Deferred restricted stock program

The advantage, he is not paying taxes when he vests on the undistributed shares and he has the ability to continue to grow them tax deferred. When the kids are out of school, he and his wife want to enjoy life a little. And finally, he makes two elections with the final shares and defers the balance until retirement, setting up two buckets.

The first, he decided to take a lump sum so he can take a little money off the table at retirement and the second, he takes over a year period with the growth of the stock appreciating tax deferred.

By taking the last bucket over 15 years, he also takes advantage of additional tax benefits. There are tax advantages for taking a distribution over ten years or longer, called the source tax provision. This provision allows the executive to defer while living in a high-income tax state like California or New York, and taking his deferral 10 years or longer while living in a state without income tax, like Nevada or Florida.

Nine states in America assess Chart II no income tax. Think of yourself in this scenario. This provision could make a huge difference on the income you receive at retirement. It will be very important at retirement to plan your distributions not only in the form you take them, but where you take them. As an example, if the child decides to not go to college immediately, or better yet she gets a scholarship, you can re-defer those dollars to later years. The rules are quite clear: You need to elect to re-defer at least one year prior to distribution, and your re-deferral must be for at least five years.

There is no restriction on how many buckets you can establish or how many times you re-defer. You will have the same opportunities with future grants of RSUs, by adding to the existing buckets, or setting up new ones. Without an 83 b election, the holding period starts on the vesting date. Stock sold more than one year after the holding period starts is taxed at the favorable long-term capital gains rate.

An employee is entitled to receive dividends on restricted stock even during the vesting period when the sale of shares is deferred. Dividends on unvested stock without an 83 b election are taxed as employee compensation. However, when an 83 b election is made, the dividends are taxed just like dividends on unrestricted stock.

This allows treatment as qualified dividends, which are taxed at the capital gains rate instead of the higher tax rate for compensation income. Brian Huber has been a writer since , primarily composing literature for businesses that convey information to customers, shareholders and lenders. Huber has written about various financial, accounting and tax matters and his published articles have appeared on various websites. In the second blog we provided a hypothetical analysis illustrating the potential advantage of the deferral of taxation upon vesting of RSUs and discussed various issues associated with participation in a non-qualified deferred compensation plan.

We noted that, contrary to conventional thinking, it may be possible to design a plan that permits the voluntary deferral and diversification of RSUs deferred without triggering accounting issues. In this fourth and final blog in the series, we will turn our attention to the critical importance of professional, on-going plan administration and participant communications; specifically, related to the timing of RSU deferral elections and the management of distributions.

An election to defer income taxes on RSUs beyond the vesting and payment date must be made in compliance with Section A, the Code section that deals with the taxation of non-qualified deferred compensation arrangements. The rules are quite specific but allow for a good deal of flexibility as to the timing of a deferral election, and the timing and form of the elected benefit distributions.

The following is an overview of the general deferral election timing rule and a few valuable exceptions to the general rule. There are a few important and potentially valuable exceptions to the general rule regarding the timing of deferral elections. Note : Hypothetical results are for illustrative purposes only and are not intended to represent the past or future performance of any specific investment. First, from a plan design standpoint, it may be possible to structure a non-qualified deferred compensation plan that could significantly enhance the value of the total rewards package for senior executives by permitting the voluntary deferral and subject to specific requirements diversification of RSUs deferred.

Secondly, it is essential that such a plan be managed professionally on an on-going basis by a firm that understands the nuances of the non-qualified deferred compensation tax rules, and stock plan administration. Restricted stock units RSUs are a form of stock-based employee compensation with no liquidity until vested. They provide no dividends or voting rights. The value of the RSU may decrease before it can be liquidated.