What Happens to Vested Stock When You Get Laid Off?

Equity compensation, often in company stock, comes with specific conditions before full ownership. During a layoff, understanding what happens to these holdings, especially “vested stock,” is a key concern when employment ends. This article clarifies the process and implications of vested stock after a layoff, providing guidance on managing these assets.

Understanding Your Vested Equity After Layoff

Vesting is the process by which an employee gains non-forfeitable ownership rights to equity granted by their employer. Once equity is vested, it belongs to the employee, even if employment ends. Unvested equity typically remains with the company upon termination.

Two common types of equity compensation are Restricted Stock Units (RSUs) and Stock Options. RSUs represent a promise to deliver company shares on a future date, provided certain conditions, usually continued employment, are met. Once RSUs vest, they convert into actual shares and are delivered to a brokerage account, often automatically.

Stock Options grant an employee the right to purchase company shares at a predetermined price, the strike price, within a specified timeframe. This right becomes available only after options have vested. There are two types: Non-Qualified Stock Options (NSOs) and Incentive Stock Options (ISOs). A Post-Termination Exercise Period (PTEP) is a limited window, often 90 days, during which vested options can be exercised before they expire. This period is usually shorter than the original option expiration date and varies by company plan and option type.

Accessing Your Vested Equity

The process for accessing vested equity differs for Restricted Stock Units (RSUs) and stock options. For vested RSUs, shares are generally delivered to the employee’s designated brokerage account automatically or with minimal action required. This delivery typically occurs shortly after the vesting date, converting units into actual shares that can then be held or sold.

Exercising vested stock options after a layoff requires deliberate action. Employees must initiate the exercise through the company’s designated brokerage platform or equity plan administrator within the specified Post-Termination Exercise Period (PTEP).

Several methods cover the cost of exercising options. A cash payment involves using personal funds to purchase shares at the strike price. A “cashless exercise” allows exercise without upfront cash by using a short-term loan from a brokerage firm, with proceeds from an immediate sale covering the exercise cost. “Sell-to-cover” involves immediately selling a portion of acquired shares to cover the exercise price and any associated taxes, with remaining shares delivered to the employee.

Tax Implications of Vested Equity

Understanding the tax treatment of vested equity is important, as it can significantly impact the net value received. For Restricted Stock Units (RSUs), the fair market value of shares at vesting and delivery is generally taxed as ordinary income. This income is typically reported on Form W-2. When these shares are later sold, any gain or loss from the value at vesting is treated as a capital gain or loss.

Non-Qualified Stock Options (NSOs) have a different tax profile. At exercise, the “bargain element”—the difference between the fair market value of shares and the exercise price—is taxed as ordinary income. This amount is also generally subject to payroll taxes and reported on Form W-2. Any subsequent gain or loss when the shares are sold is treated as a capital gain or loss.

Incentive Stock Options (ISOs) offer unique tax advantages but come with specific rules. Generally, no ordinary income tax is due at exercise for ISOs. However, the “bargain element” at exercise may be subject to the Alternative Minimum Tax (AMT). To receive favorable long-term capital gains treatment, ISO shares must be held for at least two years from the grant date and one year from the exercise date. If these holding periods are not met, a “disqualifying disposition” occurs, and a portion of the gain may be taxed as ordinary income.

For all equity types, the cost basis for calculating capital gains or losses is the value at which income was recognized. Capital gains are short-term if held for one year or less after the taxable event, and long-term if held for more than one year, with long-term rates typically lower. Sales of shares are reported on Form 1099-B.

Managing Your Vested Equity After Layoff

Effective management of vested equity after a layoff requires careful attention to specific deadlines and documentation. For stock options, identify and adhere to the Post-Termination Exercise Period (PTEP), as failure to exercise within this window will result in forfeiture. This information can be found in the company’s equity plan documents, grant agreements, or by contacting the human resources department or equity plan administrator.

For Restricted Stock Units (RSUs), confirming the delivery of vested shares to the correct brokerage account is a necessary step. While RSU delivery is often automatic, verifying the transfer ensures proper ownership and access. Individuals should review all layoff-related documentation, including severance agreements and summaries of equity plans, as these documents may contain specific clauses pertaining to the treatment of vested equity.

Contact the company’s designated equity plan administrator or human resources department for clarity on specific vested equity holdings and the post-layoff process. They can offer details on access procedures and any remaining restrictions. Seeking guidance from a personal financial advisor or tax professional is advisable to understand financial and tax implications, especially when planning for potential sales or diversification. These professionals can assist with tax planning strategies and investment decisions.