting.

With performance-vesting restricted stock or performance shares, a decrease in your company's stock price or financial condition could, depending on the goal or metric used for payout or vesting, result in no shares. In this situation, very few companies make any adjustment in the goals or provide the discretion to still allow a payout. While this is how these plans are supposed to work, some companies decide that the design and metrics need tweaking in future grants.

A down market can even work to your advantage. To find out how, see the remainder of this FAQ on

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Think Twice Video And Intranet Series
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For more information on the Think Twice video series, and a free white paper on insider trading prevention and education, see Both VHS and DVD formats are available. Qualified corporate buyers, including pre-IPO companies, can request free previews. Intranet licensing is available.


Why You'll Learn To Like Restricted Stock Grants, by Richard Friedman
While grants of restricted stock or RSUs don't carry the same upside as stock options, they have benefits you will surely appreciate once you understand their special features. Read this article free!

Restricted Stock Fundamentals: What You Need To Know, by Kate Victory and Bruce Brumberg This is premium content
Restricted stock grants carry their own requirements and tax rules, which can significantly differ from those of stock options. Read the article and its companion on restricted stock taxation.

Performance Shares, Parts 1, 2, and 3 This is premium content
In this three-part series, learn about performance share grants, from the basics of their structure to more complex topics involving job events, taxes, and M&A.

Restricted Stock: Tax, Financial, Estate, And Retirement Planning, by Richard Friedman This is premium content
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 financial, estate, and retirement planning.

Decisions With Restricted Stock, by Tom Davison This is premium content
In this five-article series, learn about the key decisions you must make at grant and vesting.

Restricted Stock Versus Stock Options: Making A Rational Choice, by Alan Ungar This is premium content
In a growing trend, your company may let you choose between stock options and restricted stock. Which is better for you? Part 1 explains the nature of the choice. Part 2 analyzes the decision-making you must make according to your financial situation and goals.

In addition to the articles above, you can stream or download our 10-minute podcast on restricted stock. This lively interview explains how these grants work and outlines the basic tax issues. Available free!

Content with the This is premium content symbol requires Premium Membership.

E*TRADE Corporate Services
offers full end-to-end support for all equity vehicles, including options, ESPPs, restricted stock, stock appreciation rights, and—coming later this year—performance awards. Whether you choose full or partial outsourcing, or in-house plan management, you will receive dedicated support, expert service, and product leadership. With 25 years of experience, E*TRADE Corporate Services knows how to meet the needs of your employees, your executives, and your auditors. Visit or email to learn more.


Proposed new rules for selling call options on employee stock options. Soon it may be much easier to sell call options on your vested employee stock options. On May 3, 2009, the CBOE and the ISE proposed a margin requirement change to the SEC that could be effective soon. This would allow vested employee stock options to be considered usable collateral for selling listed call options on the underlying stock. You would need to pledge your vested options to a broker-dealer and provide it with an irrevocable power of attorney authorizing it to exercise the options on your behalf when required. Were this change to be adopted, you would not need to put up any additional collateral. If your company allows this and works with the broker-dealer, the strategy would create both an income-producing opportunity and a hedging strategy. However, there are also risks involving the securities laws and taxation.

We are actively following this development. See three articles on Options For Your Options: Generating Income From Your Vested Employee Stock Options Without Exercising by Chris Murphy and Hedging Your Employee Stock Options (Parts 1 and 2) by Robert Gordon.

SEC case warns against improper use of Rule 10b5-1 trading plans. Rule 10b-5 trading plans, which we explain extensively in the section SEC Law, are a popular way to set up a diversification strategy or sell stock for specific goals. When they are set up correctly and follow best practices, they provide protection against charges of insider trading and negative investor/media responses. However, they must be set up when you do not know inside information, as shown in the recent SEC case against the former CEO of Countrywide Financial.

Under President Obama's plan, tax increases imminent for top two brackets. If President Obama's tax proposals become law, the top two ordinary income brackets would go up to 36% and 39.6% in 2011. For only the taxpayers in those two top brackets, the tax rate on capital gains and qualified dividends would rise to 20%. This differs from reports by earlier sources that predicted an increase to 20% for all tax brackets. Instead, apart from this exception for the top two brackets, the 15% rate for capital gains and qualified dividends continues, along with the 0% rate for the 10% and 15% ordinary income brackets. This is clear from the "green book" recently released by the Treasury Department (we recommend the CCH summary).

The wide-ranging tax increases and changes may have various effects on your strategies for tax and financial planning. For example, one strategy that high-net-worth individuals are considering and implementing for their company stock is setting up a grantor-retained annuity trust (GRAT). This is popular when interest rates and stock prices are low, as we discuss in an FAQ on While now GRAT terms have no required length, President Obama's proposal would mandate a 10-year GRAT term. Usually GRATs have a term of two to three years because if you die during the term, the stock you wanted to transfer outside your estate comes back into it.

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We recently developed a self-study online training course using our content on restricted stock, RSUs, and performance shares. This benefit is available to Premium Members now without any additional cost. Click on CEP Continuing Education Credit at the left side of the home page and sign in (or upgrade) to take the course, which you can complete over several visits to our site. Certified Equity Professionals (CEPs) who score 70% or better in the exam at the end of the course can earn five credits for CEP continuing education.

We also have a quiz offering continuing-education credit for Certified Financial Planners (CFPs). With links to articles and FAQs from the answer keys, our other interactive quizzes on the home page and elsewhere on the site can serve as e-learning courses and introductory gateways into our vast library of content.

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Are you adding or switching to restricted stock, restricted stock units, or performance shares?

Our innovative Knowledge Center is a popular corporate service from that can strengthen your stock plan education, particularly when you are changing your stock plan and making new grants. Companies and stock plan service providers are licensing this package of our award-winning educational content, interactive quizzes, and dynamic animated calculators/modeling tools.

The Knowledge Center and calculators can be quickly and seamlessly integrated into your HR, benefits, or compensation portal. This includes all of our Premium content and features, and is automatically updated. No user sign-in is required.

  • Strengthen your stock plan communications and education.

  • Help employees understand and appreciate these new types of stock grants and make smarter decisions.

  • Reduce staff time and expense by letting the content of answer employees' questions about taxes, financial planning, life events, and more.

Select all or a portion of's expert content, quizzes, and calculators. For more information on our corporate services, call 617-734-1979 or email

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