Definition of restricted stock options


Several years ago, when companies began exploring alternatives to stock options for their broad-based grants of equity compensation, the type of grant most often bruited about in corporate circles was restricted stock. In fact, many observers foretold that restricted stock would become the new stock options.

Restricted - definition of restricted by The Free Dictionary

Under normal federal income tax rules, an employee receiving a Restricted Stock Award is not taxed at the time of the grant (assuming no election under Section 88(b) has been made, as discussed below). Instead, the employee is taxed at vesting, when the restrictions lapse. The amount of income subject to tax is the difference between the fair market value of the grant at the time of vesting minus the amount paid for the grant, if any.

Restricted Stock Unit Definition | Investopedia

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With most restricted stock units, including broad-based grants made under RSU plans at Amazon, Microsoft, and Intel, the delivery of shares occurs at vesting. In effect, this makes RSUs identical to standard time-vested restricted stock, although (as noted above) before vesting the RSUs are just an unfunded bookkeeping entry rather than actually issued shares. Vesting can occur in increments over the course of the vesting period (graded vesting), or all the shares can be delivered at once on a single vesting date (cliff vesting).

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A guide to creating equity compensation arrangements for limited liability companies (LLCs). Includes model plan documents.

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With a Special Tax 88(b) election, employees are not subject to income tax when the shares vest (regardless of the fair market value at the time of vesting), and they are not subject to further tax until the shares are sold. Subsequent gains or losses of the stock would be capital gains or losses (assuming the stock is held as a capital asset). However, if an employee were to leave the company prior to vesting, he would not be entitled to any refund of taxes previously paid or a tax loss with respect to the stock forfeited.

Control the timing of future income recognition. Gain (or loss) would be recognized only when the stock is actually sold and would not be triggered by the lapse of restrictions at vesting.

For executives, some RSU plans have a tax-deferral feature that lets you select a date for share delivery, or the company specifies one (. retirement). This creates more decisions for you to make, and raises tax complexities that are explained in Part 7 of this article series.

Whether to make a Special Tax 88(b) election is an important tax and financial decision, and employees are urged to consult their tax advisers.


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