What Happens to Your RSUs When You Quit?

Restricted Stock Units (RSUs) are a form of equity compensation where companies promise to deliver shares or their cash equivalent at a future date, provided conditions like continued employment are met. RSUs incentivize employees by aligning their interests with the company’s long-term success and encouraging retention. This compensation mechanism is a common component of pay packages, especially in publicly traded companies.

Understanding Vesting Status

The concept of vesting determines when an employee gains full ownership of their Restricted Stock Units. Unvested RSUs are subject to restrictions and not yet owned by the employee. Conversely, vested RSUs are those for which all conditions have been satisfied, and the employee fully owns the underlying shares. Upon an employee’s departure, the distinction between vested and unvested RSUs becomes paramount.

A general rule governs RSUs when an employee quits: vested RSUs are retained by the employee, while unvested RSUs are forfeited. Shares that have completed their vesting schedule before the last day of employment remain with the employee, becoming their property to hold or sell. However, any RSUs that have not met their vesting requirements by the departure date are cancelled without value.

Companies employ specific vesting schedules that dictate the pace at which RSUs transition from unvested to vested status. A “cliff vesting” schedule requires an employee to complete an initial service period, often one year, before any RSUs vest. After this cliff, remaining RSUs may vest gradually over subsequent months or years. For example, a grant with a one-year cliff and monthly vesting over three additional years means portions vest after 12 months, then monthly for 36 months.

Another prevalent structure is “graded vesting,” where a percentage of the RSU grant vests periodically over several years from the grant date, without an initial cliff. For example, a graded schedule might vest 25% of the total grant each year over a four-year period. If an employee with such a schedule quits after two years, they would retain 50% of their initial RSU grant that has already vested. Understanding the specific vesting schedule is important for anticipating the outcome upon leaving employment.

Company-Specific Plan Provisions

While general rules apply to RSU vesting, the precise outcome when an employee departs is governed by the specific terms outlined in their RSU grant agreement and the company’s equity plan. These documents serve as the definitive contract between the employee and employer regarding equity compensation. They often contain clauses that can modify the standard forfeiture of unvested RSUs in various circumstances, even in cases of voluntary resignation.

One modification might involve accelerated vesting, where RSUs become vested sooner than originally scheduled. While rare for voluntary resignations, some plans may allow for partial acceleration under specific conditions, such as reaching a certain tenure milestone prior to departure. Accelerated vesting is more commonly associated with involuntary terminations, company acquisitions, or specific retirement or disability provisions. Employees should review their documents for any applicable clauses. The grant agreement will specify if and when any form of accelerated vesting could apply.

Another provision found in some equity plans is pro-rata vesting. This allows a portion of unvested RSUs to vest based on the time worked within a current vesting period, even if the entire period has not been completed. For example, if RSUs vest quarterly and an employee leaves midway through a quarter, a pro-rata clause might allow a fraction of that quarter’s RSUs to vest, corresponding to the portion of the quarter worked. This is not a universal feature, and its applicability depends on the specific company plan.

For shares that have already vested by the time of departure, employees should be aware of any post-termination exercise periods or specific windows for managing these shares. While vested shares are retained, some company plans or brokerage agreements might impose time limits within which an employee must transfer, sell, or take other actions regarding their vested shares after leaving the company. Reviewing these provisions ensures employees can properly manage their equity after their employment ends.

Tax Implications of Departure

When Restricted Stock Units vest, they are treated as ordinary income for tax purposes, regardless of whether an employee remains with the company or departs. The fair market value of the shares at vesting is subject to federal income tax, Social Security tax, and Medicare tax, similar to regular wages. Employers are required to withhold a portion of the vested shares or cash to cover these tax obligations, often at a supplemental wage rate for federal income tax, which is 22% for amounts under $1 million. The actual tax liability will depend on an individual’s overall income and tax bracket.

For instance, if 100 RSUs vest when the company’s stock is valued at $50 per share, the employee recognizes $5,000 of ordinary income. This $5,000 is added to their other taxable income for the year. The employer withholds taxes, and the employee receives the net shares after withholding. The cost basis for these shares, for capital gains purposes, becomes the fair market value at vesting.

If an employee sells vested shares immediately after vesting, there is little to no additional capital gains tax owed at that point. This is because the sale price is very close to the cost basis established at vesting. Any gain or loss from holding the shares beyond vesting and then selling them later is subject to capital gains tax rules, depending on the holding period (short-term or long-term). For example, if shares are sold within one year of vesting, any gain is taxed at ordinary income rates; if held for more than one year, the gain is taxed at lower long-term capital gains rates.

Conversely, unvested RSUs forfeited upon departure do not create a taxable event for the employee. Since the employee never received ownership of these shares, there is no income to recognize and no tax liability. It is important to consult with a qualified tax professional to understand the specific tax implications based on individual circumstances, as tax situations can vary widely.

Employee Steps Upon Quitting

Upon deciding to leave employment, individuals with Restricted Stock Units should take several steps to understand and manage their equity. The initial and most important action is to review their RSU grant agreement and the company’s equity plan document. These documents detail the specific terms and conditions governing the RSUs, including vesting schedules, forfeiture rules upon resignation, and any post-termination provisions. Understanding these agreements beforehand can prevent surprises regarding RSU forfeiture or retention.

After reviewing the relevant documents, it is advisable to contact the company’s Human Resources department or the equity plan administrator. This administrator is often a third-party brokerage firm, such as Fidelity, Schwab, or ETRADE, where the RSUs are held. These contacts can provide clarification on the vesting status of specific grants, confirm the exact number of shares that will vest by the departure date, and explain any payout timelines or necessary actions. They can also detail the process for transferring or selling vested shares after employment ends.

Employees should also ensure they have continued access to their brokerage account where the RSUs are managed. It is common for access privileges to change or be revoked shortly after departure, so confirming ongoing access or understanding how to regain it is important. This access is necessary to monitor vested shares, initiate sales, or transfer shares to a personal investment account. Understanding any limitations or timeframes for accessing funds or shares post-departure is also part of this step.

Finally, individuals should understand the process for selling or transferring their vested shares. This may involve specific instructions from the plan administrator or brokerage, including any required forms or waiting periods. Keeping in mind the tax implications discussed earlier, employees can make informed decisions about whether to sell vested shares immediately or hold them. Seeking advice from a financial advisor can assist in making optimal decisions based on personal financial goals and risk tolerance.