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Your equity awards, when life happens

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Equity-based awards can be one of the more rewarding components of your overall compensation. Like any asset, your equity compensation can be affected by major events in your life and at your company. But unlike other assets, equity compensation involves rules that aren’t always clear-cut.

Here are a few common events that can affect your awards, and the types of things you’ll need to think about.

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Company merger or acquisition

A change in control at your company may impact your equity plan, and can result in:

  • Accelerated vesting, which allows you to receive stock-based compensation earlier than the normal vesting schedule, sometimes up to 100% of your award. This can compress taxes normally paid over many years into one large tax bill. Accelerated vesting also usually has a short exercise window — sometimes as brief as 30 days.
  • Changes in your equity award. For example, depending on the terms of the agreement, awarded company shares may convert into shares of a new company. Or your unvested equity award may be substituted for an unvested equity award of the purchasing company, if your company is being acquired.
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Death

Vesting equity awards that transfer upon your death are typically taxed on your final tax return. Your company’s plan may have exceptions to its current vesting rules in the case of death.

Generally, your estate or beneficiaries typically have a time limit of up to 12 months after your death or the end of the term to exercise stock options, whichever is sooner. Generally in the United States, any gain upon exercise after your death is taxable to your estate or beneficiaries.

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Divorce

Divorce can raise a number of equity compensation issues. Financial professionals specializing in divorce generally advise clients first to accurately identify all of their equity-based compensation, then to gather all applicable grant and plan documents, in order to assess the tax and other implications of dividing these marital assets.

Restricted stock transferred to an ex-spouse upon vesting is subject to income tax at the time of transfer. In the event a plan document permits an employee to transfer restricted stock to an ex-spouse prior to vesting, such stock should be income taxable to the ex-spouse at the time of vesting. In both circumstances, however, the employee would still be responsible for employment taxes.

Any stock options transferred to an ex-spouse are income taxable to the ex-spouse upon exercise (however, the employee would still be responsible for employment taxes), unless otherwise agreed upon in the divorce agreement.

Divorcing spouses can agree to have their portion bought out and receive an immediate payout (by dividing marital assets accordingly and receiving assets other than equity) — but only after identifying and valuing the stock awards, a task that grows more complex as more kinds of awards are given and as more time has passed.

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Leaves of absence

Plans can differ greatly in their treatment of company leaves:

  • A leave of absence may be considered a termination of your employment, depending on the reason for your leave. Some plans give vesting credit for authorized unpaid leaves (sabbaticals, maternity leaves), while others don’t.
  • Some plans continue vesting for paid or “statutory” leaves (those required by law) but not for disability leaves.
  • During a leave of absence, you may be prohibited from exercising options or receiving shares upon vesting of restricted stock units (RSUs). This can create problems, for example, if you have RSUs and your company continues vesting during your leave, but doesn’t release your shares until you return to work full-time.1
  • During a disability leave, unvested restricted stock and RSUs may be covered by special provisions. Stock option grants may continue, or vesting may be paused during the leave.
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Leaving your job

Depending on how you part ways with your company, your equity award options will differ. Typically, you keep any shares or options that vest before your termination date. Cliff vesting, where options vest all at once rather than incrementally, may mean you forfeit your entire grant if you leave before vesting.

Read Job Loss and Your Equity Awards for a more detailed overview of how various award types may be handled post-termination.

Termination

  • You may have a set time limit, for example 90 days after your termination, to exercise vested stock options. This can vary depending on the rules of the plan and the reason for your termination.
  • Unvested stock options, restricted stock and RSUs may be forfeited.
  • Vesting of performance shares depends on meeting stated performance goals. If you quit or are terminated before the end of a stated performance period, you generally forfeit all rights to the grant.
  • Note that if you’re terminated as a full-time employee but you continue to perform services — say, as a consultant — your termination may not trigger forfeiture/termination provisions under your company’s equity plan.
  • The specific rules for your plan are explained within your plan documents. Employers uphold these rules very strictly, so it’s important for you to be familiar with them and also to know your official termination date.

Retirement

  • Long before you retire, you’ll want to factor equity compensation into your overall retirement strategy — something a financial professional and legal and/or tax advisor can help you with. This planning process is particularly important when you expect stock options to account for a large part of your retirement nest egg. (For more information, read Retirement Planning and Your Equity Awards.)
  • As you reach retirement eligibility, be aware that restricted stock and RSU vesting may accelerate, which can trigger a tax event even if you continue working.
  • When you do retire, unvested stock options, restricted stock and RSUs may be covered by special provisions.
  • Note that you’ll pay Social Security and Medicare taxes on equity-based compensation, up to the annual limit — whether you’re working or not, and no matter how old you are.

Be informed and prepared

Locate and review any documents related to your grants and employment to understand how your awards may be treated as a result of various life events. Direct any questions you may have to the person, department or entity listed in the equity plan document, such as the Human Resources department. They can’t give financial or tax advice, so consult your own tax or financial professional.

It’s also a good idea to let a trusted loved one or the person you’ve named as executor of your estate know where your important plan documents and grant agreements are kept in the event that something happens to you.

Finally, it’s important to remember that generally, in the United States, equity compensation is considered wages for tax purposes is and is therefore subject to income and payroll taxes. So, you’ll want to consider the tax consequences before exercising options or initiating other equity award transactions.

Learn more and take action

Visit the Equity Awards Education page for additional information, videos and quick tips related to managing your awards.

 
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Neither Merrill Lynch nor any of its affiliates or financial advisors provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.

1 Note that the equity plan or award agreement will describe the applicable forfeiture provisions, in the event you do not return to work within a specified period of time.

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