Notes for restricted stock units

Restricted stock unit (RSU) is a form of stock-based compensation used to reward employees. RSU will be exercised at some time in the future. Unlike stock options, RSU will have a certain value when exercised, unless the relevant company’s stock becomes worthless.

RSU can be an important part of your client’s compensation plan. As a financial consultant, your suggestions can help clients get the most benefit from this part of the salary.

Knowledge about RSU

RSU is a grant whose value is based on the value of the company’s stock. It is of no value to employees at the time of distribution. The RSU will be assigned at a certain time in the future based on the past time or the realization of the goal. They are then distributed in the form of shares, but they can also be distributed as cash-although this is less common.

Before RSUs were awarded, they were nothing more than unfunded commitments to issue shares to recipients at some point in the future. The holder does not have the right to vote during the period of holding the restricted share unit, and will not receive any dividends that have been paid. Some companies will pay RSU equivalent dividends. Companies can allow dividends to accumulate and use these funds to pay part of the taxes that should be paid at vesting.

Once they have vested and allocated the shares, the recipient will be taxed on the value of the shares at the time of vesting. They are taxed at the ordinary income tax rate plus the applicable state income tax rate. (For related reading, please refer to “How to Tax Restricted Stocks and Restricted Stock Units (RSU)”)

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The recipient should be aware of the four key points of RSU:

  • What caused RSU to become vested? A certain time period or employee’s achievement of a certain goal or milestone.
  • What happens to RSU if certain events such as employee termination, retirement or death occur?
  • If the company’s control rights change, what will happen to the restricted stock units?
  • How is tax deducted when RSU vests?

How to deal with RSU

Some companies may have made arrangements for employees to receive cashless distributions in which they will have enough shares to pay taxes due. There is no preferential capital gains tax treatment at the time of vesting. Since holding stocks for one year does not have the opportunity to enjoy preferential capital gains tax treatment, if you want, nothing can stop you from selling some or all of your stocks.

So, should you keep the shares or sell some or all of the shares? Like most of these questions, the answer will depend on the unique circumstances of each customer.

Once granted, the RSU is like any other share in the company’s stock. Customers should consider all other company stocks held in taxable accounts and retirement accounts. If the employer’s stock performance is stable, the employee may want to own the stock—after all, there is no cost to acquire the stock.

Another way of looking at this issue is that the decision to hold the stock at the time of vesting is the decision to buy the company’s stock at the price of the day. If the stock price appreciates sharply, it is like buying at the top of the market and hoping that the stock price will continue to appreciate.

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Remember, RSU is part of the compensation and should be treated as such.

Diversified attempts

There are no hard and fast rules regarding the allocation, but many financial advisers caution against holding more than 10% of the company’s stock portfolio. Any centralized stock holding is risky, but when it is your own company’s stock, if the company is in trouble, you will face higher risks.

If an employee loses their job in the company, this may be the result of a significant drop in the value of the restricted stock unit’s stock and any other stocks. Taken together, this may be a serious financial blow.

Financial advisors working with clients who are partly paid as RSUs should advise clients on how to best use stocks. It is wise to think of RSU as a cash dividend; decide whether to “buy” the company’s stock or invest it elsewhere to diversify.

Other things to consider

What happens if your client receives a job offer from a competitor before granting part or all of the RSU vesting? You can help the client evaluate the RSU that may be lost, and then use it as part of the compensation negotiation between the client and the potential employer.

If there is a large amount of unattributed parts of the RSU, your client may also stay with the current employer until they are vested.

If your customer’s employment relationship with the company is involuntarily terminated, any unvested RSUs are likely to be confiscated. However, the company may have an employment agreement or other arrangements that specify RSU benefits. This is another key point that your customers should determine.

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When you retire, you can use any vested RSU at will. If you have an unowned RSU, it will depend on the plan and company policy. If you will lose a restricted share unit of significant value, you may need to continue working until the restricted share unit vests.

Death or disability

Most companies plan to vary what happens in the event of RSU death or disability. Don’t just assume that the treatment of other benefits and compensation in the case of disability applies to RSU and other stock-based compensation.

Planning opportunities

In addition to the customer’s overall compensation plan, RSU and other stock-based compensation can also be provided, and it can be a way for them to accumulate a lot of wealth.

If the client is ready to acquire a large number of shares in a given year, the consultant can help keep other income as low as possible to minimize the tax impact. The consultant may also recommend that any deductions from previous or future years be consolidated into the vesting year.

In addition, financial advisors should advise clients on how to best use the stocks received. If the additional stock makes the percentage of company stock in a person’s portfolio too high, it is logical to urge customers to sell the stock and diversify their assets.

Bottom line

RSU can become an important part of the customer’s overall compensation plan. Financial advisors can provide much-needed advice on how to best handle what is essentially a bonus payment.


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