RSUs, ESPP and Acquisition Equity: What GovCon Executives Get Wrong

Equity feels like a bonus. It lands in your account, it has your name on it, and it is easy to treat as extra.

It is not extra. It is ownership of one company, with its own tax timing and its own risk. Most of the mistakes I see come from that gap between how it feels and what it is.

Questions I help executives answer

01 “My RSUs vested. Why is my April bill so high?”

Withholding on a vest is set at a flat rate, not at your bracket. Employers usually withhold federal tax on supplemental wages at 22 percent, or 37 percent on supplemental wages above $1 million in a year. A senior executive is usually in a higher bracket. The difference comes due in April.

1. Multiply the vest value by your marginal federal rate.
2. Subtract 22 percent of the vest value.
3. Set the remainder aside in cash.
4. Raise your withholding or make an estimated payment before the next vest.

Your cost basis is the share price on the vest date.

02 “Should I sell at vest or hold?”

After vest, you are holding stock you effectively bought with salary. Selling at vest creates little or no extra gain. Holding for more than a year makes later gains long-term. Many advisors treat a single position above 10 to 20 percent of net worth as a point to examine.

1. Add up your salary, bonus and equity tied to one employer.
2. Pick the share of net worth you will hold in that stock.
3. Write a sale schedule.
4. Follow the schedule when the stock is up and when it is down.

The exception is an insider. You may need a Rule 10b5-1 plan to sell on a schedule through blackout windows. Gains stack with other taxes, too: a 3.8 percent net investment income tax applies above $200,000 for single filers and $250,000 for joint filers.

03 “I am in the ESPP. Should I hold for the better tax treatment?”

The discount can be up to 15 percent, with a purchase limit of $25,000 in fair market value per year. A qualifying sale is at least two years after the start of the offering period and one year after purchase. Part of the gain is then ordinary income and the rest is long-term gain. A sale before that taxes the discount as ordinary income.

The harder part is a falling stock. A tax break is not worth a large loss of principal. In that case, selling at purchase is usually the cleaner decision.

04 “I have options. When do I exercise?”

The type of option sets the tax.

1. Find out whether each grant is a nonqualified option or an incentive stock option.
2. For nonqualified options, the spread is ordinary income at exercise.
3. For incentive options, the spread can trigger the alternative minimum tax. A qualifying sale needs two years from grant and one year from exercise, and the first-exercisable limit is $100,000 per year.
4. Find the post-termination exercise window. It is often 90 days.

05 “The company is being acquired. What happens to my equity?”

Executives may receive cash, rollover equity, an earnout, or a mix. Each has its own timing and risk. Before you sign, ask four things about each piece.

1. How is it taxed?
2. When does it pay?
3. What controls the amount after closing?
4. What happens to it if you leave?

Restricted stock may allow an 83(b) election. The deadline is 30 days from the grant and cannot be extended.

Bring the documents

I read the grant agreements and plan documents with your tax professional before any decision is made. If you have a vest or an acquisition ahead, book a free 20-minute call with me.

Securities and Advisory services offered through LPL Financial, a registered investment advisor. Member FINRA / SIPC. The financial professionals associated with RPM Financial Group may discuss and/or transact business only with residents of the states in which they are properly registered or licensed. No offers may be made or accepted from any resident of any other state.