Your individual situation is determined by the terms of your employment contract and any legal agreements with your employer. Our aim is to ensure you don’t leave money on the table, provide you with questions you can ask your employer during your exit, and even give you a jumping-off point for negotiating a potential exit package.
Restricted stock units
At most companies, unvested restricted stock units (RSUs) revert back to the company when an employee leaves the firm. If this is the case with your firm, you essentially lose the right to any unvested shares. However, this may be negotiable. Your company may offer:
- Pro-rata vesting: If your shares aren’t vested yet, it’s possible a portion of those units will vest upon termination, based on how long you were employed at the company. The specific formula for how this is calculated tends to vary by company.
- Accelerated vesting: Some companies offer accelerated vesting of RSUs if your termination is due to specific circumstances, like a buyout or even in a mass layoff situation (termination without cause).
- Grace periods: Some companies offer a short grace period where your RSUs can continue to vest. If your RSUs are set to vest in the next month, for instance, a grace period would allow you to still claim those shares.
The good news is: Many companies include a clause about company discretion in their RSU terms and agreements.
Next steps: Read your agreement to see if any of the above apply. If not, see if the company has any discretion over the terms. You may be able to negotiate to keep a portion of unvested RSUs as part of your exit.
Employee stock options
What happens with your employee stock options depends on the type of options you have and whether they are vested or not. Unvested options generally go back to the company.
However, there are circumstances where unvested options may vest when you leave the company.
· Your company may have an immediate vesting clause, for instance, that triggers an automatic vesting of options if you are terminated without cause (as with a layoff).
· Similarly, your company may offer accelerated vesting.
The more vested options you have, the better, as this creates opportunity and choices around what you do with those options.
With vested stock options: There is usually a window for exercising your vested options.
We frequently hear from people who assume that their options either expire on termination or that they must be exercised immediately. This is rarely the case. You usually have a 90-day window for exercising vested options, though the exact time frame varies by company. This gives you time to talk to your advisor about whether you have enough cash to purchase the options and what you might do with them after they vest.
· If your termination qualifies as retirement, your window to exercise your options may extend longer than with a traditional termination. Keep in mind: This retirement designation depends on how long you were with the company and your age, not your personal decision to retire.
Next steps: See whether your options have vested or not, and whether you may be able to negotiate immediate or accelerated vesting of any unvested options. Then, speak with your advisor about the decision to purchase your options.
Deferred compensation plans
What happens to any deferred compensation depends on the terms of the plan and what you elected each year as part of the enrollment process. In other words, you may have different payment schedules triggered by termination, based on each year you contributed to the plan. You’ll either have elected:
- Immediate distribution: It’s possible you will need to take immediate, lump-sum distribution of any vested funds, which can create a taxable event.
- Payment schedule: Instead of taking one, lump-sum payment, your company may offer payment plans, such as installments, delayed payment, or annuity payments.
There are three things to note:
1. Any employer matches may be subject to a vesting period. If you leave the company before that vesting period, it’s likely you’ll forfeit all or some of those funds.
2. Distributions from a deferred compensation plan create a taxable event, so it’s important to account for these distributions when tax planning.
3. The number of installments impacts your tax treatment. If you elect nine or fewer payments, you’re taxed based on the state you lived in when you made the deferral. With 10 or more payments, you’re taxed based on your current residence. So, if you move to a lower-tax state, you’ll only receive lower tax treatment for the plan years in which you elected 10 or more installments.
Next steps: Review the distribution elections you made each year, paying particular attention to the termination schedule you chose. Make sure you understand exactly when to expect your first distribution.
Review the deferred compensation terms with your financial and tax advisors. They can help you plan for any potential tax complications.
Other financial considerations
There’s much more to exiting a job than finalizing the details of your compensation and exit. To get a better handle on what to consider regarding health and life insurance, cash flow, and more, our layoff checklist can help.
You can also meet with a Quorum Private Wealth advisor to discuss the specifics of your personal situation. Our goal is to help you reach financial stability as you look for the next opportunity. We want you to pick your next job because it’s the right fit, and not because you’re worried about your finances.
