Granting Equity: The Restricted Stock versus Restricted Stock Unit Conundrum

A grant of restricted stock is a common type of vehicle to deliver executive compensation, intended to motivate the individual in contributing to share performance. Taxation occurs on vesting unless the executive opts, under I.R.C. Section 83(b), to elect taxation sooner. Restricted stock units (RSUs) are economically identical to restricted stock, except that they represent a promise to deliver stock (or the cash equivalent) in the future, in most cases promptly following vesting. If share delivery occurs promptly following vesting, Section 409A generally will not apply to the RSUs pursuant to Section 409A’s short-term deferral rule. See Treas. Reg. § 1.409A-1(b)(4). However, if delivery may be delayed to a later date, the RSUs must comply with Section 409A. Learn more about what to communicate to the client, to the executive, and for payroll tax, considering both FICA and income tax withholding and reporting.

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