Jun 22, 2021

EBS Restricted Stock Blog Series Blog 3

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

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.

Jan 28, 2021

Best of 2020: Restricted Stock and More

2020 Hot Topics: Restricted Stock and More

A new year means new content!  While we get started on 2021’s concepts, take a look at our top three downloads from 2020.  It’s always helpful for us to see what our readers enjoy the most, so that we can continue to create high quality materials to share with you all throughout the year.  2020’s hot topics included restricted stock, NQDC plans, and split dollar life insurance.  Please as always, let us know if there’s anything you’re hoping to see from EBS in 2021.  We look forward to creating and working with you this year.

  • Protecting the Downside Risk of Nonqualified Deferred Compensation Plans
  • Learn the Financial Impact of Deferring Annual RSU Grants
  • Split-Dollar Life Insurance White Paper

This White Paper discusses the risks associated with participating in a Nonqualified Deferred Compensation Plan.  It was written in 2018 by Bill MacDonald, Managing Director for EBS-West and remains one of our most downloaded content items every year.

Most companies that sponsor NQDC’s take measures to ensure funds are set aside to fund future benefits.  Many firms establish rabbi trusts to hold these funds, which provides a measure of certainty that the funds won’t be used for purposes other than benefit payments.

But participant balances in NQDC’s are subject to creditor risk, and bankruptcy could result in a loss of the account.  This White Paper discusses the Deferred Comp Protection Trust, a relatively new structure that protects against this risk.

If you’re interested in learning more on this topic, you may be interested in listening to a recorded webinar that features Brian Yolles, CEO of Stock Shield, the firm that created the Deferred Compensation Protection Trust. 

Nonqualified Deferred Compensation

When stock options gave way to the use of Restricted Stock Units (RSUs), recipients lost the ability to control the timing of taxation.  Taxation of RSUs is triggered when vesting occurs, which is often on a prorated basis over the course of three or four years.

To regain control over the timing of taxation, some NQDC’s allow for the deferral of RSUs, in addition to cash compensation such as salary and bonuses, raising a number of questions for executives. Do I defer or not? What about vesting? Can I diversify into other investments? How will my decision impact tax liabilities?

This case study provides a methodology for answering these questions, and introduces the Restricted Stock Modeler created by EBS.  Find out the pros and cons of deferring or not deferring your RSUs and how your action impacts your financial situation at retirement.

For a deeper dive into deferring Restricted Stock Units, take a look at EBS’ case study on creating a Restricted Stock Wealth Management Program (RS WMP).  By using an NQDC’s short-term deferral account and the redeferral option, you can transform your annual RSU grants into a vigorous wealth-building strategy.

Restricted Stock Deferral

Recently, Nonprofit organizations have been bombarded by proposals to implement Split Dollar programs for their highly compensated executives.  Why is this?  Two major factors stand out:  the 2017 Tax Cuts and Jobs Act imposed a new 21% excise tax on compensation paid by a Nonprofit organization in excess of $1 million; and the relative disadvantage of retirement programs for Nonprofit executives structured under Section 457(f).

This White Paper provides a comparison of Section 457(f) and Split Dollar plans, helping highlight the pros and cons of each.  There is a handy matrix that presents a side-by-side summary of the two structures across a number of key features.  The paper is helpful for Nonprofits that are trying to level the recruiting playing field with for profit entities in search of executive talent.

If you’re interested in learning more on this topic, take a look at A Practical Guide To Accounting For Loan Regime Split Dollar Arrangements.  Written by EBS Managing Director Chris Rich (a former E&Y Tax Partner), it provides an overview of the accounting for split dollar arrangements. 

split dollar life insurance executive compensation

That’s all for 2020.  Be sure to follow our Twitter and LinkedIn to stay up to date with the latest content from EBS in 2021.