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Stock compensation Q and A

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En español | Stock compensation can be an important part of a total compensation package, but all too often those receiving it haven’t been provided with all the details or made aware of potential impacts.

If your employer provides you with stock compensation, reading this Q&A may help you better address the topic.

Q: Can stock compensation affect my other employee benefits, such as 401(k) contributions?

A: Generally, the grant, vesting or exercise of stock options, or the vesting of restricted stock, should not affect other retirement plan benefits provided by your employer.

One notable exception that can generally work in your favor relates to the amount you can contribute to your employer’s 401(k) plan. When non-qualified stock options and incentive stock options are exercised, employee stock purchase plan stock is sold early, or restricted stock vests, additional taxable income will be reported on your IRS Form W-2. This additional taxable income can increase the amount of money you have available to contribute to your 401(k) plan when:

  • Your current contribution amount is based on a percentage of your compensation, and
  • Your annual contribution is normally below the annual IRS 401(k) contribution limits: $18,000 in 2016, plus an additional catch-up contribution of up to $6,000 for those who are age 50 or older.*

You should review your individual situation with your financial or tax professional and also confirm if your stock compensation is considered eligible pay for purposes of the contribution calculation.

Q: What key questions should I ask about my stock grants?

A: Understanding these topics can help you make the most of your stock grants and may prevent costly mistakes.

1) What type of stock grant do I have? Is it a grant of stock options, restricted stock, restricted stock units, performance shares or stock appreciation rights?

2) How often will I receive grants? Does my employer make grants only upon hiring, or will I be eligible every year?

3) Is formal acceptance of the grant required? What happens if I don’t accept the grant?

4) What is the vesting schedule?

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5) For stock options and stock appreciation rights, what is the grant term’s expiration date, after which an unexercised award is forfeited?

6) What would happen to the grant if I were to leave or lose my job, die, become disabled or retire? How do these events affect vesting and the forfeiture of the grant?

7) Do I need to open a brokerage account for the shares or cash proceeds? If so, do I need to complete any tax forms at that time?

8) How does the tax withholding work? What is the general withholding rate?

9) What would happen to the grants in a corporate acquisition?

10) How do my stock grants interact with my overall financial plan and important life events?

You also should find out whether your employer has an employee stock purchase plan. If it does, what are the rules for eligibility and enrollment?

In addition, you should understand the tax treatment of the grant and other related events and learn about the related Form W-2 and tax-return reporting, including the proper reporting related to your stock compensation.

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* However, in certain circumstances, an increase in compensation could result in your classification as a “highly-compensated employee” or “key employee” for plan testing purposes. Depending on the plan’s terms and the participation of other employees that year, this classification could potentially reduce the amount you are permitted to contribute to the plan for that year.

Merrill Lynch and its representatives do not provide tax, accounting or legal advice. Please consult your own independent advisor as to any tax, accounting or legal statements made herein.

This content is adapted from content provided under arrangement with myStockOptions.com, an independent source of online stock plan education and tools. Copyright © 2015. myStockPlan.com Inc. is not responsible for any errors in the article, or any actions taken in reliance on it. Please do not copy or excerpt the myStockOptions.com content without express permission from myStockPlan.com Inc.

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