What Happens to RSUs When Laid Off?
Unpack the complex reality of Restricted Stock Units (RSUs) during a layoff. Learn how to assess your equity and manage its financial impact.
Restricted Stock Units (RSUs) are a form of equity compensation. They promise company stock shares to an employee once conditions, usually continued employment, are met. Unlike stock options, RSUs have inherent value from grant, representing actual shares rather than a right to purchase. This article clarifies their implications during a layoff.
Understanding RSU Vesting and Layoff Impact
The concept of “vesting” is central to understanding RSU handling during a layoff. Vesting is when an employee gains full ownership of RSU shares, transitioning them from conditional promise to property. Until RSUs vest, they are unearned and not the employee’s property.
Companies use vesting schedules to dictate ownership transfer. Cliff vesting is common, where a large portion or all RSUs vest on a single date, often after one year. Subsequent portions may vest incrementally (e.g., quarterly, monthly) over years. Graded vesting is another method: a percentage vests each year (e.g., 25% over four years).
When a layoff occurs, the distinction between unvested and vested RSUs matters. Unvested RSUs are forfeited upon termination. As they haven’t met vesting conditions, the employee doesn’t gain ownership; they revert to the company. Unvested RSUs are a future incentive tied to continued service.
Conversely, vested RSUs are the employee’s property. Once vested, shares are delivered to the employee’s brokerage account. Even if delivery occurs after layoff, the employee retains rights as vesting conditions were met before termination. The RSU grant agreement governs this, ensuring earned shares transfer as scheduled.
Accessing and Interpreting Your RSU Grant Information
Reviewing your RSU grant documentation is essential to understand their fate post-layoff. The primary document is your RSU Grant Agreement, or Award Agreement. This contract outlines the terms and conditions for your RSU award, including termination.
Beyond the individual grant agreement, examine the company’s Equity Incentive Plan. This plan provides rules and definitions for all company equity awards. Your grant agreement often references this plan; review both for understanding your rights. Look for sections addressing “Termination of Employment,” “Forfeiture,” or “Involuntary Termination.”
These sections detail any accelerated vesting provisions in a layoff or involuntary termination. While less common for RSUs than stock options, some companies include such clauses in severance or change-of-control scenarios. These provisions allow certain unvested RSUs to vest sooner upon a qualifying termination. Such exceptions are not universal and depend on company policies and agreement.
To access these documents, check your former employer’s HR portal or the equity plan administrator’s platform. Common administrators include Fidelity, ETRADE, Charles Schwab, or Morgan Stanley. If electronic access is unavailable, contact the former company’s HR or benefits department to request copies of your RSU grant agreement and equity incentive plan. These documents contain answers regarding your RSU entitlements.
Tax Implications and Post-Layoff Considerations
RSU tax treatment is important after a layoff. When RSUs vest and shares are delivered, their fair market value on the vesting date is ordinary income. This income is subject to federal income tax, Social Security taxes (6.2% up to an annual limit), and Medicare taxes (1.45% with no wage limit), plus state and local income taxes.
Your former employer withholds these taxes at vesting. This often occurs via “net share settlement,” where vested shares are sold to cover tax obligations, with the remainder going to you. This income is reported on your IRS Form W-2 for the year RSUs vested. The tax event occurs at vesting, whether you sell or hold the shares.
Unvested RSUs forfeited due to layoff have no tax implications. As these shares never vested or became your property, no income was realized, and no taxable event occurred. Forfeiture means potential income was never earned.
After RSUs vest and shares are delivered post-layoff, you have two options: selling or holding them. Selling shares immediately can simplify your tax situation by eliminating potential capital gains or losses if the sale price is close to the vesting date’s fair market value.
If you hold shares, your cost basis is their fair market value on the vesting date. Any subsequent increase in value above this cost basis, upon sale, is a capital gain, taxed at short-term rates (for shares held one year or less) or long-term rates (for shares held more than one year). Conversely, if the share price decreases below your cost basis, you incur a capital loss. Consult a tax advisor or financial planner to understand your tax obligations and manage these shares, especially given your changed employment status.