Advisors Reveal Top Tips For Stock Options, RSUs, ESPPs

Equity awards are complex, and so is the financial planning. No single strategy fits all. You must link the necessary financial and tax decisions to your own personal situation and goals. However, there are some general financial-planning considerations to understand before you start. A recent myStockOptions webinar featured four leading advisors who routinely work with clients that have equity comp and company stock acquired from their grants. In the real-world case studies they presented, they discussed their core strategies for stock options, RSUs, ESPPs, and company shares.

Start With Your Personal Goals

All of the advisors who spoke in the webinar cited the complexity and highly personal nature of planning for equity compensation and company stock holdings. “I always start with clients by asserting that these are complex benefits,” said panelist Megan Gorman, the founder of Chequers Financial Management in San Francisco and the author of a highly anticipated forthcoming book, All The Presidents’ Money. Megan emphasizes the importance of “playing the long game” with her clients. “We have to keep them on strategy, and strategies are personal—ignore the watercooler talk.”

“I also start with the client’s personal and financial goals,” stated panelist Chloé Moore, the founder of her firm Financial Staples in Atlanta. “What are they wanting to accomplish in the short term and in the long term? What are their cash needs? What do they want their life to look like and how can we use these RSUs or other equity awards as a tool to help make those dreams reality?”

Equity Comp As Goal Accelerator

Chloé said she often frames this as “accelerating that timeline.” For retirement goals, the stock-sale proceeds can perhaps go toward saving more, investing more, and making retirement possible sooner. For short-term goals such as buying a house or paying off student loans, the proceeds from equity awards can bring those goals even closer to the present.

An important point that Chloé stressed is that you should “live off your base salary and not rely on occasional income from equity awards or bonuses to fund basic living expenses.” Stock compensation “is really something that clients need to achieve or accelerate financial goals,” she reiterated.

Be Realistic With Yourself

Danika Waddell, the founder of Xena Financial Planning in Seattle, raised the importance of personal comfort level and pragmatism in financial planning for equity comp and company shares. “I think it’s really important to keep in mind that even though there may be an optimal financial or tax strategy, it may not make sense for the client—whether they’re not comfortable with it or it’s too complicated or for whatever reason they are just not willing to do that strategy. You have to find something that’s going to work for that client.”

She pointed out that, oddly enough, the strategies which actually work for her clients are often not the ones that are optimal from a tax perspective or a financial perspective. They are successful, she emphasized, because the client will stick to them.

“Tune out the noise,” added Danika. It’s vital, she asserted, to craft and stick with a financial plan that is tailored for you, regardless of casual advice from those around you. “Almost all of my clients hear a lot of opinions from co-workers and on Slack channels. They may also be getting input from an uncle, a dad, a cousin. What I say to clients is that they may be smart people and know a lot about tax situations, they don’t know everything about your situation. They may be at a different life stage. They may be in a different tax bracket.”

Know How Much Tax Will Be Withheld

For most employees, 22% is the statutory federal withholding rate for supplemental wage income, such as income recognized from stock option exercises or RSU vesting, and it’s the rate that most companies use. (The required withholding rate rises to 37% for amounts in excess of $1 million during the calendar year.) Depending on your overall yearly income and tax bracket, the 22% withholding rate may not be enough to cover the taxes you actually owe according to your bracket rate.

“A lot of my clients’ companies now give employees the chance to add extra withholding on top of the 22%, so they can choose exactly the amount of withholding they want,” observed Chloé Moore. “If that’s a choice and it makes sense for the client, we’ll get that as well. If not, we’ll want to be sure they set aside cash to cover the tax bill.”

Quarterly estimated tax payments are one way to cover any shortfall in the tax withholding. Alternatively, you can put cash aside from stock-sale proceeds to pay the taxes with your tax return for the year.

Sell The Company Shares Or Hold Them?

This is the $100,000 question (or maybe even more). When you receive shares of your company’s stock via equity compensation, whether you sell or hold the shares depends on various factors. Some of those factors, especially personal ones, are under your control, while others stem from the tax rules, your company’s stock plan, or its blackout periods for insider-trading prevention. Nevertheless, many advisors often suggest immediately selling all or most of the shares received at RSU vesting, chiefly to diversify and thus avoid the risky overconcentration of your wealth in just the stock of your company.

Webinar panelist Daniel Zajac, the managing partner of Zajac Group in the Philadelphia area, often takes this approach. “Generally speaking, selling RSU shares right when they vest is where we lean with most of our clients, and then we figure out what to do with the proceeds,” he explained. “Are we going to cover taxes by putting money on the side, making estimated tax payments, running tax projections? Or are we going to take the rest of it and invest it, fund a goal, buy a house, doing whatever the client wants to do with that excess money.”

Diversification

Danika Waddell concurred—and pointed out the importance of diversifying. “This isn’t a blanket rule, but for many of my clients I recommend selling RSU shares soon as they vest and setting aside money for the taxes and just diversifying,” she said. “Many of the clients I work with come to me with already 60%, 70%, 80% of their net worth tied up in their company stock, so we’re absolutely working on diversification. If that’s not the case, it’s a little less critical. But for many people it’s just sell as soon as the shares vest.”

Danika recommends this course of action even more strongly for shares acquired via an employee stock purchase plan (ESPP). “If someone is going to participate in an ESPP, I always recommend selling the ESPP shares as soon as they become available. I don’t really want anybody to hold on to them. I’ve seen too many situations where it doesn’t pan out, and then the ESPP taxes are just so complex on top of that.”

Automate Selling Under Your Plan Where Possible

Automated selling is another recommendation that Danika favors. “I’m a big fan of automation. If your company allows you to set things to auto-sell, that leaves one less thing on your plate. Especially if your RSUs are vesting monthly, you otherwise have to go in and remember to sell shares.”

Daniel Zajac agreed. “As much as we can automate selling for clients, we’re all for it. It’s not uncommon for our clients to come in regularly with $50,000 or $100,000 of after-tax RSU money that’s been sold, and we then dump it into an investment account, where it builds and builds. And clients start to love that action, seeing that account get bigger and bigger over time.”

Danika noted that dispassionate automated selling can work well as part of a financial plan determined in advance, sometimes in the form of a Rule 10b5-1 trading plan if you frequently know material nonpublic information about your company. “Make it really simple so that you’re not constantly having to think about when should I sell, how should I sell, what should I wait for—removing as much as possible emotional decisions.”

Capital Gains Tax

What about the tax on capital gains when you sell shares? Avoid letting aversion to capital gains tax get in the way of your bigger-picture financial planning. “Don’t let the tax tail wag the planning dog,” quipped Megan Gorman. “I think it’s great that sometimes people focus on the tax, but sometimes you just have to sell. You pay the tax and you move on.”

Further Resources

The webinar in which these advisors spoke is available on demand at the myStockOptions Webinar Channel. It is part of our Equity Comp Masterclass series of three webinars. For additional guidance and ideas, see the extensive resources in the section Financial Planning at myStockOptions.com, along with the website’s modeling tools and calculators for stock options, restricted stock, and restricted stock units.

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Year-End 2023: Advisor Insights On How Market Uncertainty Impacts Planning For Stock Options, RSUs, And ESPPs

When the wreaths and holiday lights come out, it's time for year-end financial and tax planning. Year-end planning is crucial for employees who have equity compensation (such as stock options and restricted stock units), participate in an employee stock purchase plan (ESPP), and/or have holdings of company shares.

Year-end 2023 is a relatively straightforward time for financial planning compared with what lies ahead for year-end 2024 after the upcoming election. The prospect of tax changes will then loom large. For now, remember that the tax cuts which became effective in 2018 will expire at the end of 2025 unless Congress extends them. The possibility of tax increases after 2025 may already start to affect your planning in 2023.

Even without any consideration of future tax changes, the current uneven markets and economic uncertainty can make year-end planning tricky. To help keep the season merry and bright, myStockOptions.com recently held a webinar on year-end planning that featured three leading financial and tax advisors with expertise in equity comp. Below we summarize some of the special insights they revealed for year-end 2023 and year-start 2024.

Volatile, Uneven, Sideways: Stock Market And Job Concerns Affect Year-End Approaches

“We consider the markets over the last year to be what we call a sticky swamp,” observed webinar panelist Rebecca Conner (CFP, CPA, RLP), the founder of SeedSafe Financial LLC, based in Austin, Texas. “It’s been good, it’s been bad, it’s been in the middle, it’s been sideways.”

Amid these uneven markets of 2023—in which some companies’ stocks rose substantially while others fell—her firm applies a holistic approach that considers the client’s overall past year and outlook for next year in their financial picture and employment. “We’ve had clients that were laid off and are still looking for jobs,” she gave as an example. “We’re trying to keep who they are and where they are in perspective. Then, based on that, we look at what we may want to do.”

Approaches she mentioned for down or volatile stock prices include harvesting capital gains and tax losses. With job loss or lower compensation, said Rebecca, other strategies involve converting pre-tax IRAs to Roth IRAs. “On the plus side,” she added, when stock prices are down “there may be opportunities such as exercising more incentive stock options (ISOs) without triggering the AMT.” Alternatively, for clients at companies where the stock price has jumped this year, she considers the tax advantages of donating the stock, including to a donor-advised fund.

Rebecca’s theme of tax-loss harvesting and loss carry-forwards was echoed by panelist John Owens (CFP, EA, CPWA), Director Of Financial Planning at Brooklyn FI, based in New York City. “The market is up lately, but couple of months ago, the markets looked terrible,” he noted. “It was a really rough October. Are there ways to alleviate a concentrated position without a tax hit because you have capital losses?”

“Opportunity For A Wakeup Call”

John Barringer (CFP), the Managing Partner of Executive Wealth Planning in Denver, Colorado, likes to step back with his clients at year-end and assert the importance of financial goals as their starting point. “Equity is income. How does that fit with retirement? How does that fit in with paying off the mortgage or paying for the kids’ college education? It really starts with goals, and then equity is a tool.”

At year-end, he continued, this leads to a discussion of assessing what grants you have, what grants you expect in the coming year, and what option grants may be about to expire. “You’d be surprised how many executives are so busy doing their jobs that they don’t even pay attention. Year-end is an opportunity for a wakeup call to focus on what they told me they wanted to do to reach their goals.”

Multi-year planning is key, John emphasized, to consider whether to exercise stock options this year or next, and to know what RSUs are vesting or performance share grants may pay out. “We always talk at the end of the year about income tax bracket space. How much room is there to exercise stock options without going into the next higher tax bracket?”

Year-Start 2024: Points To Consider

Comprehensive year-end planning includes not just the end of 2023 but the start of 2024. A theme John Owens raised is planning for taxes on income that is coming up with vestings of restricted stock or restricted stock units (RSUs) in the year ahead.

The flat federal tax rate of withholding at restricted stock/RSU vesting for most employees may not cover all of the taxes you owe to the IRS, depending on your tax bracket. The flat withholding rate for most employees’ supplemental wage income is 22% (it is 37% for yearly total amounts in excess of $1 million). One way to remedy a tax shortfall is to pay quarterly estimated taxes.

“Prepare for 2024 estimated taxes for RSU under-withholding,” John advised. One of the tasks he likes to do with clients as part of year-end planning is to get ahead of the game and map out the estimated payment for at least the first quarter.

John Owens also recommended thinking about enrollment in any company employee stock purchase plan (ESPP). “Are we contributing? Are we optimizing that as we look ahead at the coming year?”

John Barringer explained that in his approach to clients, the early-year window is “a mirror of the end of the year—same basic questions as we had then.” He again emphasized the importance of knowing—and giving your financial advisor—a complete picture of your equity comp and company shares. “I’m surprised how many times clients will go into the brokerage website and click and sell something without telling us what they’re doing.”

As a CPA, Rebecca Conner has tax season in mind. “In early 2024, we’ll be getting ready for tax returns, so we’re looking for forms. We’re making sure we know where things are or when things are due. We’re re-checking cash to be sure we have enough for 2023 taxes as well as all of our strategies for 2024.”

Preparing For Job Change Or Job Loss

If you think you may switch companies in 2024, answers to key questions will help you negotiate severance or a new compensation package. “What option grants will expire soon or could expire if you’re laid off?” John Barringer asks his clients. “What grants do you expect to receive in the first quarter or first half of the year? What RSUs vest in the coming year?”

Rebecca Conner seeks to clarify her clients’ job expectations and career goals. Any moves in the year ahead could affect income and the need to exercise options sooner than anticipated.

Special Issues For Incentive Stock Options (ISOs)

Special issues arise with ISOs and the alternative minimum tax (AMT). You can trigger the AMT when you exercise ISOs and then hold the shares beyond the calendar year of exercise. Any AMT you pay often can eventually be recovered in later years via the AMT credit available under the tax code.

When your ordinary income tax climbs above your calculated AMT, you can use up more of that credit until the two taxes equal each other. “At this time of year, if you haven’t sold the ISO stock [from an exercise earlier in the year] and the price is higher, you may be able to capture some of the AMT credit,” John Owens explained. He takes an approach that hunts for AMT credits. “It may make sense to do some disqualifying dispositions [early sales] to accelerate ordinary income that will unlock your AMT credit created by a prior year’s ISO exercise, especially if the stock price has appreciated throughout the year.”

John further discussed the importance of year-start planning for ISOs. “I love an early-year ISO exercise,” he enthused. “In early 2024, we’ll be talking with clients about whether to do ISO exercises and holds.”

Exercising ISOs in January gives you the rest of that calendar year to see where the stock price goes, he explained. This allows plenty of time to make decisions about whether to sell the shares or whether to hold them beyond year-end (but potentially get locked into the AMT). For startup companies, with 409A valuations staying flat or declining, he also suggests this as an early-year strategy to consider, though it involves additional risks and lack of liquidity for the shares.

“I am also a lover of ISO exercises early in the year,” chimed in Rebecca. She particularly favors that approach when the stock price is depressed and/or when the company’s outlook is positive. “Then if something happens during the year you can always sell the stock if you need to and disqualify it.”

Further Resources

The webinar in which the panelists spoke is available to stream on demand. It’s one of many webinars on equity comp planning at the myStockOptions Webinar Channel. Meanwhile, myStockOptions.com provides abundant education and guidance on year-end financial and tax planning for equity comp and company shares in its section Year-End Planning.

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• How can you minimize your tax bill?
• How do you negotiate for stock compensation in your employment agreement?

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Leading Financial Advisors Unbox Year-End Planning Amid Down And Volatile Markets Of 2022

After a tumultuous year of stock-price volatility and declines, year-end financial and tax planning in 2022 may be trickier than usual for some people with equity comp and holdings of company shares. This was the emphasis of a popular webinar we held at the start of December: Year-End 2022 Financial & Tax Planning For Equity Comp. In the spirit of the season, leading advisors with expertise in equity comp presented ideas and tips for year-end 2022 and year-start planning 2023:

• John P. Barringer (CFP®), Executive Wealth Planning
• Rebecca Conner (CPA, CFP®), Founder, SeedSafe Financial LLC
• John Owens (CFP®, EA, ECA, CPWA®), Director of Financial Planning, Brooklyn FI

The article below summarizes some of the key points they made. The webinar in which they spoke is available on demand at the myStockOptions Webinar Channel. Meanwhile, myStockOptions.com has a comprehensive section on year-end planning, including extensive articles and FAQs. Seek guidance on your specific situation from qualified tax and financial advisors.

The Importance Of Multi-Year Planning

“When we start off with a client, we begin right away with the idea of multi-year planning,” noted webinar panelist John Barringer of Executive Wealth Planning in Denver, Colorado. “We treat every meeting with clients as if it’s year-end. There are so many overlapping issues: trading windows, new grants, vesting.”

Multi-year planning is especially valuable with stock comp, as you can control the timing of stock sales and option exercises, and you know when RSUs will vest. Getting this planning right is crucial, for example, if you are considering option exercises or stock sales at the end of 2022.

For a start, you need to be aware of the 2022 and 2023 thresholds for higher tax rates on compensation income and capital gains, the phaseouts for various tax credits, and the Medicare surtax on investment income. If you believe your tax rates will be higher in 2023 and beyond, you want to consider whether to accelerate income into 2022.

Webinar panelist Rebecca Conner, the founder of SeedSafe Financial in Austin, Texas, outlined her systematic approach to multi-year planning. “What we do for all of our clients is just lay out what we expect each year and then see what we can play with,” she explained. “If they’re receiving RSUs as well as nonqualified or incentive stock options, we’ll map out RSUs over the years and where we think taxable income is going to be. Then we’ll see how we can pop other things around and fit them in over those next few years.”

Stock Option Exercises: Variables To Consider

As Rebecca acknowledged, the vesting dates of RSUs are fixed, so you can’t control when you receive RSU income at vesting. By contrast, you choose when to exercise stock options, making them a variable to play with in multi-year planning.

Example: You are a joint filer with $290,000 of taxable income in 2022 and projected taxable income of roughly the same in 2023, putting you in the 24% tax bracket. You also have a $100,000 spread on your nonqualified stock options (the grant will expire in March 2023). By exercising just enough options in 2022 to generate $50,000 of additional income (giving you $340,000 for the year), you can then exercise the remaining options in early 2023 and avoid the higher 32% tax bracket in both years.

However, many advisors emphasize that taxes should not be your only consideration in year-end planning. “At year-end, we don’t let the tax tail wag the dog,” cautioned Rebecca. “The main question is really how much cash are you willing to lose toward options? They’re never a guarantee. It’s important to recognize that this may be a moonshot. If we can treat it like a very small company stock with high volatility, what would you want to put toward that? We’ll recognize what our clients would like from that perspective.”

Other factors in planning for stock option exercises at year-end are holding periods for capital gains and your company’s stock-trading windows, as discussed by webinar panelist John Owens, Director of Financial Planning at Brooklyn FI in New York. “One of the things that’s top of mind is going through what the timeline looks like,” he said. “If you’re doing an exercise on, say, December 8, you might not be able to sell those shares for long-term capital gains next year because your company’s trading window is closed during that time. We need to understand cash-flow needs for clients and how long they actually want to hold the stock.”

Incentive Stock Options: Year-End Dilemma

The advisors emphasized that in a down market it is crucial to review incentive stock option (ISO) exercises that you made earlier in the year if you are still holding the stock. Selling that ISO stock before the year ends removes the spread at exercise from the AMT calculation, thus eliminating the need to pay the AMT on it. However, making that move also means you don’t meet the ISO holding periods for beneficial tax treatment.

Diversification In Down And Volatile Markets

The need to diversify is a common theme in all investment planning. Do the down markets and volatility of 2022 make that need more or less urgent at year-end?

“I think it really depends on what the client is anchoring to,” offered John Owens. “If they’re anchoring to a stock price that was 80% higher a year ago, it may be hard to get them to sell. But I try to spin it by saying hey, your company’s stock may be down but the broader stock market is also down, so you’re selling something at a discount to buy something at a discount. You’re still getting upside, and it’s a more diversified upside.”

The webinar panelists all said they generally recommend that clients sell RSU shares at vesting as a way to diversify out of company stock. “With our clients, we explain that diversification is something we’re going to recommend in every trading window,” asserted Rebecca Conner. “For RSUs that are vesting and available to sell immediately, we will do that from the get-go. And we’ll have that conversation during the good years as well as the bad years. It’s part of the process. Clients understand that they’re dollar-cost-averaging over a period of time.”

To those who are skeptical about this concept, she points out that loyalties to single stocks can be dangerous allies. For example, after an initial public offering (IPO), “statistically 70% of IPO companies do not get back to their initial high price,” an observation that may help to ease the client away from anchoring on that price.

Private Companies In 2022: Delayed IPOs

John Owens noted the special relevance of multi-year planning in 2022 for employees of private companies which were expecting an IPO this year that was postponed by a year or more due to economic uncertainty or other factors.

“Many clients have had delayed liquidity events this year because the IPO market has dried up,” he explained. “For clients who we now know are going to have huge liquidity events in future years, we’ve actually been looking at accelerating income into this year because their income is lower than we thought it was going to be.” This strategy, he observed, takes advantage of the client’s lower tax rate this year for any income that can be recognized now instead of later, when the rate will be higher at the time of the company’s IPO, acquisition, or other liquidity event.

Ways To Reduce Taxable Income At Year-End

What if you did have a big income spike from stock compensation this year? What are some of the ways in which you can reduce your income on other fronts to keep your 2022 income in a lower tax bracket?

John Barringer mentioned first the need to max out 401(k) plans and, beyond that, perhaps consider a contribution to a nonqualified deferred compensation plan. However, he cautioned, this type of planning should be prospective rather than retrospective. “Before that big income hit happens, we need to know how we’re going to proceed,” he urged. “By the time the event happens, if there wasn’t some planning before, it’s getting close to being too late.”

Rebecca Conner agreed. “A client will come to us with a double-trigger RSU vesting and say ‘How do I minimize taxes?’ Oh, man!” she laughed. “Not very easily. However, we can talk about ways to defer future taxes. Maybe it’s a great time to do a mega-contribution to a 529 college-savings plan for a young child. Maybe it’s time to make choices with investments now to really set you up to defer those kinds of taxes in a bigger picture over multiple years in the future.”

Tax-Loss Harvesting

One popular year-end strategy is tax-loss harvesting: you sell stock at a capital loss that can then be used on your tax return to first offset capital gains and then up to $3,000 of ordinary income. “We’re focusing a lot on tax-loss harvesting, mainly for people with huge first-time capital gains, perhaps $2–3 million payouts,” said John Owens. Rebecca Conner added that her firm is doing the same. “We look at how much a tax loss can really help clients and what we think is justifiable,” she explained. “It may help them for a lot of additional stock sales.”

But not all advisors are big fans of this technique. “I do not oversell the idea of tax-loss harvesting,” said John Barringer. “It’s not going to make a huge difference on your tax return. It’s going to lock in losses that you may or may not regret later. And there’s not a lot of bang for your buck in focusing on this when there are so many other issues to focus on with equity comp.”

If you do seek tax-loss harvesting and plan to repurchase the same stock after selling it at a loss, beware of the rules on wash sales, which are explained in an article at myStockOptions: 7 Wash Sale Facts To Know Before Selling Stock For Tax Loss Harvesting.

Year-Start Planning In 2023

Part of year-end planning is also thinking about the coming year. “What new grants do you expect in 2023?” asks John Barringer of his clients. “An ongoing down market may mean a bigger share grant or at least a lower exercise price for stock options.” You should also be aware of stock option grants that are scheduled to expire in 2023, he added, along with what would happen to stock options and RSUs if you were laid off.

John Owens pointed out that now is a great time to enroll in an employee stock purchase plan (ESPP), especially if it has “a good lookback provision for calculating the purchase price.” ESPPs with that feature can be a surprisingly profitable deal in a down market.

Rebecca Conner urges clients to think about employment prospects. “Review job expectations and career goals. If you’re making a move in 2023, consider your total expected income and the impact of any stock options that you may need to exercise when you leave your current job for a new one.”

She and the other panelists also recommend evaluating whether to exercise ISOs early in the new year and hold the shares if the company’s stock price is still depressed but the outlook for the company is good. This can minimize your AMT risk while starting the holding-period clock for the beneficial ISO tax treatment.

myStockOptions Webinars

See the myStockOptions Webinar Channel for upcoming webinars and past webinars on demand. Each webinar (100 mins) offers 2.0 CE credits for CFP, CPWA/CIMA, CEP, EA (live webinars only), and CPE (live webinars only):

Year-End 2022 Financial & Tax Planning For Equity Comp. Boost your knowledge of year-end and year-start strategies for stock options, restricted stock/RSUs, ESPPs, and company stock holdings to help you make smarter decisions and prevent costly mistakes.

Restricted Stock & RSU Financial Planning: Advanced Bootcamp. Insights from a panel of three leading financial advisors, including case studies, to provide practical expertise for restricted stock/RSUs in public and private companies.

Stock Option Exercise Strategies: Advanced Bootcamp. It is crucial to have a plan for stock option exercises. This webinar features compelling strategies from a panel of three experts in financial and tax planning for option exercises.

Stock Compensation Bootcamp For Financial Advisors. Whether you are new to stock comp or want to sharpen your knowledge, our bootcamp webinar provides practical information and insights to maximize success.

Stock Comp Financial Planning For Private Company Employees: From Startup To IPO Or Acquisition. Equity comp in private companies is different. Learn the related financial and tax planning with three leading financial advisors, including real-world case studies.

"The knowledge I gained from myStockOptions both as a premium member and from your webinars has made me stand out at work." —Vincent Leonardo (EA), Tax Analyst, Intuit

Negotiating Equity Compensation: How Advisors Can Help Clients. Learn the best ways to evaluate and negotiate equity compensation in job offers and how to protect it at job termination.

Strategies For Concentrated Positions In Company Stock. Wealth is won and lost through the management of concentrated company stock positions. In this webinar, experts at managing concentrated stock wealth explain strategies and solutions.

10b5-1 Trading Plans And Other SEC Rules Advisors Need To Know. Learn the fundamentals, best practices, and most effective designs for Rule 10b5-1 trading plans. This webinar features top legal and financial experts presenting practical guidance and real-world case studies for financial advisors.

Preventing Tax-Return Errors With Stock Comp And Stock Sales. Understand the rules of tax-return reporting for stock options, restricted stock/RSUs, ESPPs, and sales of company shares. Learn how to avoid the common mistakes that can lead to overpaying taxes or unwanted IRS attention.

How 10b5-1 Plans Can Help You Build Wealth And Avoid Insider Trading With Your Company Stock

Executives and other key employees with equity compensation face a unique conundrum with company stock. While much of their pay is in the form of restricted stock units (RSUs) and/or stock options, they often cannot sell company shares because they possess what's called material nonpublic information (MNPI), i.e. knowledge of confidential company info that will affect the stock price when made public. In other words, they have to sell company shares to meet financial goals but also don’t want to be accused of insider trading.

Fortunately, there is a way out of this Catch-22 situation: SEC Rule 10b5-1, which provides for a Rule 10b5-1 trading plan.

Insider-Trading Risk

MNPI is confidential information about the company that will move the stock price up or down. When you know MNPI about a company, whether you’re an executive, employee, or outsider, you cannot trade in that company’s securities until the MNPI is disclosed.

When you possess MNPI, regardless of whether or not you factored that information into your buy or sell decision, you’re at risk of being charged with insider trading by the Securities and Exchange Commission (SEC) and criminal prosecutors. To make matters even more challenging, the intervals when company insiders do not possess MNPI, and can sell shares without the risk of insider trading, may be brief and infrequent.

Test your knowledge of the rules: Try our quiz on insider-trading prevention and its interactive answer key at myStockOptions.

Rule 10b5-1 To The Rescue

If you’re in this position, how can you regularly sell company stock? You can use what’s called a Rule 10b5-1 trading plan. When properly created, a 10b5-1 plan gives you a way to diversify your stock holdings, sell stock to meet goals under your financial plan, and avoid getting into trouble for insider trading.

Alert: The SEC is focusing on abuses with these plans and has proposed new rules.

myStockOptions recently held a webinar on 10b5-1 plans and other SEC rules: 10b5-1 Trading Plans & Other SEC Rules Advisors Need To Know. A panel of three experts provided key insights on both the legal framework of 10b5-1 plans and the role they can play in financial planning for company insiders.

Basics Of 10b5-1 Plans

A 10b5-1 plan is a prearranged stock-trading plan under SEC Rule 10b5-1 that provides an affirmative defense against charges of insider trading when you later sell or buy stock while you know MNPI about your company. Created when you do not know MNPI, the plan is set up in advance to make automatic, periodic sales and/or purchases of your company’s stock.

The plans need to follow the requirements, as the SEC is starting to bring enforcement actions for abuses. For example, the SEC recently announced (September 21, 2022) that it had settled an enforcement proceeding involving alleged insider trading by Cheetah Mobile’s CEO and its former president; this case and the related SEC Order involved the misuse of a Rule 10b5-1 plan.

The SEC’s statement quotes Joseph G. Sansone, Chief of the SEC Enforcement Division’s Market Abuse Unit, who explains that “while trading pursuant to 10b5-1 plans can shield employees from insider-trading liability under certain circumstances, these executives’ plan did not comply with the securities laws because they were in possession of material nonpublic information when they entered into it.”

Rule 10b5-1 trading plans have become popular since SEC Rule 10b5-1 was adopted in 2000. “Over 50% of Fortune 500 companies have at least one executive using a 10b5-1 plan,” observed webinar panelist Mike Andresino, a partner in the Boston office of the law firm ArentFox Schiff, in his opening remarks.

Mike went on to outline the basic parameters of 10b5-1 plans. “The insider who establishes the plan cannot be in possession of MNPI when the plan is established,” he asserted. “The person cannot exert any subsequent influence over the implementation of the plan and must have entered into the plan in good faith.”

There are various ways to establish a 10b5-1 plan, he noted. By far the most common is the contract method. “You enter into a binding contract to buy or sell company stock that specifies, or has a formula to determine, the number of shares, the stock price they will be sold at, and the timing. That formula doesn’t have to be precise. You don’t have to specify prices. You can refer to the market; you can refer to extrinsic events.”

Two examples:

Period-sales approach: Sell X number of shares on the first day of every month/quarter, as long as the price is above $Y 

Price-only approach: Sell X number of shares at any time during the plan when price reaches $B; sell an additional C number of shares if price gets to $D 

Importance Of 10b5-1 Plans

Rule 10b5-1 trading plans can become very important financial tools for executives, employees, and directors who know MNPI about their companies most of the time. While companies have regular open trading windows when you are permitted to trade stock, amid blackout periods when you are not allowed to trade, those window periods may not be helpful for some executives and key employees.

“In reality, for many of them, they may have inside information at any point, whether the window is open or closed,” said webinar panelist Rich Baker, the executive director of Morgan Stanley Executive Financial Services in New York. Whether the MNPI involves a product rollout, M&A, or company litigation, it can keep executives in blackout periods for quarter after quarter. “I’ve seen executives who are unable to sell company stock for two years,” Rich stated.

Ideally, Rich went on, you set up a 10b5-1 plan when you have an open trading window and do not possess MNPI. “There’s a waiting period, a ‘cooling off’ period, before you can start trading,” noted Rich. “Then trading should be allowable from a legal perspective under the plan on an ongoing basis thereafter.”

Rich explained that 10b5-1 plans can confer other benefits beyond just letting corporate insiders trade company stock in good faith and get on with their financial planning. “10b5-1 plans can reduce investor concerns. They let the company facilitate an orderly disposition for all of their executives so that they don’t have lots of optic-concerning trades going on when activity is high at the company.”

“Diversification, selling long shares, is the most commonly thought of use for 10b5-1 plans,” chimed in Mike Andresino. “You can also exercise and sell stock options under a 10b5-1 plan. In combination with restricted stock and restricted stock units, you can use 10b5-1 plans to sell shares to cover taxes at vesting even during a blackout period.”

Best Practices For 10b5-1 Plans

Mike then discussed some of the best practices for 10b5-1 plans that have arisen to help ensure they work as an affirmative defense against insider trading. “The letter of the law doesn’t have a lot of requirements, but over the years a series of practices have developed,” he observed as a prelude to covering the SEC’s proposed rules. One is the “cooling off” period. “Companies often have a period that must elapse between the adoption of the plan and the first trade that takes place under the plan. Sometimes it’s as short as two weeks. The sweet spot is generally 30, 60, or 90 days.”

Terminating the plan early can, Mike noted, put a big dent in any later claim that you entered the plan in good faith. “One thing which indicates to courts and the SEC that you may not have had good faith is adopting a plan and then, when it looks like it may be beneficial to hold the shares, you terminate the plan.” Similarly, Mike said, multiple overlapping plans can also raise questions about good faith. “Companies often impose restrictions on that.”

SEC Proposed Rules

The SEC has proposed new rules for 10b5-1 plans to combat suspected abuses, explained Rich Baker. These rules would codify many of the best practices that have arisen. The amendments add new conditions to the availability of the affirmative defense to insider-trading liability, including:

1. 120-day cooling-off period before any trading can start after the plan’s adoption or modification
2. Requirement to certify when adopting or modifying the plan that you are not aware of material nonpublic information about the company
3. No overlapping 10b5-1 trading arrangements for open-market trades
4. A limit on single-trade plans to one per 12-month period
5. Plan must be entered into and operated in good faith

The first two SEC rules would apply only to senior officers and directors, though a company could decide under its own rules to impose them on other executives and on employees. The final SEC rules are expected in the spring of 2023.

Financial Planning With 10b5-1 Plans

Webinar panelist Megan Gorman, the founder of Chequers Financial Management in San Francisco and a Forbes.com contributor, spoke about the role a 10b5-1 arrangement can play in financial planning. She presented tips and case studies on how she effectively uses and designs these plans for clients.

When putting together a plan, she explained, you should answer four questions:

1. What shares are you selling?
2. How long is the plan?
3. What is the frequency of sales?
4. What is the selling method?

“Monthly selling plans with limits are often a great approach,” she said. She noted that the optimal length of the plan is typically 12 months. “You can also structure the plan to change at different points to meet cash-flow requirements.”

Using what she calls an “elevator design” allows more shares to be sold as the company’s stock price rises, as illustrated in one of her webinar case studies. She asserted that it is also crucial to factor tax planning into your 10b5-1 arrangement, along with future vestings of restricted stock or restricted stock units.

Optics are another key consideration, Megan emphasized, especially for senior executives who can easily stumble into the media spotlight. “Just because you are allowed to do a 10b5-1 plan doesn’t mean you should,” she cautioned. “Even the most innocent actions can look nefarious on the outside.” One test Megan applies is a thought experiment: how would this stock trade look if it were reported on the front page of The Wall Street Journal?

Seek Expert Advice

Starting a Rule 10b5-1 trading plan is not a DIY activity. You need expert legal, financial, and tax advice, to follow both the SEC and your company’s rules. You want to assure you are setting up the plan properly and that it achieves what you want it to without getting you into trouble.

Before you set out, see the myStockOptions content sections on Rule 10b5-1 trading plans and insider-trading prevention. In addition, the webinar in which the experts quoted above spoke is available on demand at the myStockOptions Webinar Channel.

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myStockOptions Webinar Channel: Next Webinar

Negotiating Equity Compensation: How Advisors Can Help Clients

• October 13, 2022, 1:00pm to 2:40pm ET, 10am to 11:40am PT
• 2.0 CE credits for CFP, CPWA/CIMA, CEP, EA, and CPE
• Agenda and panelist details at the webinar registration page

Learn the best ways to evaluate and negotiate equity compensation in job offers and how to protect it at job termination. Discover how to help clients get the best deal to maximize and preserve their wealth in company shares, stock options, and restricted stock/RSUs.

This webinar will provide practical info and guidance on negotiating equity comp, how to safeguard grants when leaving a job, and big mistakes to avoid. In 100 minutes, it will feature insights from three leading financial and legal advisors, including real-world case studies. Their expertise applies to employees and executives at all types of companies, whether startups, recently public companies, or long-time public corporations.

Register now. All registered attendees get unlimited streaming access to the webinar recording for their personal viewing, along with the detailed presentation slide deck and handouts. Therefore, even if you can't attend the live webinar, please still register, as you will receive access to the recording along with the presentation and handouts.

 

Stock Options & RSUs: 6 Pro Tips For Navigating Volatility

For many of you who have equity comp, the extreme market fluctuations of 2020–2022 may be your first experience of volatility after a decade of rising markets. Know that it's normal to feel a little rattled. Sudden stock-price declines can stress out even the most experienced holders of stock comp (and their financial advisors).

Sooner or later, volatility may force you to make decisions that affect your financial future and long-term wealth. Should you change your financial plan or stick with it?

Financial strategies for equity compensation amid volatility and falling stock prices were dominant themes in two recent myStockOptions webinars. In one webinar on stock option exercise strategies and another on planning for restricted stock and RSUs, panels of financial advisors and tax experts discussed how to navigate volatility and down markets. This diverse group, including CFPs, EAs, and JDs, presented a variety of insights from different angles.

1. Listen To Your Risk Tolerance

David Marsh, a financial-planning case manager at Ameriprise (Minneapolis), pointed out in the stock option webinar that market declines offer a useful period to “confirm or reset risk tolerance.” In good times for your company’s stock price, he observed, it’s easy to be aggressive and bullish in your financial strategy. It’s harder to keep up that resolve when the stock price tumbles. In fact, he continued, a falling stock price can give you a helpful reality check on your tolerance for investment risk.

He suggests you listen to what your emotions in a downturn are telling you. “How much of a downturn are you willing and able to stomach, and how does that impact your goals? If you’ve been relying on equity comp to meet regular living expenses, that’s a real danger zone which comes to light in stock-price volatility and downturns.” Insights you derive from dark times for the stock price can help you re-examine your goals for share proceeds and re-assess the portion of them that is discretionary.

With nonqualified stock options, he went on, a reduction in the difference between the stock price and the exercise price may seem to create a tempting opportunity to exercise the options. That starts the holding period for the beneficial tax treatment on long-term capital gains at sale when the stock price eventually recovers. This is a common strategy for incentive stock options (ISOs).

However, with nonqualified stock options (NQSOs) there may be better uses for the same money. “You should compare whether to exercise and hold NQSOs or maybe just hold on to that option and put the cash to work in another way,” he advised. “Consider investment risk and tax factors. What I would bear in mind is that if you’re game enough to exercise NQSOs at this time, I would say let’s take that cash and simply buy more shares. If indeed the stock price does recover, by increasing the equity position in the company we may produce a better result.”

2. Welcome New Option Grants, But Have A Layoff Plan

Megan Gorman, the founder of Chequers Financial Management (San Francisco), complemented David’s thoughts in the stock option webinar with the fact that a depressed stock price is an excellent time to get new stock option grants. Playing a long game, she emphasized, is key to success with equity compensation. “If you go back to March 2009, when the stock market was miserable, it was an amazing time to get a grant with a very low exercise price,” she observed. The stock-price increases during the long recovery made option grants awarded at that time extremely wealth-generating.

But beware of layoffs, she cautioned. Option grants have finite terms and typically only very short periods when options can be exercised after job termination. “It’s important to have a strategy for exercising options and selling stock in the event you are laid off. In these more volatile markets, think about the fact that you are at risk of losing your job. Don’t lose the equity awards you worked so hard for.”

3. Don’t Forget The Big Picture, But Revisit Your Cash Position

Keep your big-picture financial goals in mind, advised Chloé Moore, the founder of Financial Staples (Atlanta), in the restricted stock/RSU webinar. “Things are a little volatile now, but keep a handle on your financial goals. Focus on what you can control: continue to build savings, pay off debt, and put yourself in a stronger financial position to shield yourself as much as you can from the impact of volatile markets.”

To that end, now is a good time to increase your cash position, she noted. “Your restricted stock units can help with this,” she points out. “That’s a good reason to sell the shares as soon as the stock vests.” If you’re using your RSUs to fund your lifestyle, it’s crucial “to revisit cash flow,” she asserted.

4. Try To Be Logical Rather Than Emotional

This is often easier said than done, but it’s an attitude worth reinforcing. In the RSU webinar, Meg Bartelt, the founder of Flow Financial Planning (Bellingham, Washington), addressed the irrational tendency to place too much importance on the grant price of restricted stock/RSUs. If the stock price falls between grant and vesting, this mental “anchoring” makes it easy to feel as if you’ve lost something.

“If you received Google RSUs a year ago, the much higher grant value is really depressing now,” she mentioned as an example. “Your projected comp used to be $500,000. Now it’s $300,000. But it’s important to remember that the $500,000 was literally never yours. The only thing that is yours is the number of shares, if you stick around long enough at the company. Be aware of that bias.”

Should you hold your RSU shares or sell them? The test for answering this question, Meg pointed out, “doesn’t change with the stock price.” Rather, she went on, it’s always this: “If you had cash of the same amount, would you buy stock in the same company?” If the answer is yes, you probably want to hold your shares. If the answer is no, you probably want to sell them. “The answer may change with the stock price and market conditions, but not the logical framework,” she emphasized.

Daniel Zajac, the managing partner of Zajac Group (Exton, Pennsylvania), brought up an alternative approach to minimize downside risk in volatile markets if you have both stock options and RSUs. Speaking alongside Meg and Chloé in the RSU webinar, he suggested doing an analysis to determine whether it makes sense for you to hold your vested RSU shares and instead exercise your options and sell those shares. That can safeguard the generation of proceeds you need for specific goals.

5. Watch Your Estimated Taxes; Look Ahead To Future Grants

Meg also observed that a big drop in income between last year and this year means that if you pay estimated tax to keep up with income spikes from RSU vestings, you should revisit how much estimated tax you’re paying. “Estimated tax vouchers for the current tax year are based on last year’s income. If you use last year’s estimated tax vouchers for this year’s lower income, you’re going to be way overpaying estimated taxes this year.”

The inverse is also true, she continued, should you lower your estimated tax payments this year. If the stock price goes back up next year, you want to be sure you’re not underpaying estimated taxes on the basis of your lower income this year.

Daniel echoed Meg’s observations by stressing the importance of “actively working with a CPA” to be sure that you’re neither overpaying nor underpaying estimated tax throughout the year, instead of simply relying on the safe harbors based on your prior year’s income. “If you have significant equity comp,” he stated, “you should be doing quarterly check-ins for estimated taxes.”

Daniel and the other presenters in the RSU webinar also pointed out that a fallen stock price presents new opportunities. If your annual equity comp grants are based on a percentage of your salary, “you may be getting additional shares because the stock price is lower.” This is good news to offset the bad news of a lower stock price.

6. Now Is The Time To Seek Professional Financial Advice

Bill Dillhoefer, the CEO of Net Worth Strategies (Bend, Oregon), which developed the StockOpter analysis tool, urges employees with equity comp in a downturn to seek advice from a professional financial planner, if they haven’t already. “When the stock price is going up, you may be getting advice from the watercooler chat and think you don’t need a financial advisor,” he said in the stock option webinar. Confidence is easy in bull markets. However, the game changes when stock prices tank and a bear market looms.

Bill emphasized how much a financial advisor can help you make better decisions and avoid mistakes with stock compensation. A good advisor can “establish and track diversification criteria based on risk.” He recommended understanding your “forfeit value,” a metric an advisor can calculate that shows the value lost if you leave your company to work for a competitor. Even if you’re generally confident in your knowledge of personal finance, advisors can help you “be a little more secure about lasting through these volatile markets without going crazy.”

Further Resources

The webinars in which these financial-planning experts spoke are available on demand at the myStockOptions Webinar Channel:

• Stock Option Exercise Strategies: Advanced Bootcamp
• Restricted Stock & RSU Financial Planning: Advanced Bootcamp

myStockOptions.com has other resources and tools on financial planning amid volatility and down markets.

Concentrated Company Stock Positions: How Financial-Planning Strategies Can Manage Risk

Everyone knows the old investment adage: don’t keep all your eggs in one basket. Having a significant portion of your net worth in just one stock is risky.

Concentration in company stock can easily arise for employees and executives who receive equity comp. Whether you acquire company shares through restricted stock unit (RSU) vesting, stock option exercises, or founders’ stock in a fast-growing startup, your investment in that single stock of your company can pile up quickly. While a concentrated position can create tremendous wealth if the stock skyrockets, it can also erase your wealth in just one bad day for the stock.

But diversification, the obvious answer to overconcentration, isn’t always so simple. Many executives have ownership requirements for the stock of their companies and therefore cannot sell large portions of their holdings. Corporate insiders often possess material nonpublic information, which puts them at risk for insider trading when they sell shares.

Moreover, under company rules you may have only very brief open trading windows when you are able to sell your stock. Sometimes sheer loyalty to the company and confidence in its future may make it personally hard for executives and employees to diversify wealth out of the stock.

Strategies exist to mitigate the risk of a concentrated stock position. Some of these techniques were the focus of a recent myStockOptions webinar: Strategies For Concentrated Positions In Company Stock (available on demand). The panel of financial and tax experts who presented during the webinar outlined several key approaches, from simple to complex and from short-term to long-term.

Concentration Risk Applies To All Stocks

While experts do not agree on exactly what constitutes a dangerously concentrated stock position, they do agree that the risk applies to the stocks of all companies. Recent volatility has provided fresh examples, as pointed out by webinar panelist Valerie Gospodarek (CFA), the owner of VG Financial Consulting in Lafayette, California. She noted that, at the time of the webinar (May 4, 2022), Netflix was down 70% from its peak, Wayfair 75%, Zoom 80%, and Zillow over 80%. Even stalwarts such as Amazon (then down 25% from its peak), Google (down 21%), and Home Depot (down 28%) have shown alarming volatility and declines, she continued.

Sudden stock losses often do not involve internal and foreseeable business reasons within a company’s operations. “There were no specific company issues causing these declines,” Valerie pointed out. “A lot of stock declines happen due to macroeconomic factors, such as the pandemic, supply-chain shortages, high inflation, and the war in Ukraine. These can affect every stock out there.”

A commonly cited threshold for dangerous concentration is 10% or more of net worth in a single stock. “Many of my clients who receive equity compensation have far more than 10% of their wealth in their employer,” said Valerie. “Usually somewhere around 20% to 30%, I start to get very concerned for my clients.”

Core Strategies: Selling, Gifting, Or Donating

The simplest recourse for a dangerously concentrated stock position is to sell the shares and diversify. An executive should set up a Rule 10b5-1 trading plan for selling shares, as this can provide an affirmative defense against any insider-trading charges that arise. However, said Valerie, her clients may be reluctant to sell their shares because of combined federal and state tax rates on capital gains that can approach 40%.

An alternative strategy Valerie cited is gifting the stock. A gift of stock, no matter how large, is not taxable income, and the recipient does not have to report it. Depending on the size of your estate at death, a strategy of making lifetime gifts can reduce your estate taxes, and you may want to consider using GRATs and other techniques involving trusts. Another approach is stock donations, including the use of a charitable remainder trust.

Short-Term Strategies: Hedging

More complex strategies for concentrated stock positions were discussed by webinar presenter Marcel Quiroga (RMA®), the founder and CEO of TQM Wealth Partners in Marblehead, Massachusetts. These strategies involve "hedging" the stock: techniques for protecting gains against the risks of concentration without the full tax consequences of selling the shares.

Alert: Hedging transactions are sophisticated devices. They involve legal and tax rules that require professional advice and may attract IRS attention. Some companies prohibit them altogether.

Marcel discussed four short-term hedging strategies during the webinar:

1. A put option gives you the right to sell a specified amount of an underlying security at a specified strike price when or before the option expires. “With a put option, you have the potential to control downside risk,” Marcel observed. “This is a shorter-term strategy,” she emphasized, “because the premiums are high.” However, she noted, there are ways to reduce the out-of-pocket expenditure, such as lowering the strike price.

2. A covered call consists of selling a call option that is covered by a long position in the asset. “This strategy provides income for the stockholder,” continued Marcel, “but it doesn’t offer downside protection. You would use a covered call when you are neutral about the stock, meaning you don’t think it will either increase or decrease in price.”

3. A zero-cost collar does offer some downside protection, said Marcel. “Here you are protecting your losses by purchasing a put and selling a call. The cost of the put is canceled out by what you create in income with the call. You forgo some upside potential, but the put option protects you on the downside. This becomes really interesting not only for that downside protection but also for the possibility of eliminating the cost.” While forfeiting some upside potential may be considered a disadvantage, “with a concentrated position what you’re doing is hedging your bets, so it can be worth giving up that upside potential to protect on the downside.”

4. A variable prepaid forward, like a zero-cost collar, includes buying a put and selling a call, but it has an extra twist. “A variable prepaid forward is packaged with a loan for 75% to 90% of the value of the securities that will be sold in the future, typically in two to five years,” explained Marcel. “Based on the market price at the time the contract expires, the number of shares delivered to the counterparty is variable.” Taxes on capital gains are not due until the transaction is finalized.

“This technique can be useful for executives who are granted stock options but have ownership requirements that prohibit them from selling the acquired shares for a certain time.” However, Marcel warned, this approach can draw IRS scrutiny and is less popular for that reason.

Long-Term Strategies: Exchange Funds And Protection Funds

Two approaches for managing concentrated stock positions over a longer term were discussed by webinar panelist Brian Yolles, the founder and CEO of StockShield in Pasadena, California. These involve what are called exchange funds and protection funds. Both are ways to “pool” concentration risk and thus soften its potential impacts.

An exchange fund, Brian explained, is a partnership or similar entity. Each participant contributes low-tax-cost-basis shares in exchange for a pro rata interest in the fund. As each investor provides stock from different public companies, the fund holds a diversified portfolio of stocks in a variety of industries.

After seven years, if you don’t want to stay in the fund, you can exit by receiving a basket of stocks equal to your fund interest. Contribution of shares to an exchange fund does not trigger a taxable event. The tax basis of your fund interest equals the basis of shares you contributed (i.e. a carryover basis).

“Economically it’s as if each investor sold his or her shares without triggering a taxable event and immediately reinvested the proceeds into the fund,” said Brian. “This is useful for investors with highly appreciated stock positions who wish to diversify out of some or all of their position in a tax-deferred manner.”

However, the stocks you get when you exit the fund seven or more years later “are not really your call,” he cautioned. “That’s down to the portfolio manager of the fund company. The concern there is that when you redeem your exchange-fund interest, you’re going to get stocks that the portfolio manager does not want. You may end up with a bunch of stocks you don’t really like and then have to sell them and pay taxes.”

A protection fund is an alternative risk-pooling strategy. It’s for investors who, unlike with an exchange fund, want to continue owning some or all of their stock position as a core long-term holding. “Each investor contributes a modest amount of cash (not their shares, which they can keep) into a cash pool that’s used to protect the participants from a large decrease in the value of their stock after a period of years,” said Brian, who holds patents for this strategy and whose firm specializes in protection funds. “It’s a way to mitigate the risk but let you keep the stock.”

The pool of cash, he went on to detail, is provided by several investors, “each with a different stock in a different industry and each looking to protect the same amount of stock.” The particular terms of a Stock Protection Trust (SPT) can vary depending on the risk of the underlying stocks. In the example Brian presented, every investor contributes cash (paid up front) equal to 2% of the value of stock being protected per year for five years. The pool of cash is invested to maturity in US government bonds with a five-year duration. The stock being protected is not pledged or subjected to any lockup provision.

At maturity, investors whose stock has appreciated retain their stock’s full upside gain; for investors whose stock lost value, the cash pool is distributed on a “total return” basis. If the cash pool exceeds total stock losses, all losses are eliminated and the excess cash is returned to the investors. If total stock losses exceed the cash pool, large losses are substantially reduced.

Incentive Stock Options (ISOs) And Special Tax Issues

If your concentrated position arose from exercises of incentive stock options (ISOs), you need to know the special ISO tax rules. For ISO shares held more than two years from grant and one year from exercise, you get long-term capital gains tax treatment at sale for the full gain over your exercise price. According to webinar panelist Mark Leeds, an attorney at Mayer Brown in Manhattan, New York, the ISO rules do not automatically prohibit hedging transactions; they consider whether a disqualifying disposition (i.e. sale, gift, etc.) has occurred during the required holding period for ISO shares.

Certain strategies or ways of structuring a strategy can be considered a constructive sale, triggering a disqualifying disposition of the ISO shares and the loss of tax benefits, Mark warned. He also cautioned that any strategy must avoid being labeled as a tax straddle.

Further Resources

The webinar in which these experts spoke, which included case studies and tax analyses, is available on demand at the myStockOptions Webinar Channel. In addition, myStockOptions.com has extensive content on financial planning for concentrated stock positions, diversification, and other high-net-worth situations involving stock options, restricted stock and RSUs, ESPPs, and substantial holdings of stock in public and private companies.

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WEBINAR! Stock Option Exercise Strategies: Advanced Bootcamp

June 15, 2pm–3:40pm ET, 11am–12:40pm PT
2.0 CE credits for CFP, CEP, CPWA/CIMA, and EA

Employees with stock option grants, whether NQSOs or ISOs, face important wealth-building and tax-minimizing decisions about when to exercise their stock options. Volatile stock markets make the need for effective guidance even more important. In this 100-minute webinar, a panel of three leading financial experts will provide practical info, guidance, and expertise for stock options in both public and private companies, including real-world case studies.

For details of the webinar agenda and panelists, see the webinar registration page.

Time/date conflict? No problem. All registered attendees get unlimited streaming access to the webinar recording, along with the presentation slide deck. Therefore, even if you have a time conflict, please still register, as you will receive a link to the recording and presentation.

Year-End Planning 2021: 6 Items For Your Stock Comp Checklist

Year-end financial and tax planning comes around every December like old favorite holiday movies. Strategies for year-end 2021 and year-start 2022 are especially crucial for the millions of employees in the United States who have stock compensation such as stock options and restricted stock units (RSUs), participate in an employee stock purchase plan (ESPP), and/or have holdings of company shares.

To help keep the season merry and bright, myStockOptions.com recently held a webinar on year-end planning with a panel of three financial and tax advisors who have expertise in stock compensation. Some of their insights are summarized in the year-end checklist below.

1. Should You Plan For Tax-Law Changes By Congress?

The future of new tax legislation in Congress is not clear enough to provide definite direction for year-end planning, according to the webinar panelists. The version of the Build Back Better Act passed by the House of Representatives in November did not include some of the tax hikes previously on the table to raise ordinary income and capital gains rates and change the estate and gift tax.

But it does include other tax provisions to keep an eye on that could impact equity compensation or stock sales. For example, it seeks to allow SALT (property and state tax) itemized deductions up to $80,000 (currently limited to $10,000). This change would affect tax planning when you have incentive stock options (ISOs) and want to avoid the alternative minimum tax.

Another major proposal in the bill is a surtax of up to 8% on the very wealthy. For individuals, this provision would impose a surcharge of 5% for modified adjusted gross income (MAGI) of more than $10 million, plus an additional 3% on MAGI over $25 million. This creates the equivalent of a top long-term capital gains rate of 28.8% or 31.8% that would apply to stock sales.

The bill also seeks to limit the qualified small business stock (QSBS) income exclusion to 50% for sales after September 13, 2021, for individuals with adjusted gross income of at least $400,000 and for all trusts and estates. This is a special tax benefit when you have stock compensation, founder’s stock, or investments in a private company and have held the shares at least five years, plus meet other requirements. The QSBS exclusion has been 100% for QSBS up to $10 million over the past several years.

“If this goes through, it’s basically going to negate any benefits of qualified small business stock,” lamented webinar panelist Chun Wong, Managing Partner of the CPA and accounting firm Safe Harbor LLP in San Francisco. He explained that a 50% exclusion would raise problems with the alternative minimum tax (AMT), depending on when the stock was acquired.

However, the future of the bill is too uncertain to be a factor in year-end tax planning. “The legislation currently in Congress is out of your control,” asserted Ally-Jane (AJ) Ayers, a CFP, CEP, and Enrolled Agent who co-founded the financial-planning firm Brooklyn FI in New York. “There’s so much we don’t know that at this point in the year, the best you can do is make a goals-based decision or a risk-based decision. We shouldn’t make tax decisions about what may or may not happen in Congress this year. The best thing to do is to make decisions about what your family needs for liquidity and financial independence.”

2. Income-Shifting And Multi-Year Planning

Multi-year planning is especially valuable with equity compensation, given the spikes of income that can occur with option exercises, the vesting of restricted stock/RSUs, or company stock sales. In general, you want to keep your yearly income under the thresholds for higher taxes and try to recognize extra income in the year when your income and tax rates will be lower.

Be aware of the 2021 and 2022 thresholds for higher tax rates on compensation income and capital gains, the phaseouts for various tax credits, and the Medicare surtax on investment income. The table below presents key income thresholds in 2021 that affect your tax rates.

TAX RATE/IMPACT	INCOME THRESHOLD
Income taxed at 37%	(single) over $523,600 (joint) over $628,300 (taxable income)
Other upper income tax rates for compensation income and short-term capital gains (22%, 24%, 32%, 35%)	Single: taxable income starting at $40,526 (22%) $86,376 (24%) $164,926 (32%) $209,426 (35%) Joint: taxable income starting at $81,051 (22%) $172,751 (24%) $329,851 (32%) $418,851 (35%)
Capital gains (long-term) and dividends (qualified) taxed at 15% or 20%	15% rate when taxable income: (single) $40,401 through $445,850 (joint) $80,801 through $501,600 20% rate when taxable income: (single) over $445,850 (joint) over $501,600
3.8% Medicare surtax on investment income; additional 0.9% Medicare tax on compensation income	$200,000 single $250,000 joint (modified adjusted gross income)

“The primary place where I see multi-year planning in my practice is for employees who have ownership guidelines as part of their employment contract and use RSU vestings and other ways to acquire the stock to meet them,” observed webinar panelist John Barringer, a CFP and the Managing Partner of Executive Wealth Planning in Denver. “Spreading out stock option exercises over a number of years to increase their stock ownership can smooth out the tax consequences.”

“Where we see multi-year planning the most is for clients who are going to make a big life change,” said AJ Ayers of Brooklyn FI. “For example, if they’re planning to switch jobs or add/remove a spouse from the tax return, those are opportunities for very large income swings. If we have a CMO at a company that just went public making $350,000 a year and they want to take a sabbatical next year, perhaps we can shift NQSO exercises into next year when we are nearly certain their tax rate will be lower.”

However, the advisors warn against making taxes the only reason for taking year-end action on stock comp. “I have to remind clients year after year to not let tax considerations be the primary driver of exercise timing,” explained John Barringer. “That being said, when you have options that are deep in the money or close to expiration, if you squeeze out a little bit of exercise now and still stay in the same tax bracket, that’s probably a good plan. If you run the risk of exercising in the next year, bear in mind that the differential in tax brackets could easily be erased by a couple of bad weeks of market behavior. Down markets don’t care about your tax treatment.”

“I would put need to diversify first,” added AJ Ayers. “As opposed to what the client thinks the stock is going to do, we ask what are the client’s goals? How quickly do they want to reach financial independence or retirement, and how does that impact our multi-year strategy to diversify?”

3. Withholding May Not Cover Taxes Owed

The flat supplemental wage rate for federal income tax withholding on stock compensation is based on the seven federal income-tax brackets. For amounts over $1 million, it is linked to the highest rate (37%). For amounts up to $1 million, it is linked to the third rate (22%), which is relatively low for most people with equity comp. Often those employees are underwithheld.

In fact, the 22% rate of withholding typically does not cover the actual taxes you will owe on the additional taxable income from your exercise of nonqualified stock options or vesting of restricted stock/RSUs. You must therefore know the tax bracket for your total income and assess the need to (1) put money aside to cover the taxes, (2) pay estimated taxes, or (3) revise your W-4 for the remainder of the year to increase salary withholding. Plus, with ISOs, while you have no withholding at exercise or sale, you will still owe taxes for the income triggered.

“My favorite way to handle this would be to just make changes in the W-4 and withhold extra every other paycheck,” said AJ Ayers. “Unfortunately, with the size of RSU vests, typically that’s not possible. They would have to withhold their entire paycheck and then some. So we find that making quarterly estimated tax payments is the best way to handle this.”

“We set our clients up with protective estimates,” noted Chun Wong. “If there is an event where the client has to pay more, such as at the end of the year, we’ll make an adjustment on what has to be paid on an estimate or W-2 withholding.”

4. Incentive Stock Options

Thinking about exercising incentive stock options (ISOs) before the end of the year and then holding the stock? While you must hold ISO shares for more than one year from exercise and two years from grant to get their beneficial tax treatment, you need to understand that the ISO exercise-and-hold beyond the year of exercise can also expose you to the alternative minimum tax (AMT). If the stock price falls significantly, you could be stuck with a big AMT bill on paper gains that is greater than the actual total value of the shares.

Be sure that you and your tax advisor first prepare an AMT projection to determine your AMT crossover point and see whether a tax benefit may arise from waiting until January of the following year. Next year the exercise may not trigger the AMT. Exercising ISOs at year-start can be a wiser move anyway. You then have all year to see how the stock performs and decide whether to hold the ISO shares beyond the year of exercise or sell before year-end to avoid the AMT in what is called a disqualifying disposition.

“We often will disqualify some ISOs to provide liquidity,” explained AJ Ayers. “As we disqualify ISOs, we bring up ordinary income. That creates a bigger budget to exercise additional ISOs and not generate any more AMT in the future.”

5. Year-End Planning For Pre-IPO And IPO Companies

Special year-end considerations arise for employees with stock comp at newly public companies or those announcing an upcoming IPO. You need to know:

• when the post-IPO lockup or other stock resale restrictions will end
• whether you have any ability to sell some shares sooner
• when shares will be delivered with double-trigger vesting RSUs

“One of the first things I tell my clients is to find out who the stock plan administrator is,” said AJ Ayers. “For clients who are experiencing an IPO, a direct listing, or a SPAC, having a direct line to someone who actually knows what’s going on will be the most valuable thing. Often companies are just not prepared to give these answers.”

AJ went on to offer some key points for clients at private companies who are expecting the company to go public soon.

• Be wary of companies going public in Q4 of the current tax year. If you have an RSU grant, it may start vesting and will therefore increase ordinary income.
• If you are going to be subject to blackout periods when the company prohibits sales to prevent insider trading, you may want to break the general wisdom of not exercising ISOs late in the year so you can start the one-year holding clock for a 2022 qualifying disposition and attempt to catch the Q4 trading window.
• Be prepared to run a few different tax-planning scenarios to show how disqualifying ISOs can lead to a favorable outcome if you are in danger of paying a large amount of AMT.
• The year before an IPO can be a fantastic opportunity for charitable donations, especially if you made ISO disqualifying dispositions that bump up your income.

6. Confirm Dates For Exercise And Vesting: 2021 Or 2022?

This last point here may seem little, but it can have big implications. Stock option income recognized on an exercise date in 2021, and restricted stock/RSU income with a vesting date in 2021, will be included in 2021 taxable income and on your W-2 for 2021. It does not matter that the company won’t send the taxes to the IRS until early January.

However, January 1 of 2022 falls on a Saturday, meaning that for many companies December 31 (i.e. Friday) is a holiday. Therefore, you will want to confirm how your company handles exercises that occur on or vestings scheduled for December 31, 2021. Will the transaction revert to the previous business day or the next business day? You also want to confirm whether December 30 (Thursday) or December 31 (Friday) is considered by your company and your stock plan to be the last business day of 2021 (and if it’s Dec. 31 whether up to a certain time).

Further Resources

The year-end planning section on myStockOptions.com also has articles by experts and FAQs on these topics and more. The webinar in which these advisors spoke is available on demand at the myStockOptions Webinar Channel. In addition to what’s covered in this article, the advisors presented case studies highlighting many of the planning issues they focus on at year-end for public and private company clients.

myStockOptions Webinar Channel

See the myStockOptions Webinar Channel for upcoming webinars and past webinars on demand. Each on-demand webinar (100 mins) offers 2.0 CE credits for CFP, CPWA/CIMA, and CEP:

Year-End 2021 Financial Planning For Equity Comp: Sharpen your knowledge of year-end and year-beginning financial and tax strategies for stock comp and company shares with insights from a panel of three leading financial advisors, including real-world case studies, to provide practical info, guidance, and expertise for equity comp in both public and private companies.

Stock Comp Financial Planning For Private Company Employees: From Startup To IPO Or Acquisition: Equity comp in private companies is different. Learn the related financial and tax planning with three leading financial advisors, including real-world case studies.

Restricted Stock & RSU Financial Planning: Advanced Bootcamp: Insights from a panel of three leading financial advisors, including case studies, to provide practical expertise for restricted stock/RSUs in public and private companies.

Stock Option Exercise Strategies: Advanced Bootcamp: It is crucial to have a plan for stock option exercises. This webinar features compelling strategies from a panel of three experts in financial and tax planning for option exercises.

Stock Compensation Bootcamp For Financial Advisors: Whether you are new to stock comp or want to sharpen your knowledge, our bootcamp webinar provides practical information and insights to maximize success.

Strategies For Concentrated Positions In Company Stock: Wealth is won and lost through the management of concentrated company stock positions. In this webinar, experts at managing concentrated stock wealth explain strategies and solutions.

10b5-1 Trading Plans And Other SEC Rules Advisors Need To Know: Learn the fundamentals, best practices, and most effective designs for Rule 10b5-1 trading plans. This webinar features top legal and financial experts presenting practical guidance and real-world case studies for financial advisors.

Stock Options & RSUs From Startup To IPO Or M&A: Top Financial Advisors Cover 5 Key Topics

Fast-growing private companies rely heavily on equity compensation to recruit, motivate, and retain the best employees. Grants are typically stock options, restricted stock, or restricted stock units (RSUs). However, stock comp in private companies is surprisingly more complex and varied than what’s commonly used in mature public companies. The many challenges range from the inability to sell stock at exercise to fund the exercise costs to lockup restrictions on shares after the IPO.

A recent webinar held by myStockOptions.com presented practical guidance and case studies from three financial advisors with expertise in the financial and tax planning for private company equity awards and shares. Discussed in this article are five of the many topics covered.

1. When To Exercise Stock Options In A Private Company

At private companies in the early stages of growth, stock options predominate. By contrast, in public companies RSUs are more likely to be awarded for new-hire and annual grants. These startup company grants may include what are called “early-exercise stock options,” which allow you to buy the stock immediately. At exercise, you receive restricted shares that still must vest before you own the stock. Assuming a timely 83(b) election is made with the IRS, this comes with advantages and risks.

One potential benefit is “the ability to invest in the company early, possibly at a reduced tax cost,” as explained by webinar panelist Meredith Johnson, Director of Tax at BPM in San Francisco. “Exercising early converts future appreciation from ordinary income to capital gains and starts the clock toward a long-term holding period,” added panelist Devin Blackburn, a Senior Vice President at Northern Trust Wealth Management in Chicago. Exercising early also starts the holding period for the special 0% tax rate for qualified small business stock (QSBS).

But it’s important to note that early exercise is not for everyone. “I usually advise clients to wait to exercise private company stock options until they have to (e.g. changing jobs, options expiring) or possibly for an upcoming liquidity event,” said panelist Kristin McKenna, the Managing Director of Darrow Wealth Management in Boston. “Consider the time value of the money that would be used for option exercise—other ways to use that cash and other cash needs until the stock has liquidity.” That strategy was echoed by Meredith Johnson: “If there is embedded gain in the private company options, I typically recommend timing the option with a liquidity event (tender offer, etc.).”

2. Expect RSUs In A Later-Stage Private Company

As the private company matures and moves toward an IPO or acquisition, equity grants tend to shift toward restricted stock units (RSUs). You don’t exercise RSUs, unlike stock options. Once the RSU vesting conditions have been met, the shares are delivered to you.

While RSUs in public companies typically have just one vesting requirement (e.g. length of employment from time of grant), RSUs in private companies have “double-trigger” vesting. In other words, two conditions rather than just one must be met before the RSUs vest and the underlying shares are delivered to you. “Usually time is the first trigger, and an event such as an IPO or a company acquisition is the second and final trigger,” explained Meredith Johnson.

Crucially, you cannot control the timing of taxation with RSUs, as you can with stock option exercises. This raises a myriad of tax-planning issues, leading to the next topic.

3. Need A Plan For The Taxes On Equity Comp

When you receive stock in a private company, whether by option exercise or RSU vesting, the IRS and the SEC don’t care that you can’t sell the shares to pay the taxes owed. The same tax rules apply to illiquid private company stock as to freely tradeable public company stock. Therefore, before a stock option exercise or RSU vesting date, you need a way to pay the taxes that you may owe.

With incentive stock options (ISOs), when you exercise and then hold the shares you need to consider the alternative minimum tax (AMT). Plus, while no withholding applies with ISOs, even when you can sell some of the shares, that doesn’t mean you may not owe taxes! With nonqualified stock options (NQSOs), you have withholding and taxable compensation income for the spread at exercise, plus Social Security and Medicare taxes (FICA). With double-trigger RSUs, you will face compensation income when all the vested shares are delivered in one batch at the specified time after the second trigger, and then also the FICA taxes when the IPO occurs.

Depending on your tax bracket, the flat federal withholding rate on stock compensation may not be enough to cover the total tax you really owe on the value of the shares you receive. (The rate is 22% for yearly supplemental wage income up to $1 million and 37% for amounts over that.) In this case, you need to think about paying quarterly estimated taxes, making adjustments in your salary withholding, or at least plan to pay extra taxes (and potential penalties and interest) with your tax return for the year.

All of the webinar panelists emphasized that not considering the tax impacts is an especially big mistake with private company stock comp. As Devin Blackburn put it: “lack of planning for the dreaded ‘liquidity crush’—you’re wealthy on paper but have a persisting cash deficit.” You need to think about “how to pay tax without liquidity,” Kristin McKenna reiterated.

4. Actions Before And After The IPO Lockup

Some companies, such as Airbnb, Robinhood, and Snowflake, have allowed employees to sell a small percentage of shares at the time of the IPO and/or shares later before the expiration of the lockup. However, in general, you may not be able to sell any shares for up to six months after the IPO date (and often longer with SPACs).

Plus, if you’re a company executive or key employee who often knows material nonpublic information, you may also be subject to frequent blackout periods. That is when the company prohibits you from selling stock and thus potentially committing insider trading. That creates the need to consider the use of Rule 10b5-1 trading plans.

This is another planning area where mistakes can easily occur. “Understand the attributes of all your grants, share holdings, the lockup period, and any blackout periods,” explained Devin Blackburn. She also emphasized the need to “model various scenarios that reflect multiple price targets to manage expectations and emotions.” For example, with unexercised ISOs, when about six months from the IPO, evaluate exercising and holding pre-IPO. Although this may trigger the AMT, after the lockup ends you can then sell the stock, with all the sales proceeds over the exercise price getting taxed as long-term capital gain.

This is the time to tie everything together about your grants and stock holdings. “Calendar the IPO, lockup, sales windows, and tax payments so that you can better coordinate sufficient liquidity to meet your tax obligations,” added Meredith Johnson. “Understand the immediate tax impact of an IPO (double-trigger RSUs) and whether there is an opportunity to opt in to alternative tax withholding. Review vesting schedules, early-exercise provisions, and consequences of separation from service.” She suggests a goals-based planning model that considers appropriate cash needs to determine a client’s sales strategy.

Kristin McKenna recommended that you “use the calendar year to your advantage.” This can help you decide whether it’s time to take profits and risk off the table, such as selling before year-end, which also avoids any AMT on ISOs exercised early in the year. She also urges her clients to get organized with separate bank account for taxes and cash to exercise, while tracking the lockups’ end and any special milestones, such as those related to an acquisition vesting or payout.

5. Lessons Learned From The Recent Big Wave Of IPOs, M&A, And Startup Financing

There has been a “sheer explosion of IPOs” over the past year, noted Devin Blackburn. “They are up more than 650% compared to a year ago.” Like many of their colleagues, the advisors on the webinar panel have been thoroughly battle-tested by guiding clients from the startup stage through the hectic climax of an IPO or acquisition, and then in the newly acquired wealth beyond. “Never assume that someone with a tidal wave of wealth has an adequate team, wealth plan, or estate-planning documents,” added Devin. “Founders, employees, and early investors need guidance.”

“Client education and communication are particularly important for clients who are unaccustomed to working with professional advisors,” observed Meredith Johnson. “Have the uncomfortable discussion about market risk—founders in particular see their stock in a rosy light.”

“Recognize that things can change quickly,” warned Kristin McKenna. “The market for IPOs and M&A can change rapidly, and stocks don’t just go up.” She advises her clients to “focus on what you can control.” Controllable factors she emphasizes include portfolio diversification to manage the risks of concentration in your company’s stock. They also include carefully watching “lifestyle inflation,” i.e. the growth of spending with sudden new wealth.

Further Resources

The webinar in which these advisors spoke is available on demand at the myStockOptions Webinar Channel. In addition to what’s covered in this article, the advisors addressed numerous advanced topics, such as estate planning, SPAC acquisitions as way to go public, and company-sponsored liquidity sale programs (e.g. tender offers) for later-stage private companies. The sections Pre-IPO and M&A at myStockOptions also cover a range of topics on the financial and tax planning for equity comp in private companies.

myStockOptions Webinar Channel

See the myStockOptions Webinar Channel for upcoming webinars and past webinars on demand. Each on-demand webinar (100 mins) offers 2.0 CE credits for CFP, CPWA/CIMA, and CEP:

Stock Comp Financial Planning For Private Company Employees: From Startup To IPO Or Acquisition: Equity comp in private companies is different. Learn the related financial and tax planning with three leading financial advisors, including real-world case studies.

Restricted Stock & RSU Financial Planning: Advanced Bootcamp: Insights from a panel of three leading financial advisors, including case studies, to provide practical expertise for restricted stock/RSUs in public and private companies.

Stock Option Exercise Strategies: Advanced Bootcamp: It is crucial to have a plan for stock option exercises. This webinar features compelling strategies from a panel of three experts in financial and tax planning for option exercises.

Stock Compensation Bootcamp For Financial Advisors: Whether you are new to stock comp or want to sharpen your knowledge, our bootcamp webinar provides practical information and insights to maximize success.

Strategies For Concentrated Positions In Company Stock: Wealth is won and lost through the management of concentrated company stock positions. In this webinar, experts at managing concentrated stock wealth explain strategies and solutions.

10b5-1 Trading Plans And Other SEC Rules Advisors Need To Know: Learn the fundamentals, best practices, and most effective designs for Rule 10b5-1 trading plans. This webinar features top legal and financial experts presenting practical guidance and real-world case studies for financial advisors.

Stock Options & RSUs: 5 Costly Mistakes To Avoid

Stock compensation is complex: make no mistake about it. However, that's easier said than done. It's actually all too easy to make costly mistakes with grants of stock options or restricted stock/RSUs, and the related taxation.

In two myStockOptions “advanced bootcamp” webinars this summer, leading experts in stock options and RSUs discussed equity comp blunders to avoid, among many other topics (Stock Option Exercise Strategies and Restricted Stock & RSU Financial Planning). This article covers five common mistakes as explained by these webinar panelists.

Mistake No. 1: Not Understanding Your Grant Or How It Works

This point may seem obvious, but you’d be surprised. Employees sometimes tell their financial advisors they have “stock options” but upon inspection of the plan documents it turns out they have another type of equity comp. So, first of all, confirm which type of equity grant you have.

A related mistake is simply failing to read all the stock plan documents and not fully understanding the terms of the grant. Study up on them. “Grant info needs to be organized, saved, and updated to provide ongoing guidance,” suggests Bill Dillhoefer, the CEO of Net Worth Strategies, the company behind the StockOpter equity compensation analysis applications for financial advisors.

Crucially, understand that stock options have a set period during which they can be exercised after vesting. When the option term ends, unexercised stock options expire and are irrecoverable. Understand the timeframe of your stock options and steps you must follow so that you’re not caught in a scramble to exercise on the final day before expiration. You do not want to let valuable in-the-money stock options expire.

RSUs bring some different planning factors. “Roughly how much will each vested amount be worth, pre- and after-tax?” asks Meg Bartelt of Flow Financial Planning. As an advisor who works with clients at pre-IPO and newly public companies, she also considers the special traits of RSU grants made by private companies. With her clients, she evaluates whether simply working at the company for a specified length of time after the grant is enough for the shares to vest or whether the stock plan requires a second vesting trigger involving a liquidity event (i.e. IPO or acquisition by a public company).

Mistake No. 2: Not Understanding The Taxes Or Letting Taxes Drive Decisions

You need to understand the taxation of your grants before you do anything with them. The tax treatment is crucial for both avoiding IRS problems and making the most of your gains. At the same time, the financial advisors all caution, understanding the taxation doesn’t mean taxes should be the principal driver of decisions.

“While taxes are key factors, it’s dangerous to base decisions principally on tax aspects and neglect coordination with goals and investment risk,” warns David Marsh, a Financial Planning Case Manager at Ameriprise.

In other words, “the tax tail should not wag the option dog,” says Megan Gorman of Chequers Financial Management. However, she acknowledges, “to build wealth, you have to deal with tax consequences.” So how do you get the balance right?

Model tax scenarios for your stock options and be prepared, Megan advises. For example, she points out that you should “be prepared for your company’s tax withholding to not be sufficient to cover your tax bill.” The IRS default flat withholding rate of 22% for supplemental wage income, such as the spread at option exercise or restricted stock unit (RSU) vesting, is often lower than your actual income-tax rate, she observes.

While the withholding rate jumps to 37% for supplemental wage income in excess of $1 million during the calendar year, employees between those extremes still need to pay the taxes not covered by the 22% default rate. The shortfall can be paid in quarterly estimated taxes based on the amount owed, among other methods.

Stock options aren’t the only equity awards with tricky taxes. Mistakes with the taxation of RSUs can also be very costly. “The worst-case scenario with RSUs, in my opinion, is that you lose money on them,” says Meg Bartelt. “And that’s a possibility if you do not sell enough RSUs immediately to cover your full tax bill.” The concern? The stock price could suddenly fall after vesting. “The bottom line is that if the stock price drops enough after the initial withholding of 22% before you sell more shares to pay your taxes, then the shares you still have can be worth less than the taxes you still owe.”

“Get ahead of the game by preparing a projected tax return to see the impact of vesting RSUs on your tax return,” advises Daniel Zajac, co-founder of Zajac Group. “Consider ways to defer other income and/or increase deductions to reduce the spike in your taxable income,” he adds. “For example, increase 401(k) contributions, participate in a nonqualified deferred compensation plan, make bigger charitable donations, or separately increase salary withholding.”

Lastly, watch your tax bracket. Stock compensation can push your income for the year into a higher bracket, leading to more taxes—something that careful timing of option exercises and RSU vestings can avoid. “The total picture of your grants is really important,” says Daniel Zajac. “I’ve seen clients create cash by exercising and selling nonqualified stock options when they’ve just had RSUs vest. That could needlessly push them into a higher tax bracket.”

Mistake No. 3: Forfeiting Your Grant In Job Termination

If you leave your company, the vesting of your stock options stops and the term usually ends early, requiring you to exercise the options soon after your departure to prevent forfeiture. These rules and timeframes can vary according to the reason you left work (e.g. job change, disability, death, retirement).

Chief among the option terms to know are the vesting provisions and what would happen upon job termination, which usually triggers a very short window for option exercise before the grant term expires. “It’s crucial to clarify equity awards’ terms for vesting and at separation of service,” says David Marsh of Ameriprise. “Realize they may not all be the same.”

As for restricted stock units, job termination stops the vesting of RSUs. So if you have a big vesting date coming up, you may want to stick around for it before any planned job change or retirement.

Other types of job terminations and life events may affect vesting differently. “How do leave of absence, disability, death, acquisition of your company, etc. affect the vesting schedule?” is something Chloé Moore, founder of Financial Staples, wants her clients to understand and communicate.

David Marsh lamented that many optionholders neglect to designate a beneficiary for vested stock options in case of death. “This is usually allowed in the plan, but often employees are unaware of that.” Also be sure that beneficiaries and executors of your estate know the option exercise deadlines.

Mistake No. 4: Not Having A Strategic Plan For The Shares

When you exercise stock options or when your RSUs vest, a big mistake is not having a plan ready to go for your newly acquired shares.

Overconcentration in company stock is a major danger employees face with shares they get from equity awards. Loyalty to your company’s stock can work against you if too much of your wealth is tied up in the stock and the price then drops. “It’s amazing to me how many times clients who understand they have a lot of company stock lose track of how concentrated they are and how movements in the stock price and new grants affect that concentration,” says David Marsh. “That’s a particular blind spot,” he warns.

Indeed, it would be hard to find a financial advisor who doesn’t extoll the virtues of diversification. “Investments that are diversified—your money is invested a little bit in a lot of different stocks or bonds—perform better, on average, than investments that are concentrated in one stock,” points out Meg Bartelt.

She often advises clients with just-vested RSU shares to sell all the stock. “Let’s say your RSUs are worth $100,000 when they vest. If I gave you $100,000 in cash income instead, would you go out and use that money to buy your company stock? If your answer is no, then that is literally the same, financially, as selling all your RSU shares.”

In her view, “you’re better off selling them all and using the money immediately for some current need (such as a down payment on a house) or other financial opportunity (such as paying off debt), or investing the money in a broadly diversified, low-cost portfolio.”

Chloé Moore has helped many clients strategize for RSU vesting. In one example that she presented during her webinar segment, her approach included:

• Allocated monthly savings, cash bonuses, and sign-on bonus to short-term savings goals.
• Kept 25% of shares that vested after the one-year anniversary (about 30% of the portfolio and a smaller percentage as the portfolio grew).
• Set aside reserves to pay the tax bill (worked with a CPA to estimate each year’s tax liability).
• Sold remaining shares as they vested and split the proceeds between student loans and savings goals, then eventually a diversified taxable account.

Daniel Zajac often suggests that his clients establish a sell schedule. “One strategy that may balance the decision to immediately retain 100% of the shares or sell 100% is to implement a plan that sells a certain number or percentage of shares over a set period. Setting a sell schedule allows you to intentionally reduce your company stock according to a formula. That removes some of the emotional decision-making from the process. You don’t need to guess what the stock price will do next, or decide you will sell when the price reaches X per share, but change your plans once the price does hit that point. You then risk the price going back down before you do sell.”

Mistake No. 5: Getting Bad Advice On Financial And Tax Planning

Stock compensation is a complex employee benefit. “Complex benefits require us to move slowly and think through issues,” says Megan Gorman. She implores employees with equity comp to obtain guidance from a qualified financial advisor and/or tax expert, and to avoid relying on tips from co-workers. Bill Dillhoefer echoed this sentiment, observing that applying advice from “water-cooler” chats with co-workers can lead to mistakes.

Everyone’s individual circumstances differ. Identifying strategies that work for you is yet another good reason to consult a financial planner. “Strategies are incredibly personal,” agrees Megan. “For your own unique situation, you may need to do very different things than your colleagues.”

Further Resources

On myStockOptions.com, the online educational resource with content and tools devoted to all things equity comp, employees and their financial advisors can prepare for stock option exercises and RSU vesting. For more on mistake prevention, see the following articles:

• How To Avoid The Most Common Stock Option Mistakes by wealth advisor Beth Walker
• How To Avoid Mistakes And Create Wealth With Your Stock Options by CFP Paul Palazzo

In addition, all of the financial advisors quoted in this article have discussed planning strategies in detail during webinars that are available on demand at the myStockOptions Webinar Channel.

 

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WEBINAR: Stock Comp Financial Planning For Private Company Employees: From Startup To IPO Or Acquisition

• Sept. 22, 2pm–3:40pm ET, 11am–12:40pm PT
• 2.0 CE credits for CFP, CPWA/CIMA, CEP, and EA

Initial public offerings (IPOs) are booming as fast-growing private companies go public. Important wealth-building and tax-minimizing decisions are faced by employees and executives at private companies who have stock options, restricted stock, restricted stock units (RSUs), or founder's stock.

In 100 minutes, this webinar covers the fundamentals of private company stock grants and related strategies for financial and tax planning that can help advisors serve these clients effectively, build wealth, and prevent expensive mistakes. The webinar features three leading financial advisors presenting practical guidance and real-world case studies. Their insights and expertise apply to clients at both startups and later-stage private companies, from the time of grant until the company goes public or is acquired.

For a detailed agenda of topics covered, see the webinar registration page.

Time conflict? No problem. All registered attendees get unlimited streaming access to the webinar recording for their personal viewing, along with the presentation slide deck. Therefore, even if you have a time conflict, please still register, as you will receive a link to the recording and presentation.

4 Ways Biden's Tax Proposals Could Affect Stock Comp Financial Planning

Millions of employees in the United States have stock compensation and/or holdings of their companies' shares. Many of them may be depending on these for major financial goals, such as a buying a house, saving for retirement, or funding children's college tuition. Could President Biden’s proposed tax changes impact their gains and their financial planning?

The short answer: yes, they very well could, depending on your income. While the future of the proposals remains highly uncertain, some of the proposed tax increases, such as a major hike in the top rate of capital gains tax, may require you to take action well before any new tax legislation is adopted.

The proposed tax provisions to follow are in the American Jobs Plan and the American Families Plan. The US Treasury’s General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals, known informally as the “Green Book,” provides a summary and rationale of the tax changes.

Don’t have time to read Congressional legislation or a tome written by the US Treasury? No problem. At myStockOptions, we read that stuff so you don’t have to, along with related commentaries from law firms and other expert observers. Below is what to know about the potential impact of Biden’s tax proposals on stock compensation and company shares that you hold. For financial advisors, this provides an opportunity to reach out to clients about the possible changes and the impact on decisions involving stock options, restricted stock, ESPPs, and company stock holdings.

1. Top Tax Rate

Currently, the flat supplemental wage withholding rate, which applies to income such as stock compensation and cash bonuses, is 22% for yearly amounts up to $1 million and 37% for yearly amounts in excess of $1 million. That higher withholding rate is tied to the top tax bracket.

Under Biden’s plan, the highest ordinary tax bracket rate would go from 37% to 39.6% starting January 1, 2022 (see page 60 of the Green Book). That would therefore increase the higher rate of supplemental wage withholding to 39.6%. This rate would also apply to short-term capital gains for anyone in the top tax bracket.

ACTION STEPS: When you decide to exercise nonqualified stock options (NQSOs), you control when you will realize the taxable income at exercise, including federal tax. If you’re in the top tax bracket or will be from your option exercise, analyze whether for tax reasons it makes sense to exercise the options in 2021 instead of in 2022, when that bracket rate may be higher.

While most financial advisors would not suggest you make stock option exercise decisions solely for a 2.6% tax savings, this potential tax hike is worth evaluating as a factor for options close to expiration. For options not close to expiration, remember that NQSOs offer substantial leverage and upside, all of which ends as soon as you exercise the options (see the prior article in this blog).

Private companies with a recent or upcoming initial public offering (IPO) have a special concern. If your company has granted double-trigger-vesting restricted stock units (RSUs), in which typically the shares are not fully vested and delivered until six months after the IPO, the company may want to consider accelerating the share delivery into 2021 should the change to the top income-tax bracket be enacted. Accelerating that income into 2021 by delivering the shares this year (when the top rate is 37%) will save taxes for employees who have already met the requirements of both the time-based and the liquidity-event vesting conditions.

2. Capital Gains Tax Rate

Long-term capital gains, such as from company stock sales, currently have a top tax rate of 20% (plus the 3.8% Medicare surtax). Biden’s tax plan would raise the top rate on long-term capital gains and on qualified dividends to the highest rate of ordinary income tax for households with over $1 million in adjusted gross income ($500,000 for married filing separately).

The rate change would be retroactive to the date it was announced, considered to be April 28, 2021, when President Biden issued a Fact Sheet on the American Families Plan. The change for taxes for capital gains realized at death and with gifts, discussed below, would start January 1, 2022. (See pages 61–64 of the Green Book for more details on these capital gains proposals.)

Action Steps: With incentive stock options (ISOs) taxation, when you hold the shares more than two years from grant and one year from exercise, the full gain at sale over the exercise price is capital gain. While the tax treatment for NQSOs is fixed at exercise, for ISOs when you sell the stock without meeting the holding periods the tax treatment changes to essentially follow the ordinary income rates. Anyone with annual income of more than  $1 million will want to evaluate whether to risk holding ISO shares for the long-term capital gains rate when that rate would actually, under Biden’s plan, match their ordinary income rate.

Similar thinking applies to the decision with restricted stock about whether to make a Section 83(b) election to be taxed at grant instead of vesting. One big advantage of the election is to get an early start on the holding period for long-term capital gains. But under the proposed change, the tax rates on long-term and short-term capital gains for people in the top tax bracket may become the same anyway.

Details Murky On Proposed Change And Its Potential Impact

According to some experts, it remains unclear whether this higher capital gains rate would apply to all capital gains income or to only some portion of it (see Tax Reform In The American Families Plan from the law firm Morgan Lewis). Among the many other issues are how this change would impact the 0% rate on qualified small business stock (QSBS). The potential impact for individuals with stock by this proposed change, including the range of open issues and when to recognize capital gains income, is addressed by articles from Tech Crunch (Startup Employees Should Pay Attention To Biden’s Capital Gains Tax Plans), McDermott Will & Emery (What a Capital Gains Rate Hike Could Mean), and Morningstar (Capital Gains Tax Proposal a Wake-Up Call to Assess Concentrated Holdings).

The law firm Proskauer Rose predicts that if the capital gains rate increases, affected taxpayers will “defer sales of appreciated property and to use cashless collars and prepaid forward contracts to reduce economic exposure, and to monetize, liquid appreciated positions” (see Treasury’s Green Book Provides Details on the Biden Administration’s Tax Plan).

3. Capital Gains Realized Upon Death Or At Gifting Of Stock

Biden’s tax plan would dramatically change the capital gains treatment via gifting or upon death for transfers of appreciated property, such as company stock. For example, the ability to eliminate capital gains at death by a step-up in the basis on the shares, which allows heirs to then pay tax only on the appreciation after death, would no longer apply to gains over $1 million per person ($2 million per couple).

Alert: This does not mean that the basis for the remaining stock over these amounts is just carried forward to the person(s) inheriting it or the beneficiary, as has been misreported in some sources. Death itself triggers the recognition of capital gains tax on these amounts as if the stock was sold!

Similarly, any gifts made over these amounts would be taxable at that time to the gifter. Currently the receiver just carries forward the basis, and the giver would owe gift tax only if they did not have any of their lifetime gift/estate exemption amount remaining. Exceptions would apply, such as with transfers to a spouse, a charity, or heirs of small businesses and farms that continue to run those businesses. Donations of highly appreciated stock to charities would still avoid the capital gains tax, making it an even more popular strategy.

The Biden administration’s proposals so far do not yet include lowering the estate tax exemption from the current $11.7 million per person ($23.4 million for married couples), which was discussed during the campaign and may be forthcoming. However, that amount does automatically go down to $5.49 million per person (adjusted for inflation) at the start of 2026, when the provision sunsets at the end of 2025 under the Tax Cuts & Jobs Act (TCJA).

4. Beefed-Up Enforcement

The proposed legislation provides funding to “revitalize enforcement to make the wealthy pay what they owe” in an effort to shrink the tax gap, according to the Fact Sheet on the American Families Plan. This means with certainty an increase in audits of companies, executives, and others who are wealthy because of their stock compensation or founders’ stock. The audit rates on those making over $1 million per year, which fell by 80% between 2011 and 2018, will increase substantially. Financial institutions would be required to report information on account flows so that earnings from investments, such as from stock compensation and company stock holdings, are subject to broader IRS reporting.

Likelihood Of Tax-Law Changes

Whether any of these proposals will get adopted in their current form, and with the proposed effective dates, remains uncertain. Doubts about what will happen are raised by experts quoted in articles from Investment News (Political Reality Seen Curbing Biden’s Tax Plan) and Politico (Tax The Rich? Executives Predict Biden’s Big Plans Will Flop). The lobbyist and business group leaders quoted in the Politico article seem confident that they will pressure moderate Democrats in the House and Senate to “kill almost all of these tax hikes.”

A reminder of what tax ideas have not yet been proposed by Biden, such as taxing stock options at vesting, appears in a commentary from the law firm Brownstein Hyatt Farber Schreck (Will Biden’s American Families Plan Take Aim At Executive Compensation?). That proposal had been part of the initial draft of the TCJA, the tax-reform law enacted at the end of 2017.

myStockOptions Webinar Channel

See the myStockOptions webinar channel to register for our upcoming webinars and purchase our past webinars on demand in streaming format. On-demand webinars include:

Restricted Stock & RSU Financial Planning: Advanced Bootcamp (100 mins). This lively webinar features insights from a panel of three leading financial advisors, including case studies, to provide practical info, guidance, and expertise for restricted stock/RSUs in both public and private companies. 2.0 CE credits for CFP, CPWA, CIMA, and CEP.

Stock Option Exercise Strategies: Advanced Bootcamp (100 mins). Stock options can offer great leverage, but it must be wielded wisely. It is crucial to have a strategic plan for stock option exercises. This webinar features compelling insights from a panel of three experts in option exercise strategies. 2.0 CE credits for CFP, CPWA, CIMA, and CEP.

Stock Compensation Bootcamp For Financial Advisors (100 mins). Whether you are new to stock comp or want to sharpen your knowledge, our bootcamp webinar provides practical information and insights to maximize success. 2.0 CE credits for CFP, CPWA, CIMA, and CEP.

Strategies For Concentrated Positions In Company Stock (100 mins). Wealth is won and lost through the management of concentrated company stock positions. In this webinar, experts at managing concentrated stock wealth explain the wide range of strategies and solutions available for preventing losses and meeting goals. 2.0 CE credits for CFP, CPWA, CIMA, and CEP.

The Tao Of Stock Options: Exercise Strategies From Stock Option Gurus

When we started myStockOptions.com in 2000, stock options were all the rage in equity comp. While other forms of equity compensation have since come to the fore, most notably restricted stock units (RSUs), stock options remain a major form of equity award for millions of employees in the US.

In this spirit, we recently returned to the roots of our trusted brand name in a very popular webinar, Stock Option Exercise Strategies: Advanced Bootcamp. During this educational event, three experts in option financial planning presented their tips for making the most of an option grant, from basic to advanced concepts. Some of the insights from these option gurus are summarized below.

The Tao Of Stock Options: Be Patient, Grasshopper

Taoism tells us that mindfully strategic inaction, expressed in the concept of wu wei (literally "doing nothing" in Chinese), is often the most effective approach to the challenges of living. And so it often is with employee stock options. Waiting as long as possible to exercise stock options—i.e. doing nothing and letting the value grow until a strategic moment—is often the soundest exercise strategy.

It’s important to note that there are two types of stock options with very different tax treatments. Nonqualified stock options (NQSOs) are the simpler and more common type. Incentive stock options (ISOs) are less common and more complex in that they can offer potential tax advantages but more risk. Most of the discussion in this article concerns NQSOs in public companies.

1. Waiting To Exercise Is Often Best

Stock options let you buy shares of your company’s stock at a fixed price for a specified period, typically over a term of 10 years. Under nearly all grants, you have to work at the company for a specified length of time (the vesting period) before you can exercise the options. If you leave your company, the vesting stops and the term usually ends much earlier, requiring you to exercise the options soon after your departure to prevent forfeiture. These rules and time periods can vary according to the reason you left work (e.g. job change, disability, death, retirement).

Private companies sometimes grant stock options that employees can exercise early, allowing you to start the capital gains holding period sooner and recognize little or no income at vesting. You want to check whether you have this type of stock option and carefully follow the rules (e.g. a timely Section 83(b) election), though this is not the focus of this article.

Options Align Your Pay With Company Performance

In short, stock options let you share in the growth of your company's value without any financial risk until you exercise the options (i.e. acquire shares). If your company’s stock price rises during the option term, the discount between the current stock price and your lower exercise price (the “spread”) can make stock options valuable for creating substantial wealth.

Leverage And Tax Deferral

The fixed purchase price creates the famous financial “leverage” of stock options. For example, if the stock price rises by 20%, the value of your unexercised stock options grows by much more than 20%. As soon as you exercise the options and thus purchase actual shares of stock, the leverage ends. Thus it’s important to think carefully about the right moment to make that move.

Moreover, while cash bonuses and most other forms of compensation are taxable when you receive them, stock options defer taxes until you exercise them. Before you exercise your options, their built-in value is subject to pre-tax growth—which can be significant.

For all of these reasons, the panelists in the myStockOptions webinar agreed: often no advantage exists in exercising nonqualified stock options in a public company soon after vesting, paying taxes on the spread, and then holding the shares for long-term capital gains (unless special circumstances occur, such as job termination). As long as the stock price continues to rise, thus increasing the spread over the exercise price, the leveraged value of the options grows without any tax hit, and your net after-tax proceeds will be larger.

In other words, the “Tao of Stock Options” might be the paradox that doing nothing for as long as possible could confer the greatest value.

Opportunity Cost

Consider also the opportunity cost of exercising and holding NQSOs. Financial advisors often liken stock options to an interest-free loan. “An option’s value is enhanced by the ability to use the capital that would otherwise be invested in the stock for some other investment,” said webinar panelist Bill Dillhoefer, CEO of Net Worth Strategies (creator of the StockOpter decision-making tool for employee stock options).

For example, he explained that if your options have a 10-year term and the company’s stock price keeps rising, the options have growing tax-deferred value before you have spent any money on them. Funds that you would otherwise put into buying the company’s stock can be used for other investments, then directed later into the option exercise at a strategic moment for larger gains.

Bill’s approach, which he detailed in the webinar, applies various ratios that consider special factors to calculate the optimum time to exercise options. For instance, when the stock price is much higher than the exercise price, these options with a big spread have less leverage and smaller upside from stock-price increases. These are the NQSOs that you might want to exercise and then immediately sell the shares.

2. Risk Versus Reward

As always with investing, stock options involve risks as well as rewards. If the stock price plummets below your exercise price, the value of the options vanishes (i.e. they go “underwater”). Decisions about when to exercise must therefore factor in the outlook for the company’s stock price.

The webinar panelists also discussed the risk of overconcentration, i.e. having too much of your net worth tied up in the stock of just one company. A single stock price can quickly fall. A diversified stock portfolio helps to mitigate that risk. When you calculate your concentration level, you should include any vested stock options you have. That can give you yet another reason to wait on exercising your options until you have a solid post-exercise plan that includes selling shares for diversification.

How can you balance the risks and the rewards? “Fundamentally, it is useful to base decisions with any type of equity award primarily on financial goals, timeframes for those goals, and the investment risk along the way,” explained David Marsh, Financial Planning Case Manager with Ameriprise Financial.

“Create perspective,” asserted his fellow webinar panelist Megan Gorman, a financial advisor, founder of Chequers Financial Management, and a Forbes senior contributor. “If you show the best-case scenario, also show the worst.”

To lessen concentration risk and promote diversification, a strategy formulated with a financial advisor should also extend well beyond exercise, said Megan. “Have a strategy on selling stock and where the proceeds are going to be reallocated to.” When you have a strategy, one way to document it (and provide some protection from accidental insider trading) is with a Rule 10b5-1 trading plan. She uses these for her executive clients.

3. Taxes

All of the webinar panelists agree that taxes should not be the principal driver of decisions. “While taxes are key factors, it’s dangerous to base decisions principally on tax aspects and neglect coordination with goals and investment risk,” warned David Marsh. In other words, chimed in Megan Gorman, the tax tail should not wag the option dog.

Nevertheless, Megan continued, it is important to model tax scenarios for your stock options and be prepared. “To build wealth, you have to deal with tax consequences.”

She added that for NQSOs you should “be prepared for your company’s tax withholding at exercise to not be sufficient to cover tax bill.” The IRS default statutory withholding rate of 22% for supplemental income, such as the spread at option exercise or restricted stock unit (RSU) vesting, is often lower than your actual income-tax rate. While the withholding rate jumps to 37% for supplemental wage income in excess of $1 million during the calendar year, employees between those extremes will have to plan how to pay the taxes not covered by the 22% default rate. The shortfall can be paid in quarterly estimated taxes based on the amount owed, among other methods.

4. Understand The Stock Plan Documents

One of the biggest mistakes with stock options is failing to read the stock plan documents and not fully understanding the terms of the grant, according to the experts in the webinar. “Grant info needs to be organized, saved, and updated to provide ongoing guidance,” cautioned Bill Dillhoefer.

Chief among the option terms to know are the vesting provisions and what would happen upon job termination, which usually triggers a very short window for option exercise before the grant term expires. “It’s crucial to clarify equity awards’ terms for vesting and at separation of service,” stated David Marsh. “Realize they may not all be the same.”

He also noted that many optionholders neglect to designate a beneficiary for vested stock options in case of death. “This is usually allowed in the plan, but often employees are unaware of that.”

5. Seek Help From A Qualified Advisor

“Stock options are complex employee benefits,” asserted Megan Gorman during her segment of the webinar. “Complex benefits require us to move slowly and think through issues.”

She implores optionholders to obtain guidance from a financial advisor and tax experts with experience in stock options, and to avoid relying on tips from co-workers. “Exercise strategies are incredibly personal,” Megan emphasized. “For your own unique situation, you may need to do very different things than your colleagues.” Bill Dillhoefer echoed this sentiment, observing that applying advice from “water-cooler” chats with co-workers about stock options can lead to mistakes.

More Insights Into Option Exercise Strategies

For many more insights about option exercise strategies, see financial-planning articles by expert contributors at myStockOptions.com. In addition, the webinar where Bill, David, and Megan presented advanced planning strategies and case studies, involving both NQSOs and ISOs in public and private companies (Stock Option Exercise Strategies: Advanced Bootcamp), is available on demand at the myStockOptions Webinar Channel (more details on that below).

myStockOptions Webinar Channel

See the myStockOptions webinar channel to register for our upcoming webinars and purchase our past webinars on demand in streaming format. On-demand webinars include:

Restricted Stock & RSU Financial Planning: Advanced Bootcamp (100 mins). This lively webinar features insights from a panel of three leading financial advisors, including case studies, to provide practical info, guidance, and expertise for restricted stock/RSUs in both public and private companies. 2.0 CE credits for CFP, CPWA, CIMA, and CEP.

Stock Option Exercise Strategies: Advanced Bootcamp (100 mins). Stock options can offer great leverage, but it must be wielded wisely. It is crucial to have a strategic plan for stock option exercises. This webinar features compelling insights from a panel of three experts in option exercise strategies. 2.0 CE credits for CFP, CPWA, CIMA, and CEP.

Stock Compensation Bootcamp For Financial Advisors (100 mins). Whether you are new to stock comp or want to sharpen your knowledge, our bootcamp webinar provides practical information and insights to maximize success. 2.0 CE credits for CFP, CPWA, CIMA, and CEP.

Strategies For Concentrated Positions In Company Stock (100 mins). Wealth is won and lost through the management of concentrated company stock positions. In this webinar, experts at managing concentrated stock wealth explain the wide range of strategies and solutions available for preventing losses and meeting goals. 2.0 CE credits for CFP, CPWA, CIMA, and CEP.

So Your Company Granted You RSUs. Now What? 3 Planning Tips From Top Financial Advisors

Getting an RSU grant is a reason to celebrate. But now comes the tricky part: financial and tax planning.

Restricted stock and RSUs are awards of company shares subject to a vesting schedule, which can be based on length of time employed after the grant date and/or on meeting specified performance goals. Once the grant vests you own the shares outright, at least in a public company. You can hold, sell, donate, or gift the shares as you wish (though you always need to avoid insider trading by not selling when you know important nonpublic information about the company).

However, financial planning with restricted stock and RSUs can be deceptively complex for a type of equity award that is supposed to be foolproof. Plus, you have the taxes to understand. Key questions to include on your planning checklist:

• What documents have the important grant details?
• How will withholding be handled at vesting?
• Should you hold or sell the shares?
• If you sell, how many shares should you sell, and what should you do with the proceeds?

Below we present three key planning topics recommended by financial advisors (all CFP® professionals) who have extensive experience in working for clients with restricted stock, RSUs, stock options, and ESPPs. For more on these planning topics with RSUs in particular, see articles at myStockOptions.com written by two of these advisors (Sell Or Hold RSU Shares At Vesting? 3 Approaches To Consider and Financial Planning With Restricted Stock Units: 3 Key Questions). In addition, all three of the advisors were featured presenters in a popular recent myStockOptions webinar on these topics: Restricted Stock & RSU Financial Planning: Advanced Bootcamp, now available on demand.

1. Understand Your Grant And Its Documents

This point may seem obvious, but you’d be surprised. We hear from financial advisors whose clients tell them they have “stock options” but upon inspection of the plan documents it turns out they have another type of equity comp. So, first of all, confirm which type of equity grant you have: restricted stock or RSUs, separate from any stock options or an employee stock purchase plan.

While restricted stock and RSUs are conceptually similar and close siblings, they have important differences that can matter for your financial planning (see an FAQ on the website myStockOptions.com that outlines the differences).

You want to review your actual stock plan, the grant agreement itself, communications materials your company provided, and any third-party website where you can view your grant and some of the details (e.g. website of broker or transfer agent). Two core facts to know about your grant from this review:

• Vesting schedule: how many shares vest and on what dates?
• What are tax-withholding choices?

You have many other potential factors to understand. “Roughly how much will each vested amount be worth, pre- and after-tax?” asks Meg Bartelt of Flow Financial Planning (Bellingham, WA). As someone who works with clients at pre-IPO and newly public companies, she also considers the traits of RSU grants made by private companies. Is simply working at the company for a specified length of time after the grant enough for the shares to vest, or is there a second trigger involving a liquidity event (i.e. IPO or acquisition by a public company)?

Then you need to know the impacts of job events, life events, and M&A on each grant, points out Chloé Moore of Financial Staples (Atlanta, GA). “How do leave of absence, disability, death, etc. affect the vesting schedule?” is something she considers for each of her clients. Daniel Zajac of Zajac Group (Exton, PA) concurs, adding: “What if the client leaves near retirement or is seeking another job?”

2. Know The Tax Impact

Watch out for taxes, emphasize all of the financial planners. Taxation can be tricky with restricted stock and RSUs.

Section 83(b) Election For Restricted Stock

With restricted stock, the usual time of taxation is vesting. However, within 30 days of the grant date you can make what’s called a Section 83(b) election to be taxed on the value of the shares at grant instead of at vesting (election not available for RSUs). If you’re confident the stock price will significantly rise between grant and vesting, this election to pay taxes on the lower value at grant can be a good bet, and it starts your capital gains holding period early. However, figuring out whether that is a good bet is complex and risky.

Tax-Withholding Issues

Then you face the issue of under-withheld taxes. According to the IRS rules for supplemental wage income, such as income from the vesting of restricted stock or RSUs, your company must withhold tax at a flat rate of 22%. (The rate jumps to 37% for income amounts in excess of $1 million during the calendar year.)

Here’s where it gets complicated. The rate you pay in your income-tax bracket is likely to be higher than the tax-withholding amount for your grant—especially after your income spikes with the vesting of your shares. Most people with just-vested restricted stock or RSUs need to pay extra taxes to make up the shortfall, whether via quarterly estimated tax payments or their tax return for the year. Therefore, unless you have extra cash lying around for your tax bill, you need to plan how many shares you need to sell to cover the taxes.

Mistakes here can be very costly. “The worst-case scenario with RSUs, in my opinion, is that you lose money on them,” says Meg Bartelt. “And that’s a possibility if you do not sell enough RSUs immediately to pay your full tax bill.”

The concern? The stock price could suddenly fall. “The bottom line is that if the stock price drops enough after the initial withholding of 22% before you sell more shares to pay your taxes, then the shares you still have can be worth less than the taxes you still owe.”

“Get ahead of the game by preparing a projected tax return to see the impact of vesting RSUs on your tax return,” advises Daniel Zajac. “Consider ways to defer other income and/or increase deductions to reduce the spike in your taxable income,” he adds. “For example, increase 401(k) contributions, participate in a nonqualified deferred compensation plan, make bigger charitable donations, or separately increase salary withholding.”

3. Have A Strategic Plan For The Shares After Vesting

Chloé Moore of Financial Staples in Atlanta has helped many clients meet their financial goals with tailor-made strategies for RSU shares. In one example that she explained to us, her approach included:

• Allocated monthly savings, cash bonuses, and sign-on bonus to short-term savings goals.
• Kept 25% of shares that vested after the one-year anniversary (about 30% of the portfolio and a smaller percentage as the portfolio grew).
• Set aside reserves to pay the tax bill (worked with a CPA to estimate each year’s tax liability).
• Sold remaining shares as they vested and split the proceeds between student loans and savings goals, then eventually a diversified taxable account.

This is just one example of an approach when shares vest. Everyone’s individual circumstances differ. Identifying strategies that work for you is one good reason to consult a financial planner.

Concentration Risk: Don’t Keep All Your Eggs In One Basket

An important part of financial planning for just-vested shares is understanding the risks of holding them and the need for diversification. After the vesting, you could have substantial amounts of your personal wealth tied up in just one stock. We’ve all seen how quickly a stock price can tank. If you are, for example, subject to trading restrictions by your company during a blackout period, you may not be able to immediately sell shares to avert losses. With a falling stock price, all you could do in that case is watch the value plummet.

“Investments that are diversified—your money is invested a little bit in a lot of different stocks or bonds—perform better, on average, than investments that are concentrated in one stock,” points out Meg Bartelt. “Diversification is said to be ‘the only free lunch in investing.’ Keeping your company stock is anti-diversification.”

Meg often generally advises clients with just-vested RSU shares to sell all the stock. “Let’s say your RSUs are worth $100,000 when they vest. If I gave you $100,000 in cash income instead, would you go out and use that money to buy your company stock? If your answer is no, then that is literally the same, financially, as selling all your RSU shares.”

In her view, “you’re better off selling them all and using the money immediately for some current need (such as a down payment on a house) or other financial opportunity (such as paying off debt), or investing the money in a broadly diversified, low-cost portfolio.”

This is just one type of strategy. “There’s an almost infinite spectrum of decisions you could make here,” observes Meg. Holding some shares can often be more acceptable to clients, she explains.

The most important point, in her view, is diversifying and thus reducing the risks that arise from concentration of wealth in just one vulnerable stock. “Selling at least some shares is progress toward a portfolio whose risk-adjusted return is optimized.”

More Strategies To Reduce Concentration Risk

“One strategy that may balance the decision to immediately retain 100% of the shares or sell 100% is to implement a plan that sells a certain number or percentage of shares over a set period,” says Daniel Zajac.

“Setting a sell schedule allows you to intentionally reduce your company stock according to a formula,” he explains. “That removes some of the emotional decision-making from the process. You don’t need to guess what the stock price will do next, or decide you will sell when the price reaches X per share, but change your plans once the price does hit that point. You then risk the price going back down before you do sell.”

For clients who are loyal to their company stock and feel reluctant to “dump” it, a compromise approach can be highly beneficial, Meg suggests. “I find this cognitive flexibility comes in handy when I’m working with clients whose net worth is tied up heavily in their company stock. In my profession, there’s a rule of thumb that no more than 5% of your investment portfolio should be in a single stock. Often I work with clients who have 20%, 50%, 90% of their liquid net worth (i.e. cash and investment accounts) in their company stock.”

For many people in this position, selling all the way down to 5% is often “just too big a shock to the system,” Meg has learned. “But I find most people are fine going from 90% to 70%. Or 50% to 40%. And you know what? That’s progress.”

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WEBINAR: Stock Option Exercise Strategies: Advanced Bootcamp

• June 24, 2pm–3:40pm ET, 11am–12:40pm PT
• 2.0 CE credits for CFP, CIMA, CPWA, and CEP

Employees with stock option grants, whether NQSOs or ISOs, face important wealth-building and tax-minimizing decisions about when to exercise their stock options. Our upcoming webinar Stock Option Exercise Strategies: Advanced Bootcamp will clearly explain the variety of stock option exercise strategies to both build wealth and prevent expensive mistakes. This webinar is part of our advanced series building on our flagship webinar Stock Compensation Bootcamp For Financial Advisors.

Registration is now open for this lively educational event. In 100 minutes, it will feature insights from a panel of three leading financial advisors, including real-world case studies, to provide practical info, guidance, and expertise for stock options in both public and private companies.

For a detailed agenda of topics covered, see the webinar registration page.

Time conflict? No problem. All registered attendees get unlimited streaming access to the webinar recording for their personal viewing, along with the presentation slide deck. Therefore, even if you have a time conflict, please still register, as you will receive a link to the recording and presentation.

The Top 3 Tax Numbers You Need To Know In 2021

This January has been a doozy for us all. However, amid your busy work and personal life, Covid, the new presidential administration, and the upcoming tax-return season, don’t forget basic tax planning for 2021.

At the start of each year, key numbers in many tax-law provisions are adjusted for inflation. Many of the adjustments are important for employees, their paychecks, and their basic tax planning for 2021. While the IRS and Social Security Administration announce these figures every fall, January is really when you need to pay attention to them.

Many tax-code sections are adjusted, and it can be hard to spot those that matter to you. Some are of interest only to super-wealthy executives and other individuals, such as the federal exemption for estate tax (in 2021, $11.7 million for single taxpayers and $23.4 million for married joint filers). Others are chiefly matters for corporate benefit-plan administrators. For example, the income definition of “highly compensated employee,” which affects eligibility for employee stock purchase plans (ESPPs) and 401(k) plan non-discrimination testing, is $130,000 in 2021.

Below are the top three sets of tax figures that all employees should know. They relate to compensation from work: paycheck withholding, the potential need for estimated taxes, and your retirement savings. You can find in-depth content on all of these tax topics in the Tax Center at myStockOptions.com.

1. The Social Security Wage Base

Social Security tax (6.2%) applies to wages up to a maximum amount per year set annually by the Social Security Administration. Income above that threshold is not subject to Social Security tax (by contrast, Medicare tax is uncapped, with a rate of either 1.45% or 2.35%, depending on your income level).

In 2021, the Social Security wage cap is $142,800, up slightly from $137,700 in 2020. This means the maximum possible Social Security withholding in 2021 is $8,853.60. Once your income is over that amount, you’ll see 6.2% more in your paycheck!

2. Your Income-Tax Bracket And Withholding

The table below can help you understand how an additional amount of compensation would be taxed at your marginal tax rate (i.e. the percent of tax you pay for an additional dollar of income in your current tax bracket). This number tells you whether the taxes withheld according to your information on the revised Form W-4 will cover the total tax you will owe for 2021. To avoid “penalizing” additional income in your mind, be sure you know your effective or average tax rate.

Need To Pay Estimated Taxes?

Additional compensation received, such as a cash bonus or income from a nonqualified stock option exercise or vesting of restricted stock units, is considered supplemental wage income. For federal income-tax withholding, most companies do not use your W-4 rate. Instead, they apply the IRS flat rate of 22% for supplemental income (the rate is 37% for yearly supplemental income in excess of $1 million).

As shown by the table above, once you know your marginal tax-bracket rate, you may find the withholding rate of 22% may not cover all of the taxes that you will owe on supplemental wage income. In that case, you must either put extra money aside for the 2021 tax return you will file in 2022, pay estimated taxes during 2021, or adjust your W-4 for your salary withholding as soon as possible to cover the shortfall.

3. Your Contribution Limit For Qualified Retirement Plans

In 2021, you can elect to defer up to $19,500 from your paychecks into qualified retirement plans, such as your 401(k). The total ceiling for deferrals to defined contribution retirement plans, including any extra part contributed by your employer, rose to $58,000 in 2021, a $1,000 increase over last year’s amount. Both of these limits are $6,500 higher if you are 50 or older.

The amount of compensation income that can be considered in the calculation for qualified deferrals rose to $290,000 in 2021. Check with your company’s 401(k) plan administrator for the process of making changes in your compensation deferral election.

Want To Defer More Income?

Look into whether your company has a nonqualified deferred compensation plan, sometimes called an excess 401(k) plan or other name. For more on these plans, see our sibling website myNQDC.com.

IRS Resources

Here are resources with more details on the many adjusted 2021 tax numbers:

• Revenue Procedure 2020-45 gives inflation adjustments in various income-tax-related provisions.
• IRS Notice 2020-79 and an IRS table give the annual adjustments related to various tax-qualified retirement plans.

Webinar: Stock Compensation Bootcamp for Financial Advisors

Our latest webinar, Stock Compensation Bootcamp For Financial Advisors, is available to stream on demand. Learn what you need to know about stock options, restricted stock, RSUs, and ESPPs to best serve clients, build wealth, and prevent costly mistakes. Whether you are new to stock comp or want to sharpen your knowledge, this webinar provides practical information and insights to maximize your success.

See the webinar page for details and an agenda of topics covered.

Stock Comp Bootcamp For Financial Advisors Will Get Their Knowledge In Tip-Top Shape

What do you call a bootcamp about stock compensation? A "Bootcomp"? Maybe. Whatever the case, myStockOptions is holding a bootcamp on stock comp in a special webinar on October 21, presented by myStockOptions editor-in-chief Bruce Brumberg, Esq.

While nobody will actually have to drop and give us twenty pushups (though they are welcome to do so if they want), our bootcamp is a great opportunity for financial advisors, lawyers, CFAs, and tax professionals to learn all they need to know about stock comp or sharpen their existing knowledge in just 100 lively minutes. This webinar is yet another educational offering from myStockOptions in addition to the self-study courses and exams in the website's Learning Center, which offers a multitude of continuing education credits for CFP, CEP, CPWA, and CIMA professionals.

Bootcamp details are below and at the webinar registration page.

For financial advisors in particular, stock compensation is a complex planning niche they must understand when their clients have grants of stock options, restricted stock, restricted stock units, or employee stock purchase plans. Command of the core topics is required to better serve clients, build wealth, and prevent costly mistakes.

"You will understand the fundamentals of stock comp with our bootcamp webinar," guarantees Bruce, a respected expert on equity comp with over 20 years of experience in stock comp education, communications, and training. "We are very confident in the power of this educational event. If you don't feel you're in top stock comp shape after our webinar, as part of our bootcamp guarantee I will provide you with a private tutoring session myself."

All the essential topics below will be presented in just 100 minutes by Bruce Brumberg, the editor-in-chief and co-founder of myStockOptions.

• Stock options: 8 core features
• Exercise methods
• 4 key features of nonqualified stock options (NQSOs)
• NQSO taxation: 5 core rules
• 3 special features of incentive stock options (ISOs)
• ISO taxes: 5 key points
• ISOs compared to NQSOs and what’s better for your clients
• Stock options compared to restricted stock/RSUs: what’s better for your clients
• Restricted stock & RSUs: 7 key features
• 10 tax rules for restricted stock/RSUs
• How restricted stock & RSUs differ
• 6 features of employee stock purchase plans (ESPPs)
• 10 ESPP terms to know
• Types of ESPPs and their special benefits
• 5 tax rules for ESPPs
• Key decisions to make with restricted stock/RSUs, stock options, and ESPPs
• Difference between private and public company stock grants, including taxes
• Checklist of questions to ask clients with stock comp and info to gather

The webinar will offer 2.0 CE credit hours for:

• Certified Financial Planners (CFPs)
• Certified Equity Professionals (CEPs)
• CPWA and CIMA certifications from the Investments and Wealth Institute

Registration for this special webinar is now open.

Equity Comp Pandemic Planning: Leading Financial Advisors Headline myStockOptions Webinar

Like all storms, both literal and figurative, the pandemic of 2020 will pass, but at the moment it's a wild ride. Like everything else, company approaches to equity compensation and the financial-planning strategies advisors must consider for clients are being heavily impacted by Covid-19 and its ripple effects.

After wild waves in the stock markets, financial planning for stock compensation continues to be tested by volatility, economic uncertainty, corporate layoffs, and indefinite employment furloughs. It is more important than ever for financial advisors to re-evaluate approaches in this planning niche. Client strategies that may have been ideal for the economic boom years may need adjustment or revision in the unprecedented circumstances of the novel coronavirus.

Webinar: Financial Planning For Stock Compensation During The Pandemic

This is the subject of a special one-hour webinar from myStockOptions on July 22. Bruce Brumberg, the editor-in-chief of myStockOptions, will moderate a panel discussion among three leading financial advisors and a top compensation consultant:

In this online event, leading financial advisors and equity comp experts will discuss how to reconsider planning for stock compensation and company shares amid Covid-19 and its fallout. Registration is open at the webinar homepage.

The webinar discussion panelists are:

• Meg Bartelt, CFP® (Flow Financial Planning)
• Tim Kochis, CFP® (Kochis Global, former CEO and Chairman of Aspiriant)
• C.J. Van Ostenbridge, CEP (Infinite Equity)
• Jane Yoo, CFP® (Jane Financial)
• Bruce Brumberg, discussion moderator (myStockOptions)

After explaining how companies are changing their stock grants, including trends in approaches to underwater stock options, the discussion will turn to what the pandemic and its impacts mean for financial planning. Key topics:

• what to do with vested stock options
• strategies for nonqualified stock options and incentive stock options
• whether to immediately sell restricted stock or restricted stock units when the grant vests
• whether to participate in an employee stock purchase plan, and ESPP benefits even in down markets
• special strategies for grants in private companies
• helping stock comp clients through layoffs, furloughs, and new job opportunities

The webinar offers 1.0 CE credit hour for:

• Certified Financial Planners (CFPs)
• Certified Equity Professionals (CEPs)
• CIMA and CPWA

Webinar Joins Related New Financial-Planning Articles

Many employees with stock compensation are facing tough choices with their equity grants and holdings of company shares.

• You may need to sell company stock for cash to meet living expenses.
• Your company's stock price has probably steeply declined and rebounded, going through volatility that makes you wonder about your equity comp and financial planning.
• You may have lost your job or been furloughed, or you may have changed jobs.

New articles at myStockOptions address these and other timely topics:

7 Things To Know When You Sell Company Stock To Raise Cash
For reasons beyond your control, you may find yourself in a position where you suddenly need to sell stock for cash to meet urgent living expenses. When selling stock you must always proceed with caution. Review this checklist of topics to understand on tax, company, brokerage firm, and SEC rules.

ESPPs Offer Special Benefits In Down And Volatile Markets
ESPPs cannot be "underwater" like stock options, but a declining stock price can have an impact on your plan participation and the tax consequences. This article explains what you need to know for participating in your company's ESPP with a falling or volatile stock price.

What To Do With Your Just-Vested Shares After Your Company's Stock Price Drops
Market volatility can rattle anyone's financial plan for stock compensation and company shares. What should you do with shares acquired from equity awards now? Sell them immediately? Hold them in the hope that the stock price will recover? Should you change the strategy you've been following? This article provides a financial planner's insights on how to consider these questions.

These articles join our longstanding expertise on equity comp and company stock during down markets in our sections on volatility and job loss.