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 of RSUs and discussed various issues associated with participation in a non-qualified deferred compensation plan.

In the third blog, we addressed 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 fund choices offered under the plan (such as a notional S&P 500 fund). We noted that, contrary to conventional thinking, it may be possible to design a plan that permits the voluntary deferral and diversification of RSUs deferred without triggering accounting issues.

In this fourth and final blog in the series, we will turn our attention to the critical importance of professional, on-going plan administration and participant communications; specifically, related to the timing of RSU deferral elections and the management of distributions.

Deferral Election Timing – Introduction

An election to defer income taxes on RSUs beyond the vesting and payment date must be made in compliance with Section 409A, the Code section that deals with the taxation of non-qualified deferred compensation arrangements.  The rules are quite specific but allow for a good deal of flexibility as to the timing of a deferral election, and the timing and form of the elected benefit distributions.

The following is an overview of the general deferral election timing rule and a few valuable exceptions to the general rule.

Deferral Election Timing – Time Vested RSUs – General Rule

  • A deferral election must be made in the year before the year of grant, e.g., December 2021 for RSUs to be granted in 2022.
  • A separate election is made for each vesting tranche including: the percentage of the RSUs granted to be deferred, the period of deferral (to retirement or to a specified date), and the form of benefit payments (in a lump sum or in installments).
  • Note that the deferral election applies to income taxes (which are deferred until distribution) but not to FICA and Medicare taxes, which are due upon vesting.
The Deferral and Diversification of RSUs

Deferral Election Timing – Performance-Based RSUs – General Rule

  • Once again, the deferral election must be made in the year before the year of grant as illustrated in the graphic below.
Diversification of RSUs

Deferral Election Timing – Exceptions to the General Rule

There are a few important and potentially valuable exceptions to the general rule regarding the timing of deferral elections.

  • 12 Month / 5 Year Exception: Under this exception, it is possible to make deferral election at any time up to 12 months prior to the vesting date as long as the elected distribution date is at least 5 years after the originally scheduled distribution date (upon vesting). This exception is applicable to either time vested or performance vested RSUs.
    • “Look-back” Deferral Election. As illustrated in the graphic below, an election to defer RSUs that are part of a vesting traunch that is more than 12 months out, could be made after the date of grant. Once again, this exception to the general rule could be used for either time-vested or performance-vested RSUs.

Example 1: “Look-Back” Deferral Election for Time Vested RSUs

  • The graphic below illustrates such a “look-back” election made more that 12 months before the vesting date for the March 1, 2024 and 2025 vesting tranches. Once again, the elected deferral would have to be for a minimum of 5 years.
Deferral of RSUs

Example 2: “Look-Back” Deferral Election for Performance-Vested RSUs

  • As illustrated below, a deferral election could be made anytime at least 12 months prior to the original cliff vesting / distribution date, as long as the new distribution date is at least 5 years later than the original date.
“Look-Back” Deferral Election for Performance-Vested RSUs

Deferral Election Timing – Exceptions to the General Rule

A second valuable exception to the general deferral election timing rule is for “performance-based compensation” as defined under Section 409A.

  • In this case, a deferral election can be made anytime up to 6 months prior to the end of the performance measurement / vesting period if:
    • Vesting is contingent on the attainment of pre-established performance criteria and,
    • The award qualifies as “Performance-Based Compensation” as defined in Section 409A.


Example 3: Deferral Election Timing – Performance-Vested RSUs – “Performance-Based Compensation” Exception to the General Rule

  • Assuming the P-V RSUs meet the Section 409A definition of “performance-based” compensation, a deferral election could be made anytime at least 6 months prior to the end of the performance measurement/vesting period.
Deferral Election Timing – Performance-Vested RSUs – “Performance-Based Compensation” Exception to the General Rule

Proxy Research / Analysis  To Do

EBS has developed a standard process for the review of proxy statements to identify situations where the deferral of RSUs could be of significant value to executives, especially in the case of a “look-back” election for RSUs previously granted.

The following is an example of a report produced by the review process.  Note:

  • In Column 13 an indication of whether that specific vesting trance is eligible for deferral,
  • In Column 15, the market value of the RSUs eligible for deferral and,
  • In Column 16, an estimate of the income taxes that would be due upon vesting without a deferral election.

Note:  Hypothetical results are for illustrative purposes only and are not intended to represent the past or future performance of any specific investment.

EBS RSU Proxy Analysis


  1. For the 8/1/2019 one-time integration PSU grant, the maximum payout reported as unearned was used in the analysis; and for the 2/28/2020 grant for the 2020-2022 performance period, the target payout was used.
  2. For illustrative purposes, the total reported for RSUs and Restricted Stock Awards were shown as RSUs.
  3. For illustrative purposes, it was assumed that ABC Corp. granted PSUs and RSUs similar in value to those awarded in 2020.

In Summary 

First, from a plan design standpoint, it may be possible to structure a non-qualified deferred compensation plan that could 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.

Secondly, it is essential that such a plan be managed professionally on an on-going basis by a firm that understands the nuances of the non-qualified deferred compensation tax rules, and stock plan administration.  For example, as noted above, the opportunity for a “look-back” election to defer RSUs previously granted could potentially generate significant tax savings with respect to RSUs grants made in the past, such as the receipt of a signing bonus in the form of a significant RSU grant.

If you are interested in having EBS complete a review of the company’s proxy statement to identify the potential value of the RSU deferral and diversification strategy or if the company currently sponsors a non-qualified deferred compensation program that doesn’t offer this feature, please contact one of the firm’s Managing Directors and we would be glad to set up an exploratory call.

Restricted stock units (RSUs) are a form of stock-based employee compensation with no liquidity until vested.  They provide no dividends or voting rights.  The value of the RSU may decrease before it can be liquidated.  Diversification does not guarantee a profit or protect against a loss in a declining market.  It is a method used to help manage investment risk.

Complimentary Proxy Review Request



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.

Which Investment Option Should You Use?

The Asset Allocation Decision in Indexed Universal Life Insurance Policies

EBS’ Managing Director, Chris Wyrtzen, recently wrote a white paper that describes a methodology developed by EBS to help with the asset allocation decision faced by owners of indexed universal life (IUL) policies.

These policies offer the ability to allocate policy cash value to an account that receives an interest credit based in part on the performance of the S&P 500 Index, excluding dividends, over a 1-year period.  The minimum crediting rate is typically guaranteed to be either 0% or 1%, in exchange for a cap on the maximum crediting rate.

Use of Index Investing in Split Dollar Arrangements

Index investing is particularly prevalent in Loan Regime Split Dollar arrangements like those used by nonprofit organizations.  The premiums paid by the organization are treated as loans to the executive that are repaid at death.  Having an interest credit that is guaranteed to be 0% or greater but with upside potential based on the S&P 500 can be very attractive.

Most IUL policies offer more than one index account to choose from, however, and therefore present a challenge in deciding which one to use.  A key point to keep in mind is that deciding what index to use does not have to be a long-term decision.  A different index can be used when the current index segment matures and the index credit is received – which is typically at the end of 12 months.  And it’s also possible to use more than one index at a time.

The IUL Asset Allocation Decision Tool

EBS’ methodology involves the creation of a grid.  The rows in the grid represent different rates of return in the S&P 500 index, excluding dividends.  The columns in the grid represent the different index account choices available in a specific IUL policy.

Each of the individual cells in the grid are the calculated interest credit a policy owner would receive given that S&P 500 return (excluding dividends) and the index represented in each column.  Some index options perform better in lower return markets (e.g. a High Floor index) and some index options would perform better in higher return markets (e.g. an Uncapped index).  The grid makes it clear which index would perform best at each S&P 500 rate of return.

EBS’s grid methodology is enhanced with the use of color coding.  The index with the highest crediting rate at a given S&P 500 rate of return is highlighted in green.  The second highest crediting rate is highlighted in yellow.  Color coding makes it easy to see which indexes perform best in low return, average return, and high return markets.

To read EBS’ white paper, you can go to our resource page, or simply click here.