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The Why, What and How Surrounding Restricted Stock Units (RSU)

We often get questions from clients regarding their Restricted Stock Units (RSU). This blog clarifies why companies issue RSUs, what they are and how individuals should handle the units once they are vested.

WHY?                                                                                                            

We tend to start getting questions early on in the salary negation stages. Clients wonder why their company is offering RSUs. Employee compensation is a major expenditure for most corporations; therefore, many firms find it easier to pay at least a portion of their employees’ compensation in the form of stock. This type of compensation has two advantages:  One, it reduces the amount of cash compensation employers must pay out. Two, it serves as an incentive for employee productivity.

WHAT?

RSUs represent an unsecured promise by the employer to grant a set number of shares of stock to the employee upon the completion of the vesting schedule. Some types of plans allow for a cash payment to be made in lieu of the stock, but this type of plan is in the minority. Most plans mandate that actual shares of stock are not to be issued until underlying agreements are met.

Therefore, the shares of stock cannot be delivered until vesting and forfeiture requirements have been satisfied and release is granted. Some RSU plans allow the employee to decide within certain limits exactly when they would like to receive the shares, which can assist in tax planning. However, unlike standard restricted stockholders, RSU participants have no voting rights on the stock during the vesting period, because no stock has actually been issued. The rules of each plan will determine whether RSU holders receive dividend equivalents.

HOW?

The most important question we get is: How am I taxed on my RSU?.  RSUs usually are granted at no cost to the employee and typically vest based on number of years of service or a performance metric, such as total shareholder return. There is only one date in the life of the plan when the value of the stock can be declared. The amount reported will equal the fair market value of the stock on the date of vesting, which is also the date of delivery. Therefore, the value of the stock is reported as ordinary income on a W-2 in the year the stock becomes vested.

Final Thoughts

The final question we get from individuals is: Should I hold onto the stock once I am fully vested or should I sell it? Holding the stock should be evaluated based on many factors, including future profitability, expected growth rate of the stock, dividend rate, among others. It may make sense to hold the stock for a better price or valuation.  The decision on whether to hold or sell should be made based on how it relates to your overall financial situation. It is extremely important to discuss this with your financial professional to make sure your decision matches your overall goals and objectives while maintaining a diversified asset allocation.

Restricted Stock Units are a form of stock-based compensation that has been gaining popularity since late 2009. It is very important to understand why you have them, what they are and how they work.  This article covers the highlights of this subject and should not be construed as tax advice. For more information, either contact our office (610-651-2777) or your plan administrator.