Understanding Restricted and Performance Stock

E*TRADE Securities2

Restricted stock and performance stock typically provide immediate value at the time of vesting and can be an important part of your overall financial picture. Understanding what they are and how to cover any associated taxes can help you make the most of the benefits they may provide.

 

How Do Restricted Stock & Performance Stock Work?

 

Restricted and performance stock, once vested, give you an ownership stake in your company via shares of stock. Once your grant has vested and your company has released the shares to you, you can sell them at your discretion (outside of any company imposed trading restrictions or blackout periods) or hold the shares as part of your portfolio. When granted restricted or performance stock, you’ll first need to accept the grant. In most cases, restricted and performance stock is granted at no charge to the employee, although some companies may charge a nominal amount per share.

Restricted and performance stock is said to be “vested” when you own the shares free of restrictions—meaning you have the authority to sell, transfer, or make other important decisions concerning the shares. Vesting conditions can be based on employment, the passage of time and/or contingent upon the achievement of certain performance goals. The rate

at which your stock vests—referred to as the “vesting schedule”—is described in your grant agreement and displayed on the My Stock Plan Holdings page on etrade.com. You can access the Holdings page by selecting My Stock Plan from the Accounts menu on etrade.com, and then clicking Holdings.

 

Know the Types of Restricted and Performance Stock

 

  • Restricted Stock Unit (RSU) — A company’s promise to give a specific number of shares of stock or cash equivalent to an employee at a future date, once vested. One RSU equates to one share of company stock.
  • Restricted Stock Award (RSA) — A company’s award of a specific number of shares of stock to an employee, which are held in escrow and cannot be sold until vested.
  • Performance Stock Unit (PSU) — A company’s promise to give a targeted number of shares of stock or cash equivalent to an employee at a future time, once vested. The actual number of shares given will vary based on performance as measured against the defined goals.
  • Performance Stock Award (PSA) — A company’s award of a targeted number of shares of stock to an employee, which are held in escrow and cannot be sold until vested. The actual number of shares given will vary based on performance as measured against the defined goals.

 

U.S. Tax Considerations

 

The following tax sections relate to U.S. tax payers and provide general information For those who are non-U.S. tax payers, please refer to your local tax authority for information.

Before you take action on your shares, you’ll want to carefully consider the tax consequences. The information contained in this document is for informational purposes only. Tax treatment depends on a number of factors including, but not limited to, the type of award. For advice on your personal financial situation, please  consult a tax advisor.

 

Taxes at Vest

 

The value of your shares when they vest, less the amount you paid for the shares, is treated as ordinary income. Your employer will report this amount on Form W-2 or other applicable tax document, and it will be subject to income tax. For example, if you have 100 shares that vest when the stock price is $30 per share, and you did not pay any consideration for the shares, you’ll recognize ordinary income of $3,000 in the year the shares vest. The ordinary income you recognize upon vesting establishes your cost basis which is important when you eventually sell, gift, or otherwise dispose of the shares.

 

Taxes at Sale

 

When you dispose of your shares, any capital gains or losses will be realized. To determine your gain, if any, simply take the stock price at sale minus the stock price at vest, multiplied by the number of shares sold. If you held the stock for more than a year after the vest date, the capital gains should be eligible to be treated as a long-term capital gain, which has historically been taxed at a lower rate. Any losses you incur may not be taxable and may even be deductible.

 

Taxes at Dividends

 

Any dividends received on your shares are considered income and are taxed as such in the year they are received. If your grant includes dividend benefits before vesting, any dividends your company issues will likely be reported on your W-2 as wages. If you make a Section 83(b) election (described below) your dividends may be reported on a 1099-DIV or if you are not an employee of the company your dividends may be reported on a 1099-MISC.

 

Taxes at Sale

 

  • Acceleration (Section 83(b) election) — In some cases it is possible to move up the first tax trigger from the vest date to the grant date by filing a Section 83(b) election with the Internal Revenue Service (IRS). This must be done within 30 days of the grant. Please keep in mind that paying taxes at grant can be risky therefore, you should consult with your tax advisor, as there are no allowances for refund or tax loss if your shares fail to vest. Also, you should check with your company to see if it allows this type of election. Section 83(b) elections are not applicable to Restricted Stock Units or Performance Stock Units.
  • Deferral — In some cases, it is possible to defer the receipt of shares from a Restricted Stock Unit or Performance Stock Unit. Even if a deferral election is made, applicable taxes will still be due at vest. However, income taxes can be deferred until the shares are released to you. Again, you should check with your company to see if it allows this type of election and consult with your tax advisor.

 

A Closer Look at Potential Tax Scenarios

 

Let’s take a look at the potential taxes for different types of restricted, performance stock awards, and elections.

This hypothetical example assumes a grant of 100 shares or units of company stock issued at no cost to the employee.

 

GRANT TYPE

 

TAXES AT GRANT

 

POSSIBLE TAXES AT VEST

 

POSSIBLE TAXES AT SALE

Example:

Stock Price at Grant = $25

Stock price at Vest = $30

Sale Price = $45

 

 

Restricted Stock Unit

 

 

Not applicable

 

100 shares X $30 = $3,000 taxed as ordinary income2

 

$45 - $30 = $15

100 shares X $15 = $1,500 taxed as capital gains

 

 

Restricted Stock Award

 

 

Not applicable

 

100 shares X $30 = $3,000 taxed as ordinary income

 

$45 - $30 = $15

100 shares X $15 = $1,500 taxed as capital gains

 

 

Performance Stock Unit

 

 

Not applicable

 

100 shares X $30 = $3,000 taxed as ordinary income2

 

$45 - $30 = $15

100 shares X $15 = $1,500 taxed as capital gains

 

 

Performance Stock Award

 

 

Not applicable

 

100 shares X $30 =$3,000 taxed as ordinary income

 

$45 - $30 = $15

100 shares X $15 = $1,500 taxed as capital gains

Examples with 83(b) Election

 

Restricted Stock Award with 83(b) election

 

100 shares X $25 = $2,500 taxed as ordinary income

 

 

Not applicable

 

$45 - $25 = $20

100 shares X $20 = $2,000 taxed as capital gains

 

Performance Stock Award with 83(b) election

 

100 shares x $25 = $2500 taxed as ordinary income

 

 

Not applicable

 

$45 - $25 = $20

100 shares X $20 = $2,000 taxed as capital gains

1Tax treatment for each transaction depends on the type of restricted or performance stock you have been granted. Please keep in mind that these examples are hypothetical and for illustrative purposes only. For advice on your personal financial situation, please consult a tax advisor.

2If you have elected to defer the receipt of the shares from your RSUs or PSUs, only employment taxes would be due at vest. Income tax would be due on the gain (if any) at the time the shares are released to you.

 

Possible Tax Payment Methods

 

Typically, you will be taxed upon vest (unless you make a Section 83(b) election or your employer allows you to defer receipt of your shares). There are several possible methods available to pay your tax obligation through either the use of cash in your account, the sale of existing shares, or having your company withhold shares in an amount sufficient to cover the taxes. You should check your specific plan details to determine which tax payment method(s) are available to you.

Depending on your company’s plan, you may be able to pay taxes in the following ways:

Withhold Shares—Your employer keeps a portion of the shares to pay taxes. The remaining shares are deposited to your account.

Same-Day Sale—All vested shares are immediately sold and some of the proceeds are used to pay taxes.

Sell-to-Cover—Shares sufficient to cover the taxes are sold and the remaining shares are deposited to your account.

Cash Transfer—You deposit cash in your account to pay taxes.

To select your preferred method log on etrade.com. From the My Stock Plan Overview page, click the My Account tab. Under My Account > Plan Elections, click Accept next to the particular grant to be accepted. Make your selection from the menu available to you for each vesting period.

 

Selling Your Shares

 

Once your restricted or performance stock has vested and the shares have been deposited to your account, you can either sell them at your discretion (outside of any company imposed trading restrictions or blackout periods) or hold them until you choose to sell. Follow these steps to create an order to sell your shares:

1.   Create Order

A.    Log on to etrade.com. From the Stock Plan Overview page, click the Sell tab

B.     Choose your price type by selecting one of the following:

    a.    Market: “I want to sell at the next available price”

    b.   Limit: “I’m willing to wait until the stock hits the price I want”

C.     Enter the number of shares you would like to sell from each of your tranches

D.     Select how you would like to receive your cash proceeds

2.   Preview Order

E.    Estimate your proceeds by clicking the Preview Order button

F.   From the Preview Order page, click Place Order; or change it using the Change Order button

3.   Confirm Order

G.   You will receive a confirmation that your order has been placed

We’ll alert you when your order has been executed and when settlement occurs.

You can also track your order status on the Orders screen (My Stock Plan > My Accounts > Orders) on etrade.com.

 

Have Questions?

Visit our Customer Service Online at etrade.com/service or call us at 1-800-838-0908, 24 hours a day, weekdays.  From outside the U.S. or Canada, call +1 650 599 0125. One of our dedicated professionals will be happy to assist you.