Restricted Stock Units (RSU) Issues

Restricted Stock Units (RSUs) are a popular form of equity compensation that, after vesting, result in an employee’s receipt of shares of company stock or a cash payout. Similar to a bonus, RSUs can positively affect cash flow but incur taxes that require planning. Many professionals have been (or potentially will be) granted RSUs by an employer during their careers. It is important for these fortunate to develop an understanding of how these interests fit into their overall financial plan.

This checklist helps guide your conversations when advising clients regarding their RSUs. It covers:

• Key characteristics of RSUs
• Ordinary income tax considerations at vesting
• Capital gains tax considerations at sale
• Company stock and portfolio considerations

RSU Grant Issues

Do you need to review how RSUs work?

Do you need to confirm the conditions of vesting?

If so, consider the following:

• Depending on your plan, your RSUs may fully vest after a number of years, or they may follow a graduated vesting schedule over multiple years.
• Your plan may tie vesting to a liquidity event or performance goals, instead of (or in addition to) the expiration of a vesting period.
• Vesting triggers should be closely monitored to ensure there is no surprise tax liability.

Does your plan allow you to defer distribution of shares and continue to hold units until a later date, post-vesting (e.g., at retirement)?

If so, consider whether it would be advantageous to choose a future payment date to coordinate the timing of tax recognition with your overall plan. Also, understand what events may accelerate any deferred payments.

Do you need to review what you will receive when your RSUs vest?

If so, determine whether a cash settlement and/or stock settlement option is offered.

Does your company accrue/pay dividend equivalents while you hold RSUs?

If so, consider how this affects your cash flow and tax liability.

Do you need to review how termination of your employment (voluntary or involuntary), disability, or death might affect your interests under your plan?

If so, termination generally causes you to forfeit unvested interests (unless vesting is accelerated under your plan).

Investment Issues

Do shares of your company’s stock, along with any unvested RSUs, make up a significant percentage of your investment portfolio (e.g., more than 10%)?

If so, consider tax-efficient diversification strategies. Maintaining a concentration in your company’s stock can be especially risky.

Does your company have a blackout period or trading window, or are there other limitations on your ability to sell shares?

Do you need downside protection while holding your company’s shares?

If so, consider whether buying put options (if permitted) or investments with negative correlation would offer a safeguard.

Are you considering selling company shares at a loss?

If so, review how the timing of your sale and any RSU grants or vesting may trigger the wash-sale rules.

Tax Issues

Do you need to understand the tax consequences of the grant of your RSUs?

If so, note that the receipt of an RSU is not a taxable event.

Income is not recognized until the shares (or cash) are delivered.

Do you need to understand the tax consequences of the vesting of your RSUs?

If so, consider the following:

• Upon the transfer of shares (or cash), the FMV of the shares is taxable compensation for federal and any state and local income taxes. The taxable event (delivery) typically occurs at vesting, but it can be deferred in certain circumstances (e.g., if your plan qualifies for IRC § 409A).
• This income is also subject to FICA taxes in the year of vesting, regardless of any elective deferral. (continue on next page).

Do you want to reduce your income tax liability in the year that your RSUs vest?

If so, consider the following:

• Maximizing deductible savings into tax-advantaged accounts (e.g., 401(k), 403(b), 457, traditional IRA, HSA, and/or FSA, etc.) can help reduce your taxable income.
• Using a bunching strategy to time your deductible expenses can help maximize your ability to take itemized deductions and reduce your tax liability. Consider a DAF for charitable gifts.

Do you need to plan for tax withholdings in the year of vesting?

If so, consider the following:

• Upon vesting, your employer is required to withhold according to the supplemental withholding rates. Depending on your tax situation, this could be insufficient and you would need to make estimated payments.
• Your employer may automatically retain shares sufficient to cover withholdings and issue the remaining shares to you.
• If you have a choice under your plan, you may also sell shares to cover withholdings or pay in with outside funds.

Does your company offer the IRC §83(i) election to defer the recognition of income for up to five years after your RSUs vest?

If so, and if you are a qualified employee, consider whether making this election provides an attractive tax benefit, noting the potential risks of a decline in share value during the deferral period.

Do you need help determining your cost basis in any shares acquired at vesting?

If so, your cost basis should equal the amount you paid for the stock (if any) plus the amount included as taxable income (see Form W-2).

Do you need help determining your holding period for shares acquired through your RSU plan?

If so, your holding period starts on the date of vesting, unless you elect to defer distribution.

Do you need help understanding the tax consequences of the sale of shares acquired through your RSU plan?

If so, when you sell shares of stock, you may have capital gains or losses to the extent your sale price is higher or lower than your cost basis. If you held the shares for more than one year, such gains or losses will be subject to the long-term rates.

Miscellaneous Issues

Do you need to assess your employer’s future equity value and long-term viability?

If so, be mindful of becoming overly financially dependent upon your employer (as your sole source of earned income and a potentially large percentage of your net worth).

Is there a risk that your company will be acquired in the near future?

If so, consider how an acquisition might affect any unvested RSUs.

Do you have future financial goals that your RSUs/shares could help to achieve?

If so, factor your vesting schedule and the estimated tax consequences into your overall plan, in coordination with your income and savings strategies.

Do you need to address your RSUs in your estate plan or in a pending divorce?

Does your plan allow you to designate a beneficiary?

Do you need to consider any state-specific issues?

About Archford®

Archford® was built around the mission of “Taking Care of Families”. CEO and Founder Jim Maher grew up in a family business, which inspired him to seek a diverse professional background with secured licenses in law (JD), accounting (CPA), insurance, financial planning, exit planning and retirement planning. While acquiring these designations and degrees, he realized how important it was for all of these areas of a person’s life to be interconnected for financial success. Archford® provides wealth management, retirement planning, business consulting, accounting, data management and philanthropic services all under one roof. This unique service model enables the team to collaborate daily to help clients save time, save money and make money.

Meet our Founder

Jim Maher, an attorney and CPA, holds a bachelor’s degree and a law degree from the University of Missouri – Columbia. He is the CEO and founder of Archford Capital Strategies. Believing that the most important asset for the business owner is the employees themselves, Jim has brought together a team of passionate advisors. Jim has earned seven certifications and designations along with his advanced degree. These designations help him to efficiently design and implement both financial and tax-advantaged plans. He also created a consulting division to assist business owners with a wide range of solutions for business continuation or succession planning. As a Certified Exit Plan Advisor (CEPA®), he helps closely held family businesses to establish resources for business owners in transition. Jim and Jenny have four boys who enjoy giving back to the community through philanthropy, traveling and playing soccer. Jim and Jenny are very proud of their boys for their high academic and sport achievements.