What Happens to RSUs If You’re Laid Off?

Restricted Stock Units (RSUs) are a common form of equity compensation, granting employees company shares that vest over time. These units are promises of stock, becoming actual shares only after specific conditions are met. This article explores the typical fate of RSUs when an employee experiences a layoff, covering vesting, termination impact, tax considerations, and company policies. Rules and outcomes vary significantly based on the employer’s RSU plan documents.

Understanding RSU Vesting

The process of RSU vesting dictates when employees gain full ownership of their granted shares. RSUs become “vested” when grant conditions are satisfied, typically continued employment for a certain period.

Unvested RSUs are those granted shares that have not yet met these conditions, meaning the employee does not have full rights to them. Conversely, vested RSUs are those for which conditions have been fulfilled, and the employee owns the shares outright.

Common vesting schedules include “cliff vesting,” where a significant portion of shares vests all at once after an initial waiting period, often one year. “Graded vesting” allows shares to vest in increments over time, such as a percentage vesting annually over several years.

Impact of Layoff on Your RSUs

Upon termination of employment, including a layoff, unvested Restricted Stock Units are almost universally forfeited. Since the condition of continued employment is no longer met, these shares are returned to the employer.

Shares that have already vested before the layoff are generally retained by the employee. These vested shares are considered the employee’s property, as they have fulfilled the grant conditions.

However, employees must be aware of a post-termination sale window for these vested shares. This is a limited timeframe, often ranging from 30 to 90 days, during which the laid-off employee must sell their vested shares. Missing this deadline can lead to the forfeiture of even previously vested shares.

Tax Considerations

Restricted Stock Units are taxed as ordinary income when they vest. The taxable amount is the fair market value of the shares on the vesting date. This income is reported on the employee’s W-2 form for the year vesting occurs.

Employers typically withhold taxes, including federal income tax, Social Security, and Medicare (FICA), at vesting. This withholding often occurs through a “sell to cover” method, where a portion of newly vested shares is sold to cover the tax liability.

For vested shares held after a layoff and subsequently sold, any difference between the sale price and the fair market value at vesting (the “cost basis”) is treated as a capital gain or loss. If shares are sold within one year of vesting, any gain is a short-term capital gain, taxed at ordinary income rates. If held for more than one year after vesting, any gain qualifies as a long-term capital gain, generally subject to lower tax rates.

Navigating Company-Specific Policies

Understanding the implications for your RSUs after a layoff requires consulting specific company documents, as policies vary significantly. The primary documents to review are your individual RSU grant agreement and the broader RSU plan document. These outline the terms and conditions governing your awards, including termination provisions.

Any severance package documents from your former employer may also contain clauses related to RSU treatment. Contact the former company’s Human Resources (HR) department, benefits administrator, or stock plan administration team for clarification. They can provide definitive answers regarding deadlines, such as the post-termination sale window, and confirm any unique conditions.