How can I maximize the value of my RSUs?

The Deferral and Diversification of Restricted Stock Units

In the first blog in this series, we discussed how the design of long-term equity compensation plans has evolved from a primary emphasis on stock options to the portfolio approach commonly used today.  And within the portfolio of equity compensation awards, Restricted Stock Units, both time-vested and performance-vested, have become the vehicles of choice for many companies because of the flexibility of plan design, potential tax advantages and simplified stock plan administration.

In the second blog, we provided a hypothetical analysis illustrating the potential advantage of the deferral of taxation upon vesting and discussed the issues associated with participation in a non-qualified deferred compensation plan including; the timing of deferral elections in general, and the opportunity for a “look back” election with respect to prior year grants.  In addition, we reviewed the potential benefit of the active management of distributions.

In this third blog in the series, we address the issue of diversification; that is, the ability of a participant in a non-qualified deferred compensation to reallocate some or all of the RSUs deferred to other notional fund choices offered under the plan (such as a notional S&P 500 fund).

Deferral and Diversification

There can be significant advantages to permit the deferral of taxation on RSUs upon vesting through a non-qualified deferred compensation plan.  Federal income taxes can be deferred and, in some cases, state income taxes can be reduced or eliminated entirely. In addition, distributions can be managed in a manner consistent with the executive’s overall financial and tax plans.

As a result, a number of publicly traded companies permit the deferral of RSUs; however, few permit diversification.  This creates a unfair disadvantage of deferral as it precludes the opportunity to diversify company stockholdings as an executive might do if he/she accepted delivery of the shares upon vesting, paid the related income taxes and then diversified the remaining shareholdings to avoid a concentration of net worth linked to company stock.

The reason most cited by plan sponsors for not offering diversification of RSUs deferred is that permitting the reallocation of the RSUs to other notional investment choices in the deferred compensation plan and the payment of benefits in cash at the end of the deferral period, would trigger accounting issues.

That is not necessarily the case. If the conditions on which diversification is permitted are properly structured, “liability” accounting treatment would not be required until such time as an executive chooses to reallocate the RSUs deferred to other notional fund choices in the deferred compensation plan. The conditions for diversification might be a specified holding period for the RSUs deferred, a specified age, retirement, or upon a change in control.

Result

The net P&L impact of permitting the deferral and diversification of RSUs through a properly designed non-qualified deferred compensation plan would be comparable to that for RSUs that are distributed as shares at the time of vesting; that is:

  • The date of grant value would be recognized as compensation expense over the vesting period,
  • Any appreciation in value of RSUs deferred from the date of grant to the date of diversification would not impact the P&L,
  • If and when an executive choses to diversify the RSUs deferred through reallocation to other notional funds offered in the deferred compensation plan, “liability” accounting would kick-in and the value of the participant’s deferred compensation account would be marked to market through the P&L from that point forward.
  • However, that expense would be offset by the investment income from the rabbi trust assets purchased to hedge the deferred compensation plan liability (e.g., an S&P 500 Index Fund).

In Summary

It may be possible to significantly enhance the value of the total rewards package for senior executives by permitting the voluntary deferral and (subject to specific requirements) diversification of RSUs deferred without triggering accounting issues.

RSU Blog #4:  Final Blog in the Series

In the next and final blog in the series, we will recap the benefits of permitting the deferral and diversification of RSUs including the opportunity for a “look back” deferral election for prior year grants.  In addition, we will discuss the implementation steps and administration issues associated with permitting deferral and diversification.

Ready to chat RSU’s?  Complete the form below

EBS has also created a brief video discussing RSUs (restricted stock units) which you can watch now.  Click to WATCH NOW and learn more about the deferral and diversification of RSUs.

 

P.S. We’ll announce when blog #4 from the series is live, via LinkedIn.  If you don’t want to miss it, be sure to follow us by clicking the link here!
Caveat:  EBS is an executive benefit consulting firm.  It does not provide accounting or tax advice.  The tax and accounting treatment described above for the deferral and diversification of RSUs is based on the firm’s experience working with its clients and their advisors on similar plan designs.

Split Dollar Life Insurance: What to Know

Is your organization struggling with executive turnover? 

 

All sorts of factors can lead to a key employee walking out the door.  But usually one thing is true – the person who leaves doesn’t feel valued enough.

If you’re a nonprofit organization, this problem is even more prevalent.

The structure of your company doesn’t allow for the same sort of benefit packages and equity that for-profit organizations can offer – and that’s not going to change.

But, there is something you can do. 

Consider the use of a split dollar life insurance plan.  We cover the basics in our video found here.

If you’re looking for the details, we recommend you download our white paper, “Why Non-Profits Are So Interested in Split-Dollar Life Insurance—Should You Be, Too?”.

Not enough time on your hands to go through the download process – we get it.

The takeaway message:

  1. The comparative tax advantages of a life insurance-based program: Section 457(f) programs trigger income taxation to the participant on the value of the entire benefit when vested, regardless of when the benefits are paid. As a result, virtually all Section 457(f) plan benefits are paid in the form of a lump-sum upon vesting. A split-dollar program can be designed to provide non-taxable supplemental income timed to meet the participant’s needs (if the contract is properly structured and administered).
  2. The avoidance of the Section 457(f) requirement for “substantial risk of forfeiture:” Under a loan-regime split-dollar arrangement, the sponsoring organization (rather than the IRS) can design the vesting and forfeiture provisions to meet the organization’s retention objectives in a manner responsive to the participant’s needs.
  3. The reduced exposure to the new Section 4960 21% excise tax: A Section 457(f) plan can trigger the excise tax if the value of the participant’s benefit upon vesting is more than $1 million, or if the benefit represents an “excess parachute payment” (even if less than $1 million). Loans made to participants under a split-dollar arrangement are not subject to the excise tax.
  4. Greater benefit security: Under a loan regime split-dollar arrangement, the participant owns the underlying life insurance contract from day one, with an assignment to the sponsoring organization of an interest in policy values related to the premium loans until the loans are repaid. In the case of a Section 457(f) plan, the Participant’s rights to benefits are exposed to the claims of the sponsoring organization’s creditors in the event of bankruptcy or insolvency.
  5. The relatively favorable Form 990 disclosures: Compensation expense related to a Section 457(f) plan is disclosed in Schedule J twice; at the time the benefits are accrued, and again upon payment. Under a loan regime split-dollar arrangement, the sponsoring organization’s contributions are converted from an expense to an asset, reported as a loan on Schedule L. Only the relatively modest annual imputed interest to the executive is reported as compensation expense on Schedule J.

 

Don’t let your organization lose out on top talent due to poorly designed executive compensation programs.  You can give us a call to discuss whether split dollar is the right solution for your company.