Restricted Stock Units (RSUs): Popularity Soars for Incorporation in Long-Term Incentive Compensation Programs

November 11, 2020
Hall Benefits Law, LLC

According to The Ayco Company’s October 2019 survey of 325 companies, restricted stock units (RSUs) now represent the most common type of equity award in the U.S. The survey showed that 72% of companies responding to the survey award RSUs, while only 14% award straightforward restricted stock.

Restricted stock units (RSUs) represent an unfunded promise by an employer to grant a certain number of stock shares to an employee at the end of the vesting schedule. Shares of stock are not delivered until vesting and forfeiture requirements have been met and release is granted. Since no stock has been issued, RSU participants have no voting rights on their stock during the vesting period. 

RSUs have increased in popularity primarily because of their flexibility. Since they are unfunded, companies can choose to settle RSUs with either cash or stock shares. RSUs also offer greater administrative convenience at a lower cost since shares do not have to be tracked and recorded. In addition, since no stock is issued for an RSU until restrictions lapse, RSUs do not count as outstanding shares. And, since RSUs are full value awards that employees don’t have to pay for and always have value once vested even if the share price plunges, RSUs hold greater appeal for high-value employees.

Taxation of RSUs

RSUs are taxed as regular income according to when they vest. If RSU awards have a staggered vesting schedule – for example, if an employee receives 1,000 shares of stock over a vesting schedule of five years with 200 shares vesting each year – the employee would pay income and FICA taxes every year on the market value of those 200 shares.

Companies are required to withhold taxes upon vesting, which can be done in one of three ways:

  1. Employee sells all shares the day they vest and receives cash minus withholding;
  2. Employee sells enough shares to cover withholding and remaining shares are kept; or
  3. Employee keeps vested shares and pays employer to cover withholding.

Since RSUs are considered supplemental wages for tax purposes, taxes are withheld at a flat rate of 22%. If the employee’s annual income exceeds $1 million, the applicable tax rate jumps to 37%.

HBL helps our clients stay on top of the legislative and regulatory changes that apply to their businesses, ensuring that their benefit plans and processes are updated to stay in compliance. Call our team of experienced, responsive ERISA attorneys today at 678-439-6236.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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