A couple months back, the IRS released “Generic Legal Advice Memorandum 2020-004” – which addresses the timing of tax withholding on options, SARs and RSUs. This Troutman Pepper memo explains that under the memo, the tax date for RSUs is the date the employer “initiates payment” – i.e., when it instructs the transfer agent to transfer shares to the employee’s account.
Under most RSU agreements, the share transfer is baked in to occur on the vesting date. But for some awards – e.g., performance awards that provide for a payment during a specified period after certification of year-end financial results – there is more flexibility, and the memo clarifies that there are tax consequences to that decision. Here are some planning opportunities that the memo highlights:
- Having a single payment date for administration of tax reporting and withholding for RSUs and PSUs that vest on multiple prior days during a year;
- Timing the payment date to be during an open trading window (e.g., three days after public release of quarterly or annual financial statements); and
- Timing the payment date in coordination with dividend record dates (e.g., so that the shares delivered in settlement will qualify to receive the dividend).
For example, assume an employer has time-vesting RSUs that vest on February 12, 14, and 15 during 2021. Assume there is also a PSU award with a 2018-2020 performance period that the compensation committee, at its meeting in February 2021, determines was earned at target. Assume the employer plans to file it’s 10-K at the end of February, with an open trading window under their insider trading policy starting on March 4. If the award agreements include language permitting the employer to pick a payment date within a specified administrative period (e.g., on a day no later than March 15, 2021), the employer could select March 4 as the payment date for all of these awards and initiate payment on that date. This single payment date for the various awards could provide several potential benefits, such as:
- Simpler administration for tax reporting and withholding (e.g., by having a single stock price to value all of the awards for tax purposes);
- If share withholding is used to cover taxes for Section 16 officers, simpler Form 4 filing requirements (with a single Form 4 reporting those share withholding transactions for each Section 16 officer); and
- If tax withholding is to be covered through employee-directed broker sales of shares subject to the awards, simpler compliance with insider trading policy requirements (i.e., by having the sale transactions executed during an open window).