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A common provision in many restricted stock unit (RSU) awards is that vesting will accelerate when a participant becomes eligible to retire, after having reached a certain age and/or completed a minimum number of years of service. One aspect of “retirement vesting” that can be overlooked is the timing of the employment tax obligations. Taxand USA investigates further.
In the normal case, if an RSU has a service-based vesting period, the shares will be transferred following the end of the vesting period under the applicable award agreement.
There is no income or employment tax event until the shares are actually or constructively received. However, if the RSU award agreement provides for retirement vesting, the lapse of the service-based substantial risk of forfeiture will occur when the participant becomes retirement eligible, even though the shares may not be deliverable until the original settlement date. Therefore, under the standard timing rules, FICA and Medicare tax will become due and payable immediately.
This obligation to pay employment taxes before delivery of the vested shares can be unwelcome news for both the employer and the participant.
Discover more: Employment tax considerations that vest on retirement
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The rule of administrative convenience, the lag method and net settlement are three alternatives that can be used to mitigate unpleasant employment tax consequences for participants and employers alike.