The NASPP Blog

In the Restricted Stock Fundamentals course this year at the NASPP conference, the issue of retirement provisions on restricted stock was a hot topic. We’ve talked about retirement provisions (the acceleration or continued vesting of a part or all of the unvested shares from a grant upon termination if certain parameters are met that qualify that termination as a retirement) before, especially as FAS123(R) was rolling out. At the Restricted Stock Fundamentals, the fact that these types of retirement provisions on a restricted stock grant will most likely have an impact to FAS123(R) expense, 409A, and tax-withholding. This is because the vesting event for restricted stock awards and restricted stock units centers around the idea around the assumption that shares are subject to a “substantial risk of forfeiture”. This means that a loss of substantial risk of forfeiture (substantial being the key word), creates a situation where the effective vesting date may not coincide with the lapse of restrictions on the underlying shares.

I think that many of us are familiar with the impact to expensing; that the existence of this type of provision may change the amortization of expense. Expense is amortized over the service period (generally the period between the grant date and the vest date). However, if the participant no longer has to remain in service to the company to earn the right to the shares, the service period has effectively ended and the expense must be shortened to reflect the new service period. This may mean that there is a sudden increase in the period expense.  To help spread this impact out, the company may begin an accelerated expense amortization in anticipation of an upcoming retirement eligibility date. For more information, see the Frederic W. Cook article FAS 123(R) Requires Acceleration of Equity Compensation for Retirement-Eligible Employees.

What companies may not have considered that this change in the effective vesting date, or service period, may also have a tax withholding and 409A consequence. Assuming no 83(b) election was filed, income and FICA/FUTA taxes will be due on any unvested shares that are no longer subject to a substantial risk of forfeiture. If the grant were an RSU, the loss of substantial risk of forfeiture means that FICA/FUTA taxes are due, with income tax due at the constructive receipt of the shares. For more information on the tax implication of retirement eligibility, see the Towers Perrin alert Potential Tax Problems for Restricted Stock Held by Retirement-Eligible Employees. This treatment of RSUs is where the 409A issue comes up. If the employee has the right to the shares, but is effectively delaying the income related to those shares, this is essentially the deferral of income. There are ways to address the potential 409A issues, which are included in the Frederic W. Cook memo Technical Issues Related to Accelerated Vesting of RSUs at Retirement.

The question that came up in the Restricted Stock Essentials course was, “Can the inclusion of a clause that the retirement provision (whether it is the acceleration or continuation of vesting) is subject to approval, can you avoid any of these issues?”. It appears that there are companies that have gotten buy-off from their auditors that the inclusion of such a clause would essentially mean that there still exists a substantial risk for forfeiture. I think that companies will want to be very careful with this. If the approval is really just rubber-stamping the provision and 100% of the retirement provisions are approved, then I would question whether or not there really is a risk of forfeiture at all. We have seen similar arguments be denied with regards to the fact that retirement eligible employees may actually be terminated “for cause” rather than have the opportunity to retire. However, if your company really does require the retirement provisions to be approved and has a track record for not approving a reasonably substantial number of them, then there may actually be a justifiable claim that the existence of potential acceleration or continued vesting of grants on or after retirement may not push those shares into a situation where there is no longer a risk of forfeiture.

If your company is granting restricted stock with acceleration or continued vesting available at retirement and you have not already considered the expense, tax, and 409A implications, you may find that the Restricted Stock Essentials program has a lot to offer you. If you missed your opportunity to attend in person at our conference, you can still take advantage of our online webcast course which includes the recorded sessions from this year’s conference. For access to the recorded sessions, go here or you can register for the online Restricted Stock Essentials.