What Happens to Your RSUs When You Leave a Company?

Restricted Stock Units (RSUs) have become a common component of compensation packages, particularly within larger corporations. These equity awards represent a promise from an employer to grant company stock to an employee once specific conditions are met. For many employees, RSUs constitute a significant portion of their overall compensation. A frequent question that arises for employees holding these units pertains to their fate if they leave their current employment.

Understanding RSU Vesting and Forfeiture

Restricted Stock Units are a form of equity compensation that companies use to attract and retain talent. Unlike traditional stock options, RSUs do not require an employee to purchase the shares; instead, they are granted for free and gain value only after certain conditions are satisfied.

The process by which an employee gains full ownership of their RSUs is known as “vesting.” This process occurs over a predetermined period, often contingent on continued employment or the achievement of specific performance goals. Until RSUs vest, employees do not hold full ownership rights to the underlying stock. Once vested, these units convert into actual shares, which are then delivered to the employee.

Vesting schedules, outlining when and how RSUs become fully owned, vary between companies but commonly fall into distinct categories. Time-based vesting is prevalent, where a percentage of RSUs becomes available at regular intervals over a set number of years, such as 25% annually over a four-year period. Another common structure is “cliff vesting,” where no shares vest for an initial period, often one year, after which a substantial portion or all of the RSUs vest simultaneously. After a cliff, remaining units may vest gradually.

Performance-based vesting ties the release of RSUs to the achievement of specific company or individual performance targets. Some plans may also combine these methods, incorporating both time and performance criteria. The concept of “forfeiture” is linked to vesting; if an employee departs before their RSUs have vested, those unvested units are typically lost and revert back to the company. This mechanism incentivizes employees to remain with the company for the duration of their vesting schedule.

Impact of Departure Type on RSUs

The circumstances of an employee’s departure influence the treatment of their Restricted Stock Units. The terms governing RSUs are detailed within the RSU grant agreement and the company’s overarching equity plan. These documents are the definitive source of information, and understanding their provisions is crucial for employees to anticipate the outcome for their equity compensation.

When an employee voluntarily resigns, any unvested RSUs are immediately forfeited upon departure. However, RSUs that have already vested by the departure date remain the property of the employee. Some grant agreements, particularly for executives or key personnel, may include provisions for accelerated vesting upon resignation, though this is not a universal practice.

In cases of involuntary termination, the treatment of RSUs depends on the reason for separation. If an employee is terminated due to a layoff or company restructuring, unvested units are forfeited, while vested shares are retained. Companies might, in some instances, choose to accelerate vesting partially or fully during layoffs, but this is at their discretion. If termination is for “cause,” such as misconduct or a policy violation, grant agreements stipulate the immediate forfeiture of all unvested RSUs. In more severe cases, some agreements may even allow for the forfeiture of previously vested shares, though this is less common and depends on the specific terms outlined in the grant agreement.

Retirement triggers favorable provisions for RSU holders. Many companies offer retirement clauses, which may include continued vesting of unvested RSUs or accelerated vesting for employees who meet certain age and service criteria. For example, a company’s plan might specify that employees reaching age 55 with 10 years of service qualify for such treatment. These provisions are designed to reward long-term employees and ensure their accumulated equity is not entirely lost upon retirement.

In cases of an employee’s death or permanent disability, RSU plans include provisions for accelerated vesting or immediate settlement of unvested units. These provisions ensure that the value of the equity is not lost and can be passed on to the employee’s beneficiaries or directly benefit the employee themselves. For instance, all unvested RSUs may immediately vest and be paid out to designated beneficiaries or the estate. These provisions provide financial security during difficult circumstances.

Tax Considerations Upon Departure

The taxation of Restricted Stock Units is important for employees to understand. When RSUs vest and convert into company shares, the fair market value of those shares at the time of vesting is treated as ordinary income. This income is subject to federal, state, and payroll taxes, similar to how a cash bonus or regular salary would be taxed. The amount is reported on the employee’s Form W-2 for the year in which the vesting occurs.

Employers are required to withhold taxes at the time of RSU vesting. This withholding includes federal income tax, often at a supplemental wage rate of 22% for income up to $1 million, along with Federal Insurance Contributions Act (FICA) taxes, which cover Social Security and Medicare. FICA taxes are applied to the fair market value of the vested shares. Companies often satisfy these withholding requirements by selling a portion of the newly vested shares, a practice known as “sell-to-cover.”

Once RSUs have vested and the shares are delivered, any subsequent sale of these shares may trigger capital gains or losses. The cost basis for calculating capital gains or losses is the fair market value of the shares at the time they vested, as this amount was already taxed as ordinary income. If the shares are sold immediately after vesting, there is typically little capital gain or loss, as the sale price is generally close to the vesting date’s fair market value.

If the vested shares are held for an extended period before being sold, capital gains or losses will arise from the difference between the sale price and the vesting date’s fair market value. The tax rate applied to these capital gains depends on the holding period after vesting. Shares held for one year or less after vesting are subject to short-term capital gains tax, which is taxed at the individual’s ordinary income tax rate. Shares held for more than one year after vesting qualify for long-term capital gains tax, which is typically taxed at a lower rate. State and local taxes may also apply, depending on the individual’s residence and the company’s operations.

Managing Vested RSUs After Leaving

After an employee departs a company, the management of their vested Restricted Stock Units becomes a personal responsibility. Vested shares are held in a company-designated brokerage account, which is often established by the employer with a third-party financial institution. Upon leaving, the individual will need to understand how to access and manage these shares within that brokerage platform. In some cases, the brokerage account may transition from an employer-sponsored plan account to a personal investment account, or the former employee may need to transfer the shares to a different brokerage of their choice.

Individuals have two primary options for their vested shares: selling them or holding them. The decision to sell immediately or hold depends on various factors, including an individual’s personal financial goals, their overall investment portfolio diversification, and their outlook on the company’s future performance. Selling shares immediately after vesting to cover taxes can provide immediate liquidity and eliminate exposure to the volatility of a single stock.

Holding the shares allows for potential appreciation in value over time, but it also carries the risk of depreciation. When deciding to hold, consider the tax implications of future sales, differentiating between short-term and long-term capital gains based on the holding period since vesting. Maintaining a diversified investment portfolio helps mitigate risk, and concentrating too much wealth in a single company’s stock, even a former employer’s, can be financially risky.

Be aware of any potential deadlines or timelines for taking action on vested shares after leaving a company. Some corporate brokerage accounts may have specific periods, often ranging from 30 to 90 days, within which former employees must either sell their shares or transfer them to another personal brokerage account. Failure to adhere to these timelines could result in temporary restrictions on access or administrative complexities. Reviewing the terms and conditions provided by the brokerage firm and the former employer’s equity plan documents is advisable to ensure a smooth transition and management of these assets.