4 Strategies for RSUs Vesting During Blackout Periods

Trading windows are an important tool public companies use to discourage employees from trading in company stock while they have access to material nonpublic information. But when the window is closed for award vesting events, these safeguards can feel like a hindrance rather than a help.

Understanding the intricacies of trading blackout periods—and how they affect restricted stock and unit awards—is crucial for both employees and stock plan administrators.

What Are Trading Windows—and Why Do They Matter?

Trading windows govern when employees can trade in company stock and typically coincide with the release of quarterly financial results. A company’s window usually opens within a day or two after the company announces results—at that point, the information is public and employees no longer have an unfair advantage over other investors.

The window generally remains open for one to two months, until employees might be able to anticipate the next quarter’s results. At that point, it closes, and a trading blackout period begins. Employees cannot trade again until the next results are announced.

Companies may also impose unscheduled blackouts for significant events, such as mergers, acquisitions, or changes in control.

Trading windows help protect companies from the legal and reputational risks of insider trading. But they also create challenges for those holding or administering equity compensation awards.

The Challenges of Blackout Periods for RSUs

One major challenge occurs when restricted stock or units vest during a blackout. At vesting, the awards are treated as income, and tax withholding is due. If employees cannot sell shares to cover their tax obligations, they may struggle to raise the necessary funds.

Another concern arises when employees must wait until the window reopens to sell. If the stock price has declined, the sale proceeds may be lower than the taxable income recognized at vesting—leaving employees with a loss and a sense of unfairness. This can undermine confidence in the company’s equity program.

Four Strategies for Handling RSU Vesting in Blackouts

1. Schedule Vesting to Avoid Closed Windows

Companies can try to avoid scheduling vesting events during blackout periods. Vesting dates are often predictable, making it possible to align them with open windows. For example, many companies consolidate vesting dates to one day per month or quarter, increasing the likelihood they fall in an open window.

This approach is not foolproof. Unplanned blackouts can still overlap with restricted stock vesting events, and this method requires that vesting schedules remain fixed even during leaves of absences or other employee status changes (not usually a problem, since most companies don't adjust vesting for leaves).

2. Use Share Withholding to Cover Tax Withholding

The second solution involves share withholding, i.e., having employees remit shares back to the company to cover the tax due on their vested equity shares. Because this is a private transaction between the company and the employee, many companies permit it during blackout periods. In fact, the 2022 NASPP/Deloitte Tax Equity Administration Survey found that only 35% of companies prohibit this practice.

This method reduces employee hardship but may create cash flow implications for the company. It also does not prevent potential tax losses if share values fall.

3. Set Up Rule 10b5-1 Plans

Rule 10b5-1 plans allow employees to pre-arrange stock sales for a future date, including during blackout periods. These plans can be tailored to cover award tax obligations and can be executed separately or embedded in award agreements, provided they comply with the SEC’s 2022 amendments to the rule.

Key requirements include a cooling-off period, good-faith operation, and certifications for Section 16 insiders. Notably, 10b5-1 plans for sales to cover RSU taxes are exempt from restrictions on overlapping and single-trade plans, making them a flexible option.

4. Delay Share Release Until an Open Window

Since RSUs are not taxed as wages until the underlying shares are released, companies can consider delaying the release until an open window. To qualify as a short-term deferral exempt from Section 409A, shares must be released by March 15 of the year following vesting. When the underlying shares are released by this date, Treas. Reg. §31.3121(v)(2)-(1)(b)(3)(iii) also allows collection of FICA taxes to be delayed until the release. 

See the NASPP article “Deferred Stock Units” for more information on delaying releases of RSU awards, including the full requirements of Treas. Reg. §31.3121(v)(2)-(1)(b)(3)(iii).

This approach is not applicable to restricted stock awards, which are taxed at vest regardless of whether the underlying shares are released at this time.

Mixing and Matching Strategies

Many companies use a mix of these strategies. For instance, vesting dates may be scheduled during open windows whenever possible, while share withholding or 10b5-1 plans are used when overlap is unavoidable.

The key is tailoring solutions to employee needs while aligning with company policies.

Aligning With Insider Trading Policies

Any approach must be consistent with the company’s insider trading policy. In some cases, the policy may need updates to explicitly allow certain transactions during blackout periods. Balancing compliance with SEC rules, company risk management, and employee needs is essential.

Final Thoughts: Building a Fair and Compliant Policy

Blackout periods can be challenging for both employees and administrators, but careful planning can minimize their impact. By aligning vesting schedules, providing alternative tax-coverage methods, and updating policies as needed, companies can support employees while ensuring compliance.

Other factors to consider when designing blackout policies include:

• The length of the blackout period,
• Which transactions are permitted, and
• How information is communicated to employees.

A thoughtful policy protects the company, supports employees, and upholds SEC regulations.