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  • Writer's pictureSteve Coker, CFP

The Basics of Restricted Stock Units


If you are a corporate executive then it is likely that you are receiving Restricted Stock Units (“RSU”) as a key part of your compensation. Unfortunately, many executives do not understand RSU’s and rarely develop a strategy for managing this significant asset. If you have RSU’s, here are some basics that you should understand and some strategies to consider.


Ownership


First, it is important to understand that Restricted Stock Units are not the same as Restricted Stock. Restricted Stock is issued at the date of grant is held in escrow, restricting you from selling the stock until it vests. Restricted Stock Units, in contrast, are an unfunded promise to issue stock once the vesting requirements have been satisfied. RSU plans are simpler to administer, especially for public companies, and are therefore much more common.


Tax Treatment


RSU’s are taxed based on the value of the shares when they vest. Since RSU’s typically vest over time, there is usually no taxable income on the grant date. However, there will be taxable income on the future vesting date, presenting a challenge for tax planning since the taxable event occurs even if the shares are held, and generates ordinary income similar to a bonus. For example, a 3-year annual vesting schedule will result in annual taxable ordinary income for the vested shares. In addition, the vested RSU’s will be subject to Social Security tax (up to the yearly maximum) and medicare tax.


Deferral


Some plans allow the executive to defer delivery of the RSU shares (and recognition of the ordinary income) similar to a deferred compensation plan. RSU Deferral can be an excellent tax planning tool since it allows the executive to defer to recognition of income to a future date, such as retirement, when income will be lower. However, in my experience deferral is rare and the executive is left with few choices.


Hold or Sell


If deferral is not offered in the plan, the executive is forced to recognize ordinary income on the vesting date. The decision boils down to hold or sell the stock. Executives will obviously have an opinion of the future prospects of the companies they manage and may want to hold the shares. However, on balance I have a bias toward selling shares as they vest for the sake of diversification. Executives will often receive annual grants and keeping all the shares can build a concentrated position that risks a ‘life changing event’. In addition, RSU’s are often coupled with other stock-based compensation such as Non-Qualified Stock Options that add to the exposure.


If you would like to talk more about your specific situation, please give us a call. We would be happy to help.

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