Frequently Asked Questions
A Restricted Stock Award (RSA) is a grant that will provide you with a right to purchase shares at the FMV (fair market value), a discount, or you may receive shares at no cost. The first difference to note is the company shares for an RSA granted are given at the time of grant enabling you to have voting rights. The second difference to note is the ability to elect to file an 83b Election (allowing special tax considerations to pay tax on grant date rather than at lapse- this can be tricky and you should consult your tax adviser). But the shares you will acquire are not really yours. Technically you cannot take possession of them until specified restrictions lapse. Most commonly, the vesting restriction lapses if the employee continues to work for the company (generally for a certain number of years). Alternatively, a time-based restriction may lapse all at once or gradually. Keep in mind though that any restrictions could be imposed. In addition, and not to be confusing, there may also be a performance restriction added that must be achieved before the restrictions lapse.
The Restricted Stock Unit (RSU), is a grant valued in terms of company stock. But you do not actually receive shares until the restrictions lapse or vest. Once the unit satisfies the vesting requirement, you then receive the shares (or cash if offered pertaining to the plan rules at the equivalent of the number of shares).
The third difference to note is that unlike their cousin the RSAs, an RSUs release of shares may be deferred until a later date. This means you, the employee, must pay statutory minimum taxes as determined by the employer at vesting, but payment of all other taxes can be deferred until the time of distribution/when you actually receive the shares (you are choosing to defer receipt of the shares as well) or cash equivalent (again depending on the company’s plan rules).
Companies must file an information return with the IRS and send copies to participants by January 31st for ISO and ESPP transactions that occurred the previous year. IRS forms 3921 and 3922 are used for IRC 6039 reporting.
IRS Form 3921, "Exercise of an Incentive Stock Option Under Section 422(b)," requires companies to report the dates the options were granted and exercised, as well as the number of shares, the exercise price, and the fair market value of shares exercised.
IRS Form 3922, "Transfer of Stock Acquired Through an Employee Stock Purchase Plan Under Section 423(c)," requires companies to report the dates the options were granted and exercised; the fair market values on the dates the options were granted and exercised; and the exercise price and number of shares transferred
Records and Statement to Participants -- Companies who are required to file forms 3921 and 3922 must issue a copy to employees by January 31st for transactions that occurred the previous year. Companies should retain a copy for their own records as well.
Under ASC718 (formerly FAS123r), companies are required to account for any modifications. FASB defines the term modification as a change in any of the terms or conditions of a share-based payment award.
Modifications to the terms or conditions of share-based payment awards requires the company to recognize additional compensation cost. Under the ASU 2017-09, FASB further elaborated on what would substantiate the need for modification accounting. An entity must record modification accounting if at least one of the following occurs:
The use of restricted stock shares at vesting to pay the withholding tax. Instead of releasing to you all the shares at vesting, your company keeps an amount of shares equal to the tax needed for withholding. This compares to a sell-to-cover, in which all the shares are released and the broker then sells some shares to cover the tax-withholding amount.
In this type of exercise, the brokerage firm sells just enough of the stock to "cover" the total exercise costs (exercise price + taxes) with the remaining stock held.
Example: You have 1,000 options with an exercise cost of $10,000. The market price of the stock is $20. At exercise, the brokerage firm sells 500 shares for the $10,000 to cover the exercise cost and sells 150 shares for taxes, and you keep 350 shares.
More questions to come...