Restricted Stock Unit award

[phish_indexer]

My sibling works for a large, publicly traded corporation and was recently awarded a Restricted Stock Unit (RSU.) I help guide her in her investment decisions while attempting to educate her simultaneously, but this one has me a little stumped and I want to see if we're on track.

The unit will be vested in 3 annual intervals with the first installment vesting in December 2013. She sent me a snippet of some literature she received that reads:

The value of an RSU equals the stock price in the market times the number of shares, so a 500 share RSU award with a share price of $10 makes the value of the award $5000. Retains value even when market price is below $10/share.

Full value shares are considered to be worth more than stock options since the value of an RSU is determined by the price of the stock rather than the appreciation of the stock price since the grant date.

Anyone have experience with RSUs? My questions are:

1. Does she receive the entire unit at once, but is restricted from selling each installment until it vests? Or will she not see her shares at all until each vestment date passes?

2. What's the deal with the RSU shares retaining value even if the share price falls? Seems like the value of her shares would fall (or rise) simultaneously with the open market price.

3. It looks like these RSUs came about as an alternative to stock options after some accounting standard changes made options unexpendable. As for taxes, I guess she doesn't owe any until after the vesting period. Then will she only owe taxes on the shares she sells or will she have to pay ordinary income tax based on the value of the RSU?

4. The company currently does not pay a dividend but could in the future. Would she receive dividends on any shares she's awarded before they vest? How would they be taxed?

Thanks for any info and input. I'm going to send her a link to this thread. She's a Boglehead in training (she just doesn't know it yet.)

[stlutz]

1. Does she receive the entire unit at once, but is restricted from selling each installment until it vests? Or will she not see her shares at all until each vestment date passes?

It's really the same thing. You can't sell (or in this case, cash them out) until they've vested. Are there any performance requirements for them to vest? Any my co., restricted shares expire worthless if company earnings targets aren't met.

2. What's the deal with the RSU shares retaining value even if the share price falls? Seems like the value of her shares would fall (or rise) simultaneously with the open market price.

What they mean is that unlike options, the share still have value even if the price goes down. If the stock drops from $10 to $8, the RSUs are still worth $8. If they were options with an exercise price of, say, $9, they wold be worthless at a stock price of $8. The RSUs guarantee that you'll get something, but you don't get the huge potential payoff that was available when stock options were more prevalent.

3. It looks like these RSUs came about as an alternative to stock options after some accounting standard changes made options unexpendable. As for taxes, I guess she doesn't owe any until after the vesting period. Then will she only owe taxes on the shares she sells or will she have to pay ordinary income tax based on the value of the RSU?

Vesting is the taxable event. At least at my co., money is withheld at that the time and the income is included in my W-2, so not a lot of complexity there.

4. The company currently does not pay a dividend but could in the future. Would she receive dividends on any shares she's awarded before they vest? How would they be taxed?

Since they are "units" as opposed to restricted shares, I think it would depend on how the plan is written up.

[phish_indexer]

Vesting is the taxable event. At least at my co., money is withheld at that the time and the income is included in my W-2, so not a lot of complexity there.

Thanks. I'm still a little off base about how these awards actually work. Why is money withheld? Is part of your paycheck diverted to purchase the shares? That would render the word "award" suspect. Seems like you'd just be receiving company stock in lieu of income. Or are they actually awards, in the same sense as a holiday bonus?

[stlutz]

Thanks. I'm still a little off base about how these awards actually work. Why is money withheld? Is part of your paycheck diverted to purchase the shares? That would render the word "award" suspect. Seems like you'd just be receiving company stock in lieu of income. Or are they actually awards, in the same sense as a holiday bonus?

Yes, they are awards like a cash bonus. If the company is providing you with compensation, they are legally required to withhold taxes.

With the restricted shares at my company, what will happen is that the number of shares I actually get at vesting is reduced by the amount withheld. So, if have 100 shares and 30% gets withheld, 70 shares get deposited into my brokerage account at vesting. With RSUs, you'll get cash instead.

Some good info. here:

https://scs.fidelity.com/webxpress/help ... ml#rsuvrsa

[Steelersfan]

stlutz is right on the money with his answers so I'll let him continue with follow-ups.

On dividends - she will get dividends after the shares vest, not before, and only until she sells the shares she owns.

[interplanetjanet]

Thanks. I'm still a little off base about how these awards actually work. Why is money withheld? Is part of your paycheck diverted to purchase the shares? That would render the word "award" suspect. Seems like you'd just be receiving company stock in lieu of income. Or are they actually awards, in the same sense as a holiday bonus?

Yes, they are awards like a cash bonus. If the company is providing you with compensation, they are legally required to withhold taxes.

With the restricted shares at my company, what will happen is that the number of shares I actually get at vesting is reduced by the amount withheld. So, if have 100 shares and 30% gets withheld, 70 shares get deposited into my brokerage account at vesting. With RSUs, you'll get cash instead.

Some good info. here:

https://scs.fidelity.com/webxpress/help ... ml#rsuvrsa

This is all good information.

I would like to add that RSUs can be thought of as a cash bonus that comes in the form of stock. At the time the shares vest, you have W2 income from the vesting equal to the number of shares vested times their value at vest time.

There is absolutely no tax benefit from holding the shares that is distinct from the benefits you get from buying them yourself in taxable space. In general, I believe the best approach is to sell them as soon as they vest and to put the proceeds into your asset allocation - the basis is established at vesting time, so there should be a negligible gain or loss if this is done. If your sister wanted to hold more company stock she would have already bought it, the fact that RSUs were received should not change her bias towards or away from company stock.

[phish_indexer]

So is it guaranteed that she'll get cash rather than actual shares? Or is that company-specific? She's required to set up a brokerage account so I'd assumed she'd receive actual shares. Will the tax basis be the price of the stock on the day that it's vested?

Edit: Thanks Janet, stlutz, and Steelersfan. I'm on track now. And I had planned on telling her that it would probably be in her best interest to sell and invest the proceeds in the Vanguard IRA that I helped her set up. (Especially since she's already "invested" in the company by working there.) She has no bias or even remote interest in her company's stock. I'm sure she'll be happy to sell, just don't know if she'll invest the proceeds.

[interplanetjanet]

So is it guaranteed that she'll get cash rather than actual shares? Or is that company-specific? She's required to set up a brokerage account so I'd assumed she'd receive actual shares. Will the tax basis be the price of the stock on the day that it's vested?

If you missed what I just wrote, here it is again with emphasis:

RSUs can be thought of as a cash bonus that comes in the form of stock. At the time the shares vest, you have W2 income from the vesting equal to the number of shares vested times their value at vest time.

She will receive shares. They are taxed as a cash bonus would be (normal W2 income) and acquire basis at the moment of vesting.

[racy]

With restricted stock, you will owe income tax in the year your grants vest, or become eligible for sale, whether you sell them or not. Since the IRS views the vesting of shares as compensation, you will be taxed at your ordinary income tax rate. The cost basis for tax purposes is the market value of the shares on the date they vested.

If you sell vested restricted-stock shares before one year elapses, you will owe ordinary income tax on the gain realized between the value on the date of vesting and the market value on the date of sale. If you hold the vested shares for at least one year, you will owe taxes at the long-term capital-gains tax rate.

[icefr]

She will receive shares. They are taxed as a cash bonus would be (normal W2 income) and acquire basis at the moment of vesting.

I get RSU grants through my employer. I have a brokerage account that they vest into and a vesting schedule, for example:

Date # of shares
--------------------------------
2012-XX-XX 10
2013-XX-XX 15
2013-XX-XX 20
2013-XX-XX 15

When I log into my brokerage account, I can see various tax options:
1) Sell shares to cover taxes
2) Pay for taxes with cash (this would require me to deposit enough cash into the brokerage account money market fund to cover the taxes)
3) Sell ALL shares
4) I can also adjust the amount of taxes I want taken off (the default is 25%, but I adjust this sometimes)

So, I receive shares, but I have them set to sell immediately. I don't want to keep that much money in my employer's stock since my compensation goes up when the stock price goes up anyways.

On the date that the RSUs vest, the following actions happen:
1) A buy order is executed for N shares
2) A sell order is executed for N or N/3 (or your tax situation) shares
3) Three days later, this all settles into the brokerage account money market fund and then the taxes are withdrawn from there
4) I get a pay stub showing the RSU grant amount and the amount taken off for federal income taxes, social security tax (if I haven't already maxed it out), and medicare tax

I pay commissions on the sale, depending on my level with the company, just like if I was selling the shares myself. (I find this part quite annoying since there is nothing I can do about it.)

TFB has some great posts on RSUs: http://thefinancebuff.com/tag/rsu