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Whether you’re new to the concept of paying dividends on restricted stock or have been actively engaged in that activity for a while, here are 10 things to keep in mind:
Restricted Stock Awards (RSAs) are generally eligible immediately at issuance (remember, shares underlying RSAs are issued at grant) for any dividend payments made to shareholders. This is applicable to dividend payments made even before the award shares have vested.
Restricted Stock Units (RSUs) are not eligible for dividend payments until the point in time when they have been converted to stock and distributed to employees. This usually coincides with a vesting event and can occur much later than the timing of when a RSAs is issued/eligible for dividends.
Since dividends on RSUs aren’t permitted, some companies opt to pay a dividend equivalent on unvested RSUs to provide the holder with the same benefit that a shareholder would receive.
Both dividends and dividend equivalents can be paid on a current or deferred basis. Payment on a current basis payment means that the payment is calculated/issued at the same time dividend payments are made to shareholders. A deferral of the dividend or equivalent means the payment occurs when the employee actually receives the shares (i.e. at vest).
Dividends and equivalents can be paid in cash or stock. Dividend payments made on a current basis are most often paid in cash. Deferred dividend payments are most often paid in stock.
Learn the specific regulations applicable to dividend/equivalent payments to employees in non-US jurisdictions. In some locations, paying dividends before the award has vested could alter the tax treatment that applies to the underlying award because the employee will have already realized a benefit on the award. Be sure to consult with your global advisors before making any decisions on dividends or equivalents for non-US locations (and really for US locations also).
Payments of dividends on performance-based awards are not as common as those for service-based awards. Performance-based awards that settle in cash have the lowest eligibility rate for dividends. (Source: NASPP/Deloitte Consulting 2016 Domestic Stock Plan Design Survey)
When performance-based awards are eligible for dividends prior to vesting, the dividend payments should be subject to the same performance conditions as the underlying award. If an employee forfeits any portion of a performance award, the company should consider adjusting the dividends that had accrued on the award in a manner that corresponds to the forfeiture. If an appropriate adjustment is not made, this triggers a situation where dividends have been paid on an award that was forfeited, causing the company to recognize an accounting expense for the dividends.
Dividends paid on restricted stock are considered a compensation income event and subject to tax (withholding by employer) at the time they are paid out to the employee. If the employee is paid in cash, the employee recognizes income equal to the cash received; if the dividend is paid in stock, the employee would recognize income equal to value of the stock on the date it is subject to taxation. The income and related withholdings are reported on the employee’s W-2. The exception would be a situation where an 83(b) election was filed. In that case, the income is considered dividend income (reportable on Form 1099-DIV – though there is some uncertainty around this approach for awards where dividend payments are deferred until vest) and not subject to employer withholding or W-2 reporting.
Dividend equivalents paid on restricted stock units are treated as compensation income and will be subject to federal income tax when paid to the employee. Most of the time, dividend equivalents are paid out on a deferred basis and, as a result, only when the underlying award is paid out. In that case, the dividend equivalents are subject to federal income tax when they are paid out, along with the shares underlying the award. When dividend equivalents are paid on a current basis, they are subject to federal income tax at the time of the payment.
What Is the Taxable Event for RSUs?
A concept I am asked about with some frequency is the taxable event for RSUs. In fact, I’ve been asked about it twice in the last month, so it seems like a good topic for a blog entry.
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