Walt,
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About Restricted Stock Units
A Restricted Stock Unit is a grant valued in terms of company stock, but company stock is not issued at the time of the grant. After the recipient of a unit satisfies the vesting requirement, the company distributes shares, or the cash equivalent of the number of shares used to value the unit. Depending on plan rules, the participant or donor may be allowed to choose whether to settle in stock or cash.
How do Restricted Stock Unit Plans work?
Once an employee is granted Restricted Stock Units, the employee must decide whether to accept or decline the grant. If the employee accepts the grant, he may be required to pay the employer a purchase price for the grant.
After accepting a grant and providing payment (if applicable), the employee must wait until the grant vests. Vesting periods for Restricted Stock Units may be time-based (a stated period from the grant date) or performance-based (often tied to achievement of corporate goals).
When Restricted Stock Units vest, the employee receives the shares of company stock or the cash equivalent (depending on the company's plan rules) without restriction. Your company may allow or require you to defer receipt of the shares or cash equivalent (also depending on the company's plan rules) until a later date.
Income Tax Treatment
Under normal federal income tax rules, an employee receiving Restricted Stock Units is not taxed at the time of the grant. Instead, the employee is taxed at vesting (when the restrictions lapse) unless the employee chooses to defer receipt of the cash or shares. In these circumstances, the employee must pay statutory minimum taxes as determined by their employer at vesting, but payment of all other taxes can be deferred until the time of distribution, when the employee actually takes receipt of the shares or cash equivalent (depending on the company's plan rules). The amount of income subject to tax is the difference between the fair market value of the grant at the time of vesting or distribution, minus the amount paid for the grant (if any).
For grants that pay in actual shares, the employee's tax holding period begins at the time of distribution (which may or may not coincide with vesting depending on the plan rules), and the employee's tax basis is equal to the amount paid for the stock plus the amount included as ordinary compensation income. Upon a later sale of the shares, assuming the employee holds the shares as a capital asset, the employee would recognize capital gain income or loss; whether such capital gain would be a short- or long-term gain would depend on the time between the beginning of the holding period at vesting and the date of the subsequent sale. Consult your tax adviser regarding the income tax consequences to you.
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