Unlike holders of restricted stock, who receive dividends when they are paid to shareholders, employees with restricted stock units do not automatically receive dividends. However, companies may choose to issue dividend equivalents to holders of RSUs. An example at Apple, whose stock plans we blogged about earlier this year, shows how these work.
Starting in the company's 4th quarter, shareholders at Apple will receive a quarterly dividend of $2.65 per share. In conjunction with this, Apple filed an 8-K that discusses an amendment to Apple's outstanding RSUs. When the company pays the cash dividend on its common stock, each RSU will also be credited for the same amount. These dividend equivalents will not pay out until the underlying shares vest. At that time, the accumulated dividend equivalents either will pay out in cash or will be used to pay the taxes on the income from RSU vesting.
In the 8-K, Apple goes on to explain its reasons for adding this feature: "the crediting of dividend equivalents is intended to preserve the equity-based incentives intended by the company when the awards were granted and to treat the award holders consistently with shareholders." At his own request, Apple CEO Tim Cook will not take any dividend equivalents on his RSUs, and will thus forgo $75 million over the RSU vesting period.
IRS Guidance On Tax Deduction
In Revenue Ruling 2012-19, the IRS clarified this week the determination of when dividends and dividend equivalents paid to senior executives on restricted stock/RSUs are qualified performance-based compensation excluded from the $1 million deduction limit under Section 162(m). The IRS explained that the dividends and dividend equivalents are grants of compensation separate from the related restricted stock and RSU grants, and therefore they must satisfy the requirements. They can be excluded from the $1 million calculation only if they vest and pay out upon the meeting of pre-established performance goals. If Apple's CEO had accepted the dividend equivalents, they would not have been deductible, as his grant is not performance-based.
See FAQs on myStockOptions.com for additional details on RSU dividend equivalents and their tax treatment and reporting.
Comments