Whether it’s expected or not, losing a job can give you a lot to think about. As you clear off your desk and consider your next chapter, don’t forget about your stock compensation.
If you were granted equity awards during your employment, don’t make the common mistake of losing out on potentially valuable gains from outstanding awards simply because you were unaware of the post-termination rules and vesting dates of your grants.
Here’s an overview on how various award types are generally handled post-termination:
Restricted stock and restricted stock units (RSUs)
Familiarize yourself with the plan’s post-termination rules and carefully review your grant documents, offer letter and/or employment agreement. Direct any questions to your stock plan administrator or human resources department.
With restricted stock and RSUs, you almost always forfeit any stock or rights under RSUs that have not vested upon termination. Exceptions can occur, depending on the vesting terms of your employment agreement or stock plan, such as special provisions for disability, retirement or an acquisition.
Shares that vested before your termination are generally not subject to forfeiture. However, the shares may be subject to special provisions, such as repurchase by the company. If you're planning to leave your job, you may want to consider staying long enough to vest in restricted stock or rights under RSUs if they are vesting in the near future. You should review the terms of the documents governing your award to determine whether any special terms apply.
Performance shares
Vesting is also the crucial factor for performance share grants upon job termination, but with performance shares the vesting depends on the achievement of stated performance goals rather than on (or in addition to) a stated length of employment. When you leave your job for standard reasons (e.g., going to work for another company, being laid off) before the end of the performance period, you usually lose all rights to receive the grant, even if the goal appears very obtainable. However, depending on the circumstances surrounding your termination of employment, you may be entitled to a full or prorated portion of a performance share award depending on the terms of the plan. You should review the documents governing your award to see if you may be entitled to all or a portion of your performance share award based on your circumstances.
Stock options
For vested stock options, the importance of your post-termination exercise period cannot be stressed enough. While the typical time frame is 90 days after termination, your period for exercise will be dictated by your employer’s plan design and the reason for your termination. If the options aren’t exercised by the specified date, they expire and are canceled. Note, however, that if you have an award of “incentive stock options,” the tax laws require that you exercise your options no later than three months after your termination date in order to be eligible for the favorable tax treatment of the award. While some companies send registered letters to outgoing employees with the number of shares they can buy and the cost, along with how many days they have to exercise the options, no law requires this. So, it’s your obligation to know your personal grant information and the terms of your stock plan, and typically most employers uphold these rules, procedures and deadlines very strictly.
In general, you have rights only to stock options that have already vested by your termination date. If the options have a graded vesting schedule, you are allowed to exercise the vested portion of the option grant but, most commonly, you forfeit the remainder unless the plan provides for accelerated vesting based on the type of termination of employment you incur.
The importance of your post-termination exercise period cannot be stressed enough. While the typical time frame is 90 days, your period will be dictated by your employer’s plan design and the reason for your termination.
Example: Let’s say you are granted options to buy 1,000 shares of your company's stock with a four-year graded vesting schedule (25% vesting per year), and you quit the company 2½ years after the grant. You’re allowed to exercise 50% of your options within the time frame designated by your employer, and the rest will never become exercisable.
With cliff vesting, where options vest all at once rather than on an incremental schedule, you would generally forfeit the entire grant if you leave before vesting. Note, however, that the terms of the documents governing your award may provide for special vesting rules based on the circumstances of your termination of employment (e.g., retirement or in connection with a corporate transaction).
Be sure you know what your official termination date is considered to be, as this will start the post-termination exercise period. And this period cannot go beyond the regular expiration date of the option.
Employee stock purchase plans (ESPPs)
At job termination, you continue to own stock purchased under an ESPP during your employment, but your eligibility for participation in the plan ends no later than three months after your termination date. Any funds withheld from your salary but not used to purchase shares before the end of your employment will be returned to you, normally without interest, within a reasonable period.
Change of employment relationship
Sometimes the end of your employment won’t trigger forfeiture/termination provisions if you’ll continue to perform services for the company in some way — for example, as a consultant. See how your stock plan defines termination, employment, service to company and other key terms that relate to vesting and the post-termination exercise period.
Leaves of absence
If you’re taking a leave of absence, depending on the structure of your leave, your absence could be considered a form of job termination.
Some plans give vesting credit for an authorized unpaid leave of absence, such as a sabbatical or a maternity leave, while others do not. Plans sometimes continue vesting for paid leaves or statutory leaves (i.e., those required by law) but not for disability leaves. In a 2019 survey, the National Association of Stock Plan Professionals and Deloitte Consulting LLP found that the vast majority of companies do not modify the vesting schedule of options or restricted stock/RSUs for any type of approved leave of absence. Among those that do adjust the vesting schedule, some companies toll the vesting from the start of the leave, and others do so from a specified date after the leave has begun (e.g., three months into it).
In addition, companies may prohibit stock option exercises during the leave. For RSUs, if your company allows vesting to continue, but delays release of the shares to you until your return, complications stemming from Internal Revenue Code Section 409A may arise. In that event, you should consult a legal and/or tax advisor familiar with equity compensation issues.
Post-termination taxes: Tying up the loose ends
Former employees’ transactions, regardless of the reason for termination, follow the same withholding and reporting requirements that apply to current employees.
Therefore, even for terminated employees, most companies withhold taxes upon exercises of nonqualified stock options and stock appreciation rights (but not for incentive stock options, because federal taxes are not due upon exercise). The taxable income from exercising your award and the taxes withheld by the company related to that income are reported to you on IRS Form W-2, not on Form 1099-NEC, even if the exercise occurred after your employment ended. For stock options and restricted stock/RSUs that vest after you change to a consultant or other nonemployee status with the employer, the withholding and W-2 reporting apply only to the income attributable (i.e., allocated) to your service as an employee (while the remainder is reported on your 1099-NEC). Some companies’ payroll systems may send a W-2 only if you receive the income in the year of termination, so you may instead receive a 1099-NEC.
Learn more and take action
- Locate and review any documents related to your grants, and employment agreement, to understand how your awards may be treated post-termination, depending on the circumstances. Direct any questions to your stock plan administrator or human resources department.
- Visit the Company Stock Education page in the Benefits OnLine® Education Center for guides, articles and videos about managing your awards.