Do Restricted Stock Units Expire or Are They Forfeited?

Restricted Stock Units (RSUs) represent a form of compensation granted by an employer, promising to deliver company stock to an employee at a future date. Unlike immediately owned shares, RSUs are not directly transferred at the time of the grant. These units remain “restricted” because their eventual ownership is contingent upon meeting specific conditions, most commonly tied to the employee’s continued service to the company.

Understanding RSU Vesting Schedules

The process by which an employee gains full ownership of their Restricted Stock Units is known as vesting. Vesting schedules are predetermined timelines or conditions that dictate when the restrictions on RSUs are lifted, allowing them to convert into actual shares. If the conditions for vesting are not met, the unvested RSUs are typically forfeited rather than expiring in the traditional sense.

One common arrangement is time-based vesting, where a portion of the RSU grant becomes available to the employee over a set period. For example, a grant might vest 25% each year over four years. Another variation is “cliff” vesting, where no shares vest until a specific period, such as three years, has passed, after which the entire grant or a significant portion vests at once. If an employee’s service ends before a scheduled vesting date, any unvested units associated with that future date are generally relinquished.

Performance-based vesting represents another structure, where RSUs convert into shares only if certain company or individual performance targets are achieved. These targets could be tied to specific financial metrics, such as revenue growth or profit margins, or to the completion of particular strategic projects. If the defined performance goals are not met within the stipulated timeframe, the unvested units tied to those goals will not convert into shares and are consequently forfeited. RSUs do not have an expiration date; their fate is determined by the fulfillment of their vesting conditions.

What Happens at Vesting

Upon the successful completion of a vesting period, the restrictions on the Restricted Stock Units are lifted, and they transform into actual, unrestricted shares of the company’s stock. The company typically handles the conversion process automatically, and the newly vested shares are then deposited into the employee’s designated brokerage account.

Once the shares are in the employee’s brokerage account, they are fully owned by the employee, meaning they can be sold immediately or held as a long-term investment. The value of the shares at the time of vesting is generally considered taxable ordinary income to the employee. This income is subject to federal income tax, Social Security, and Medicare taxes, and potentially state income tax, with the employer typically withholding a portion of the shares or cash to cover these tax obligations.

Forfeiture Scenarios

Restricted Stock Units are forfeited when the conditions set forth in their vesting schedule are not met. This means the employee loses all rights to the unvested units, and they will never convert into actual shares.

One of the most frequent reasons for forfeiture is the termination of employment. If an employee leaves the company, whether voluntarily or involuntarily, before their RSUs have vested, all outstanding unvested units are typically forfeited immediately upon their departure.

For performance-based RSUs, a common forfeiture scenario arises when the defined performance targets are not achieved. If the company or individual goals set for a specific vesting tranche are not met by the specified deadline, the RSUs tied to those goals will not vest and are consequently forfeited. Some RSU plans also include provisions for forfeiture due to a breach of employment terms, such as severe misconduct or violation of company policies. In such cases, the employee may lose their unvested RSUs even if they remain employed, depending on the severity and nature of the breach as outlined in the grant agreement.