Restricted Stock Plans & The Impact of Your Choices

June 30, 2021 9:48 am

Kristina M. Mello, MBA

Financial Planner and Advisor

Stock benefit plans come in a variety of flavors, each requiring thoughtful decision making along the way to maximize the benefits these types of plans can offer. In this blog we explore the challenges these types of plans can present to clients and some important considerations you should be aware of.

Challenges of these types of plans
You can acquire a restricted stock plan in a few ways, and the specific type of plan you have is important to distinguish as the rules governing each plan vary widely.  Highly compensated employees often receive company stock as part of their overall compensation package, while other employees may be eligible to participate in an employee stock purchase plan. Because each plan is unique, rules for selling your stock are not uniform. Suddenly you find yourself beginning to accumulate wealth, but how, and when, do you trade your stock to use the proceeds for personal goals?

When Can You Sell?
Typically, there are restrictions in place that dictate when you can sell your restricted stock. For example, if you are a subject to Rule 144, you will likely have a 10b5-1 plan in place that facilitates selling of stock and sending the required documentation to the relevant exchanges where the stock trades. Those subject to this rule are executives, directors, or controlling shareholders of the issuing company. This is because as a 144 employee, you may have insider information that could create an advantage for you to sell stock ahead of the public. Therefore, these executive employees are usually subject to a “blackout” period for a few weeks prior to the company earnings announcement. This allows the public to act on the newly released information without giving the employees who are privy to the information first an unfair advantage.

Other employees who are not subject to Rule 144 are typically still tied to a vesting schedule that specifies the earliest you can sell your company stock. Once vested, you can choose to sell some shares or hold them for potential appreciation and more favorable tax treatment.

If you are participating in an employee stock purchase plan, you are incentivized to buy shares of the company you work for at a discount. A preselected amount is automatically deducted from your paycheck and funneled into the ESPP during the offering period. At the end of this period, shares are purchased for all employees in the plan. This usually happens automatically, in six-month tranches (this can vary by plan). This type of plan has a lookback provision which allows employees to receive the more favorable stock price, which is either the stock’s market price at the beginning of the offering period or the purchase date. Once you own the shares, you can trade them.

When Should You Sell?
Just because you find yourself in an open window to trade, it does not always mean you are ready to sell your stock. But when is the optimal time to shed some shares? This depends on a few things, mainly as it relates to your overall asset allocation, potential tax implications, and your anticipated longevity with the company.

  • Asset Allocation- It is important to factor your total company stock as a part of your overall asset allocation. Company shares can accumulate for several reasons, and one factor to consider is how much this stock relates to your overall equity target from a risk perspective. Furthermore, too much stock in one company creates concentrated stock risk. For this reason, if you start to receive stock as part of your compensation each year, it likely makes sense to stop contributing to an ESPP.
  • Tax Implications- Maybe you would like to peel back on some of your stock exposure, and you feel comfortable on the amount but how does this impact your taxes? The length of time you’ve held the shares will dictate whether you are taxed at ordinary income or capital gains rates. You will need to factor this potential gain in to other income received that year to understand your full tax picture.
  • Anticipated Length of Employment- Most unvested restricted shares cannot be taken with you when you terminate employment, making this an important consideration if thinking of making a career change. This can be an important bargaining chip, however, as you understand how much you are forfeiting in potential compensation as a result. Other restricted stock assets, like stock options, may be portable. The point is, it is important to know the difference and understand what type of restricted stock you have.

How We Can Help
Meeting with an advisor regularly ensures periodic review of your portfolio to provide proper asset allocation recommendations. They can also be integral in helping you interpret the rules of your stock plan(s). In conjunction with a solid financial plan, selling your restricted stock becomes part of the long- term framework to help you accomplish your various goals.

 

Kristina Mello, MBA serves as Financial Planner and Advisor at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail her at kmello@strategicpoint.com.

The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Kristina’s opinions and comments expressed on this site are her own and may not accurately reflect those of the firm or our parent company, Focus Financial Partners. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.