- Q. What is a Restricted Stock Award?
- A. A Restricted Stock Award is a grant of company stock in which the recipient’s rights in the stock are restricted until the shares vest (or lapse in restrictions). The restricted period is called a vesting period. Vesting periods can be met by the passage of time, or by company or individual performance. If the recipient does not meet the conditions the company set forth prior to the end of the vesting period, the shares are typically forfeited.
- Q. How is a Restricted Stock Award different from a Restricted Stock Unit?
- A. Like a Restricted Stock Award, a Restricted Stock Unit is a grant valued in terms of company stock. Unlike a Restricted Stock Award, no company stock is issued at the time of a Restricted Stock Unit grant, and therefore no Special Tax 83(b) Elections can be made at grant. After a grant recipient satisfies the vesting requirement, the company distributes shares or the cash equivalent of the number of shares used to value the unit. If the plan rules allow it, the company may require or the recipient may choose to defer distribution to a later date. Vesting requirements can be met by the passage of time, or by company or individual performance. If the recipient does not meet the conditions the company set forth prior to the end of the vesting period, the shares are typically forfeited.
- Q. How is a Restricted Stock Award different from control and restricted stock?
- A. Restricted stock awards and control and restricted stock are two entirely different concepts. Restricted stock awards relate to equity compensation, and control and restricted stock to securities law. A restricted stock award is a form of equity compensation subject to an agreement (the grant agreement) defining the recipient’s rights under the issuer’s equity compensation plan. Control and restricted stock involves unregistered shares of stock that are restricted by SEC Rule 144.
- Q. Are there any tax consequences that I need to be aware of if I am granted Restricted Stock Awards?
- A. Yes. Under normal federal income tax rules, an employee receiving Restricted Stock Awards is not taxed at the time of the grant (assuming no election under section 83(b) has been made, as discussed below). Instead, the employee is taxed at vesting, when the restrictions lapse. The amount of income subject to tax is the difference between the fair market value of the grant at the time of vesting minus the amount paid for the grant, if any.
- For grants that pay in actual shares, the employee’s holding period begins at the time of vesting, and the employee’s tax basis is equal to the amount paid for the stock plus the amount included as ordinary compensation income. Upon a later sale of the shares, assuming the employee holds the shares as a capital asset, the employee would recognize capital gain income or loss; whether such capital gain would be short- or long-term depends on the time between the beginning of the holding period at vesting and the date of the subsequent sale. Consult your tax adviser regarding the income tax consequences to you.
- Q. What is a Special Tax 83(b) election?
- A. Section 83(b) of the Internal Revenue Code permits the taxpayer to change the tax treatment of their Restricted Stock Awards. Employees choosing to make the Special Tax 83(b) election are electing to include the fair market value of the stock at the time of the grant minus the amount paid for the shares (if any) as part of their income (without regard to the restrictions). They will be subject to required tax withholding at the time the Restricted Stock Award is received. In addition to the immediate income inclusion, a Special Tax 83(b) election will cause the stock’s holding period to begin immediately after the award is granted.
- Also with a Special Tax 83(b) election, employees will not be subject to income tax when the shares vest (regardless of the fair market value at the time of vesting), and they will not be subject to further tax until the shares are sold. Subsequent gains or losses of the stock would be capital gains or losses (assuming the stock is held as a capital asset). However, if an employee were to leave the company prior to vesting, he would not be entitled to any refund of taxes previously paid or a tax loss with respect to the stock forfeited.
- Q. How long do I have to make an 83(b) election?
- A. A Special Tax 83(b) election must be filed in writing with Internal Revenue Service (IRS) no later than 30 days after the date of the grant, and you must send a copy to your company.
- Q. What are the potential advantages of taking a Special Tax 83(b) election?
- A. There are several potential advantages with a Special Tax 83 (b) election:
- Establish your cost basis now. By paying tax on your grant now, rather than when the shares vest, the current stock price will be established as the cost basis for the shares granted. When the shares do vest, no tax will be due until the shares are sold, regardless of how much the shares may have changed in value.
- Control the timing of future income recognition. Gain (or loss) would be recognized only when the stock is actually sold and would not be triggered by the lapse of restrictions at vesting.
- Capital gains treatment. Assuming the stock is held as a capital asset, future gains (or losses) would be taxed only as capital gains, and therefore would be subject to favorable capital gains tax rates.
- Whether to make a Special Tax 83(b) election is an important tax and financial decision, and employees are urged to consult their tax advisers.
- Q. What are the potential disadvantages of taking a Special Tax 83(b) election?
- A. There are several potential disadvantages to consider:
- Falling share prices. If the stock price declined by the vesting date, there is a risk that you would pay more tax based on the fair market value on the grant date than you would be obligated to pay at vesting based on the fair market value of the stock at vesting.
- Timing of tax payment. Since taxes are due when the award is granted, you must use other funds to pay the tax withholding obligation. Under normal tax treatment, you do not owe taxes until the grant vests, and you could potentially use some of the shares vesting to cover your tax withholding obligation.
- Risk of forfeiture. If you forfeit your restricted stock award (e.g., by leaving the company before the stock vests), you would not be entitled to any loss for tax purposes with respect to the restricted stock award. Additionally, you would not be able to receive any refunds on the tax paid on your restricted stock award.
- Q. What steps do I need to take to make a Special Tax 83(b) Election?
- A. You must fill out a Special Tax 83(b) election form and file it with the Internal Revenue Service (IRS) within 30 days from the date of grant. You must also send a copy of the Special Tax 83(b) election to your employer, and you must attach a copy of the form when you file your yearly income tax return. Consult your tax adviser regarding the income tax consequences to you.
- For your convenience, the Special Tax 83(b) election form can be accessed by clicking here (PDF) . This page will open in a popup window..
- Q. What are my options for paying my tax withholding obligation once my Restricted Stock Award vests?
- A. Assuming you did not make a Special Tax 83(b) election, you can either net shares, sell shares or pay cash (depending on the rules of your plan).
- Under the netting of shares option, you are instructing your employer to withhold enough shares to pay the tax withholding due at vesting. You will be left with the number of shares that vested less the number of shares withheld to cover your tax withholding obligation.
- If you elect to sell shares, you will need to provide Fidelity with a one-time authorization which gives Fidelity the authority to sell a portion of your vesting shares to cover your tax withholding obligation. Once accepted, the authorization is good for all subsequent sell shares elections. Click the 'View & Accept Agreements/Instructions' link from your plan summary page to accept your Trade Direction Instructions. You will be left with the number of shares that vested less the number of shares sold to cover your tax withholding obligation, plus any residual cash from the sale of shares.
- If you decide to pay cash, you will need to have enough cash in your Fidelity AccountSM on the day of vesting to cover your tax withholding obligation. Once you vest Fidelity will debit the amount necessary to cover your tax withholding obligation from your account and forward it to your company for reporting and remitting it to the appropriate regulatory agencies.
- The following examples illustrate how each option works.
- Mike has 250 shares of Restricted Stock Award vesting on January 1, 2004. Assume the stock price on January 1 is $10 per share and the tax withholding obligation is $725.
- Example 1 – Net Shares
- When the 250 shares vest on January 1, Mike’s company will withhold 73 of the shares (73 shares X $10 per share = $730) in order to cover the $725 tax withholding obligation. Any overage will go towards Mike’s federal income tax ($725 to cover his tax withholding obligation and $5 overage). He will be left with 177 shares (250 vested shares – 73 shares withheld to cover his tax withholding obligation = 177 shares remaining).
- Example 2 – Sell Shares
- When 250 shares vest on Jan 1, Fidelity will sell 73 of the shares (73 shares X $10 per share = $730) in order to cover the $725 tax withholding obligation. Any overage will remain in Mike's account, though additional shares may be sold to cover any commission and fees from the sale of shares. He will be left with 177 shares (250 vested shares - 73 shares withheld to cover his tax withholding obligation = 177 shares remaining).
- Example 3 – Pay Cash
- On January 1 Mike needs to have $725 cash in his Fidelity AccountSM in order to cover his tax withholding obligation. When the 250 shares vests on January 1, 2004, $725 will be debited from Mike’s account and forwarded his company for reporting and remitting to the appropriate regulatory agencies to cover his tax withholding obligation. Mike is left with the 250 shares that vested less the $725 cash that was used to cover his tax withholding obligation.
- Q. How do I let Fidelity know if I plan to pay cash, net shares, or sell shares to cover my tax withholding obligation?
- A. You can make or change your tax withholding method election from either NetBenefits.com or Fidelity.com. Once you log in, go to the Portfolio page and click your Restricted Stock Award plan name to display the Restricted Stock Award Summary page, which lists all of your Restricted Stock Awards. Use the drop down menu to the right of your Restricted Stock Award to make or change your election.
- Q. When do I need to make my election?
- A. A default election, decided by your company, will be made for you if you have not made an election 15 days prior to vesting. You can change your tax withholding method election up to seven days prior to vesting.
- Q. What happens to my Restricted Stock Award once it vests?
- A. Once the holding period has been met, the shares or cash equivalent (depending on your company’s plan rules) of company stock are automatically deposited into your Fidelity AccountSM. Once the shares have vested, you own them outright, and may hold, sell, or otherwise dispose of them without risk of forfeiture. If your grant is paid in cash you may use it as you would any other cash in your account.
- Q. What is a vesting schedule?
- A. The pre-determined period in which shares must be held before an employee can take ownership of a Restricted Stock Award.
- Q. How can I determine how much will be withheld for taxes upon vesting?
- A. You can use Fidelity’s Restricted Stock Award calculator to estimate your tax withholding obligation. To access the calculator, go to NetBenefits.com or Fidelity.com and view your Restricted Stock Award plan. Click Estimate Gain to estimate your tax withholding obligation. Enter your grant data to estimate taxable income and tax withholding on vesting.
- Q. What happens to my Restricted Stock Award if I leave my employer prior to my vesting date?
- A. If you leave your employer prior to the date your Restricted Stock Awards vest, typically you forfeit your grants. Check your company’s plan for details.
- Q. What happens to my Restricted Stock Award if I retire, die, or become disabled?
- A. There are usually special rules in the event you retire, die, or become disabled. See your employer’s plan rules for details.