What Happens to Vested RSUs When You Leave a Company?

Restricted Stock Units (RSUs) are a form of equity compensation granted by companies. An RSU is a promise from an employer to deliver company shares or their cash equivalent on a future date, provided certain conditions are met. These conditions typically involve continued employment for a set period, known as the vesting schedule, or the achievement of specific performance milestones. Once these conditions are satisfied, the RSUs are “vested,” meaning the employee gains full ownership rights to those shares. When employees leave a company, questions often arise about their awarded RSUs. Generally, any RSUs that have vested by the time of departure remain the property of the former employee, while unvested units are typically forfeited.

Accessing Your Vested Shares

After leaving a company, accessing your vested Restricted Stock Unit (RSU) shares involves procedural steps managed through the company’s designated equity plan administrator. This administrator, often a large brokerage firm, serves as the custodian for these employee stock awards. The process typically begins with the company’s human resources or payroll department notifying the administrator of your departure.

The equity plan administrator then facilitates the transfer of your vested shares from the company’s equity plan into a personal brokerage account. This account might be one you already have with the administrator, or you may need to establish a new one. While the shares are legally yours upon vesting, their actual delivery, or “settlement,” can occur simultaneously with vesting or at a later date due to administrative processes.

Timelines for this transfer can vary, but generally, vested shares are made available shortly after your final employment date. You might receive communications from the plan administrator requesting confirmation of your brokerage account details or requiring your signature on specific forms to authorize the transfer. Promptly responding to these requests helps ensure a smooth and timely distribution of your shares.

Some companies have specific policies regarding the distribution of vested shares post-employment, though these usually pertain to unvested awards. While unvested RSUs are almost universally forfeited upon an employee’s voluntary departure, some agreements may include provisions for accelerated vesting under specific circumstances, such as retirement, disability, or certain executive contracts. It is important to consult your grant agreement for any unique terms that might apply to your situation.

Tax Considerations Upon Departure

The tax treatment of vested Restricted Stock Units (RSUs) is an important consideration, especially when an employee leaves a company. The most significant tax event for RSUs occurs at the time of vesting, where the fair market value (FMV) of the vested shares is treated as ordinary income. This income is subject to federal income tax, just like your regular wages or a cash bonus.

In addition to federal income tax, vested RSUs are also subject to payroll taxes, specifically Social Security and Medicare taxes (FICA). Employers are generally required to withhold these taxes, along with federal income tax, at the time of vesting. This withholding is often performed through a “sell-to-cover” mechanism, where a portion of the newly vested shares is automatically sold to generate funds for the tax liabilities before the remaining shares are deposited into your brokerage account.

The value of the vested RSUs, including the amount withheld for taxes, is reported on your Form W-2 for the year in which they vested, appearing as part of your total taxable wages. While employers typically withhold federal income tax at a supplemental wage rate (e.g., 22% for amounts up to $1 million and 37% for amounts exceeding $1 million), this might not fully cover your actual tax liability, depending on your overall income and tax bracket. You may need to adjust your tax withholding or make estimated tax payments to avoid underpayment penalties.

Once the shares are transferred to your personal brokerage account, any subsequent change in their value from the vesting date to the date of sale will be subject to capital gains or losses. If you sell the shares within one year of the vesting date, any profit will be considered a short-term capital gain, taxed at your ordinary income tax rate. Conversely, if you hold the shares for more than one year after vesting, any profit will be treated as a long-term capital gain, generally subject to lower tax rates, which can be 0%, 15%, or 20% depending on your taxable income.

Accurately calculating the cost basis of your RSU shares is important for reporting capital gains or losses. The cost basis is typically the fair market value of the shares on their vesting date. It is common for brokerage statements (Form 1099-B) to initially report a zero cost basis for RSUs, requiring you to manually adjust this figure to prevent overstating your capital gains and paying excess tax. Finally, remember that state and local income taxes may also apply to your RSU income, with rates and rules varying by jurisdiction.

Exercising Control Over Your Shares

Once you have gained access to your vested RSU shares and understand their tax implications, you have several options for managing them. Many individuals choose to sell their vested shares immediately upon settlement. This strategy helps satisfy tax obligations and can provide immediate liquidity, allowing you to diversify your investments or meet other financial goals.

Alternatively, you may decide to hold onto your vested shares. While this allows for potential future appreciation, it is important to consider principles of diversification. Holding a significant portion of your wealth in a single company’s stock, especially that of a former employer, can concentrate risk. Financial guidance often suggests limiting exposure to any single stock to no more than 10% to 15% of your total investment portfolio.

Even after leaving a company, certain trading restrictions might still apply, particularly if you were privy to material non-public information. Former employees, especially those in executive or sensitive roles, may be subject to company-specific trading blackout periods or insider trading rules for a certain duration. It is advisable to consult your former employer’s policies or seek legal counsel if you have concerns about such restrictions.

You also have the flexibility to transfer your vested shares to a different brokerage account or integrate them into another investment vehicle. This can be beneficial for consolidating your investments or working with a financial advisor who manages accounts at a different institution. Such transfers typically involve coordinating with both the current and receiving brokerage firms.