What Happens to Vested Stock When You Quit?

Upon leaving a job, understanding what happens to vested stock is important for managing personal finances during a career transition. These assets, typically granted as part of an employee’s compensation package, can represent a substantial portion of their wealth. This article clarifies the general outcomes for vested stock upon employment separation.

Understanding Vested Stock

Vesting is the process through which an employee gains full ownership rights to their equity awards. Once stock is vested, it becomes non-forfeitable. Before vesting, equity awards are unvested and subject to forfeiture if conditions, such as continued employment for a set period, are not met.

Equity compensation often includes Restricted Stock Units (RSUs), stock options, and shares acquired through Employee Stock Purchase Plans (ESPPs). Vesting applies to these forms, signifying when the employee transitions from a potential right to outright ownership. This mechanism encourages employee retention and aligns employee interests with company performance.

Handling Vested Stock After Quitting

The disposition of vested stock upon leaving a company depends on the specific type of equity award. For vested Restricted Stock Units (RSUs), shares are typically delivered to the employee’s brokerage account once they vest. Since these shares are owned outright, their status is unaffected by employment separation; the employee retains full ownership and can choose to hold or sell them.

Vested stock options, including Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NSOs), operate differently. Upon termination, employees typically enter a “post-termination exercise period” (PTEP) during which they must “exercise” their vested options. Exercising an option means purchasing company shares at a pre-determined strike price. This exercise window is often limited, commonly ranging from 30 to 90 days after the last day of employment, though it can sometimes be longer for NSOs.

If vested stock options are not exercised within this period, they are typically forfeited back to the company. While some companies may extend this period, particularly for NSOs, ISOs generally lose their favorable tax treatment if not exercised within 90 days following termination. Employees should ensure they have access to the brokerage accounts where these options are held to initiate the exercise process.

For shares acquired through an Employee Stock Purchase Plan (ESPP), once purchased, the shares are owned by the employee. These shares are not subject to additional vesting periods like RSUs or options and remain with the employee after separation. Employees can hold, sell, or transfer these shares as they would any other stock.

Taxation of Vested Stock Upon Separation

The tax implications of vested stock vary depending on the type of equity and transaction timing. For Restricted Stock Units (RSUs), the fair market value of shares at vesting is generally taxed as ordinary income. This amount is typically included in the employee’s W-2 form for the year of vesting. If shares are held after vesting and later sold, any difference between the sale price and the fair market value at vesting is treated as a capital gain or loss.

Non-Qualified Stock Options (NSOs) are taxed at exercise. The “bargain element,” the difference between the fair market value of the stock on the exercise date and the strike price, is typically taxed as ordinary income. Employers are generally required to withhold taxes, including federal income, Social Security, and Medicare taxes, on this amount at exercise. Any subsequent gain or loss when shares are sold is treated as a capital gain or loss, with long-term capital gains rates applying if held for over a year after exercise.

Incentive Stock Options (ISOs) receive different tax treatment. There is no ordinary income tax liability at exercise for ISOs. However, the difference between the fair market value and the strike price at exercise may be subject to the Alternative Minimum Tax (AMT). To qualify for favorable long-term capital gains treatment upon sale, 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, the disposition is “disqualifying,” and a portion of the gain may be taxed as ordinary income, similar to NSOs.

Employee Stock Purchase Plans (ESPPs) are generally taxed upon the sale of shares. Tax treatment depends on whether the sale is a “qualified disposition” or a “disqualifying disposition,” determined by specific holding periods (typically, two years from the offering date and one year from the purchase date). In a qualified disposition, the discount received at purchase is taxed as ordinary income, and any additional gain is taxed as a long-term capital gain.

For a disqualifying disposition, the discount and potentially additional appreciation are taxed as ordinary income. Employers typically provide Form 3922 and may report ESPP income on the W-2. Consult a qualified tax advisor due to the complexities involved.

Importance of Company Plans and Agreements

While the general principles outlined provide a broad understanding, specific details regarding vested stock are always governed by the company’s official documents. These include the equity incentive plan, individual grant agreements, and internal human resources policies. These documents contain precise information on vesting schedules, post-termination exercise periods, potential forfeiture clauses, and other conditions that apply to an employee’s situation.

The exact timeframe to exercise vested stock options or any unique provisions for RSUs are explicitly detailed in these agreements. Review all relevant documents received from the former employer upon separation. Contacting the company’s human resources department or the plan administrator can provide necessary clarifications and ensure all terms are understood and adhered to, helping to manage equity assets effectively during a career transition.