What Happens to RSUs When You Leave a Company?

Restricted Stock Units (RSUs) represent a promise from an employer to grant shares of company stock to an employee once certain conditions, typically related to continued employment over a set period, are met. These units are a common form of equity compensation, designed to align employee interests with company performance and encourage retention. Understanding how these equity awards are treated when an individual leaves their employer is important for financial planning. This article will explain the typical outcomes for RSUs upon an employee’s departure.

Treatment of Vested RSUs

RSUs that have vested and been delivered to an employee’s brokerage account prior to departure are considered fully owned by the employee. These shares become the individual’s personal property, just like any other investment. Departure generally does not affect ownership of these vested shares.

These shares can be accessed and managed through the designated brokerage platform. The platform allows for sale, transfer, or continued holding. Employees should be aware of company policies that might restrict selling, such as insider trading blackout periods, which could apply for a short time after departure. Shares can be sold at any time after ownership transfers, subject to market conditions and restrictions.

Treatment of Unvested RSUs

Unvested RSUs are generally forfeited when an employee leaves a company, regardless of whether the departure is voluntary or involuntary. RSUs for which vesting conditions, primarily continued employment, have not been met by the separation date are lost. The forfeiture rule applies to the entire unvested portion.

Exceptions to this forfeiture rule may exist, depending on the company’s equity plan. One common exception is retirement, where some plans offer prorated or accelerated vesting if an employee meets specific age and service requirements. Death or disability are another common exception, with plans frequently including provisions for accelerated vesting of all or a portion of unvested RSUs. This ensures the employee or their beneficiaries receive the intended compensation.

Involuntary termination without cause may also include partial or accelerated vesting of unvested RSUs, depending on company policies or severance agreements. These provisions are not universal and depend on termination circumstances and negotiated terms. Employees should review termination agreements, as forfeiture is the default unless explicitly stated otherwise. The treatment of unvested RSUs directly impacts potential future compensation.

Tax Considerations on Departure

When RSUs vest, their value is treated as ordinary income, subject to income tax withholding and FICA (Social Security and Medicare) taxes, and reported on a W-2 form. If unvested RSUs accelerate and vest immediately upon departure due to clauses like retirement or involuntary termination, their fair market value at accelerated vesting is also considered ordinary income. This income is subject to federal, state, and local income taxes, as well as payroll taxes, with withholding often occurring from final payments or requiring a cash contribution.

For shares already vested and delivered to a brokerage account prior to departure, any subsequent sale has capital gains or losses implications. The cost basis for these shares is their fair market value on the vesting date. Selling shares for more than this cost basis results in a capital gain; selling for less results in a capital loss.

Capital gains or losses are short-term if shares were held for one year or less from vesting date to sale date, and long-term if held for more than one year. Short-term capital gains are taxed at ordinary income rates, while long-term capital gains benefit from lower preferential tax rates. The sale of these shares is reported to the IRS on Form 1099-B by the brokerage firm.

Understanding Your Company’s Specific Policies

The treatment of RSUs upon departure depends on the terms outlined in the employer’s equity incentive plan and individual grant agreements. These documents are the authoritative source for understanding how RSUs are handled under various termination scenarios. Employees should review their RSU plan document, detailing overall rules, and individual award agreements, specifying grant terms.

Employees should consult with Human Resources, the company’s stock plan administrator, or internal legal counsel to clarify RSU uncertainties. These professionals can provide guidance based on company policies and individual circumstances. When reviewing documents or speaking with administrators, look for clauses related to termination, including provisions for voluntary resignation, involuntary termination (with or without cause), retirement, death, and disability. Identify any post-termination deadlines for managing vested shares, such as specific windows for selling or transferring.