The Financial Impact of Non-Vested RSUs on a Company

Introduction

When an employee is granted Restricted Stock Units (RSUs), there is often confusion around the costs and implications if these units do not vest. This article aims to clarify the situation by examining the financial impact on a company, focusing on scenarios where RSUs do not vest.

What Are RSUs?

RSUs are a type of equity compensation that allows employees to receive company stock after a certain period or event. Unlike stock options, RSUs are granted on the condition that the employee stays with the company, and the shares are typically subject to vesting schedules.

Non-Vesting Scenario: Return of RSUs to the Company

In the event that RSUs do not vest, these shares must be returned to the company. While this may seem like a minor administrative process, there are indeed financial implications that the company needs to be aware of.

Reallocation of RSUs

When RSUs do not vest, the shares are typically reallocated to other employees who are still in a position to meet the vesting requirements. This can be seen as a cost-saving measure from the company's perspective, but it does not entirely eliminate the financial and administrative workload associated with managing these unvested shares.

Administrative Costs

In addition to the reallocation process, companies may incur minor administrative costs associated with tracking, managing, and reallocated non-vested shares. These costs can include transaction fees, record-keeping expenses, and potential legal fees if the process is not handled in compliance with corporate governance and tax regulations.

Consequences of RSUs Vesting

While the non-vesting scenario is less costly, the consequences of RSUs vesting are much more substantial for a company.

Value of the Shares

When RSUs vest, the company must recognize the full value of the shares. This can lead to significant financial implications, as the company needs to account for the increased equity in its balance sheet, which can affect the company's overall financial statements and valuation.

Employment Taxes

The company has to match all of the employment taxes associated with the RSUs, including FICA (Federal Insurance Contributions Act) and Medicare taxes. These taxes can be substantial, especially when the value of the shares is high. The company is required to remit these taxes to the government, adding to the overall financial burden.

Additional Tax Implications

In certain cases, employees may be able to use a net-exercise formula to cover their own tax obligations upon receiving the shares. However, even when this is the case, the company still has to match the taxes associated with the surrendered shares, which can be a significant financial burden.

Matching Surcharges

The company is responsible for matching the surcharges associated with the surrendered shares through real money. This means that the company must have the necessary funds to cover these additional costs, even if they are only applicable to a specific employee.

Conclusion

While the cost of non-vested RSUs being returned to the company may seem minor, the financial implications of RSUs vesting can be significant. Companies must be aware of the full scope of financial obligations, including employment taxes and the need to match surcharges with real money, when dealing with non-vesting RSUs.

FAQs

Are there any specific regulations that companies must follow when managing unvested RSUs?

Yes, companies must adhere to corporate governance and tax regulations when managing RSUs. This includes ensuring that the reallocation and tracking of non-vested shares are done in compliance with relevant laws and regulations.

How do companies typically manage the administrative costs associated with loaning and reallocating RSUs?

Companies often have internal systems and processes in place to manage these costs. This can include using automated systems for record-keeping and transaction fees to keep administrative costs as low as possible.

What are the tax implications for both the employee and the company when RSUs vest?

When RSUs vest, both the employee and the company face tax implications. The employee is responsible for capital gains tax on the value of the shares, while the company must match the FICA, Medicare, and other employment taxes for the employee. The company can also be required to match surcharges associated with the surrendered shares through real money.