About Restricted Stock Awards - Fidelity Investments - 23 March 2010

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About Restricted Stock
Awards

           

 

A Restricted Stock
Award Share is a grant of company stock in which the recipient's rights in
the stock are restricted until the shares vest (or lapse in restrictions). The
restricted period is called a vesting period. Once the vesting requirements are
met, an employee owns the shares outright and may treat them as she would any
other share of stock in her account.

 

 

How do Restricted
Stock Award Plans work?

Once an employee is granted a Restricted Stock Award, the
employee must decide whether to accept or decline the grant. If the employee
accepts the grant, he may be required to pay the employer a purchase price for
the grant.

 

After accepting a grant and providing payment (if
applicable) the employee must wait until the grant vests. Vesting periods for
Restricted Stock Awards may be time-based (a stated period from the grant
date), or performance-based (often tied to achievement of corporate goals.)

 

When a Restricted Stock Award vests, the employee receives
the shares of company stock or the cash equivalent (depending on the company's
plan rules) without restriction.

 

Income Tax Treatment

Under normal federal income tax rules, an employee receiving
a Restricted Stock Award is not taxed at the time of the grant (assuming no
election under Section 83(b) has been made, as discussed below). Instead, the
employee is taxed at vesting, when the restrictions lapse. The amount of income
subject to tax is the difference between the fair market value of the grant at
the time of vesting minus the amount paid for the grant, if any.

 

For grants that pay in actual shares, the employee's tax
holding period begins at the time of vesting, and the employee's tax basis is
equal to the amount paid for the stock plus the amount included as ordinary
compensation income. Upon a later sale of the shares, assuming the employee
holds the shares as a capital asset, the employee would recognize capital gain
income or loss; whether such capital gain would be a short- or long-term gain
would depend on the time between the beginning of the holding period at vesting
and the date of the subsequent sale. Consult your tax adviser regarding the
income tax consequences to you.

 

Special Tax 83(b)
Election

Under Section 83(b) of the Internal Revenue Code, employees
can change the tax treatment of their Restricted Stock Awards. Employees
choosing to make the Special Tax 83(b) election are electing to include the
fair market value of the stock at the time of the grant minus the amount paid
for the shares (if any) as part of their income (without regard to the
restrictions). They will be subject to required tax withholding at the time the
restricted stock award shares are received. In addition to the immediate income
inclusion, a Special Tax 83(b) election will cause the stock's holding period
to begin immediately after the award is granted.

 

With a Special Tax 83(b) election, employees are not subject
to income tax when the shares vest (regardless of the fair market value at the
time of vesting), and they are not subject to further tax until the shares are
sold. Subsequent gains or losses of the stock would be capital gains or losses
(assuming the stock is held as a capital asset). However, if an employee were to
leave the company prior to vesting, he would not be entitled to any refund of
taxes previously paid or a tax loss with respect to the stock forfeited.

 

A Special Tax 83(b) election must by filed in writing with
the Internal Revenue Service (IRS) no later than 30 days after the date of the
grant. Additionally, the employee must send a copy of the Special Tax 83(b)
election form to their employer, and include a copy when filing their yearly
income tax return.

 

Deciding Whether to
Make a Special Tax 83(b) Election

Whether to make a Special Tax 83(b) election is an important
tax and financial decision, and employees are urged to consult their tax
advisers.

 

There are several potential advantages of making a Special
Tax 83(b) election:

 

Establish cost basis
now. By paying tax on the grant now, rather than when the shares vest, the
current stock price will be established as the cost basis for the shares
granted. When the shares do vest, no tax will be due until the shares are sold,
regardless of how much the shares may have changed in value.

 

Control the timing of
future income recognition. Gain (or loss) would be recognized only when the
stock is actually sold and would not be triggered by the lapse of restrictions
at vesting.

 

Capital gains
treatment. Assuming the stock is held as a capital asset, future gains (or
losses) would be taxed only as capital gains, and, therefore, would be subject
to favorable capital gains tax rates (currently 20% compared with a maximum
2003 rate of 38.6% for ordinary income tax.)

 

There are also several potential disadvantages of making a
Special Tax 83(b) election:

 

Falling share prices.
If the stock price declined during the vesting period, there is a risk that
more taxes would be paid based on the fair market value on the grant date than
would have been paid at vesting.

 

Timing of tax
payment. Since taxes are due when the award is granted, you will need to
use other funds to pay the tax withholding obligation. Under normal tax
treatment, you do not owe taxes until the grant vests and you could potentially
use some of the shares vesting to cover your tax withholding obligation.

 

Risk of forfeiture.
If the restricted stock award is forfeited (e.g., by leaving the company before
the stock vests), a loss cannot be claimed for tax purposes with respect to the
restricted stock award. Additionally, there is no refund on the tax paid on the
restricted stock award.

 

Paying Income Tax on
Restricted Stock Awards

Depending on plan rules, individuals who decide not to make
a Special Tax 83(b) election have two options to meet their tax withholding
obligation due at vesting - net shares or pay cash.

 

Individuals who elect to net shares will have the appropriate number of shares withheld at
vesting in order to cover their tax withholding obligation. They will receive
the number of shares vested less the number of shares withheld for tax
purposes.

 

Individuals who elect to pay cash in order to satisfy their tax withholding obligation must
have the appropriate amount of cash in their account on the day of vesting. The
money will be debited from their account upon vesting and it will be forwarded
to their company for reporting and remitting to the appropriate regulatory
agencies. They receive the full number of shares that vested.

 

 

Federal Income Tax Treatment Regular Tax Treatment No 83(b) election Special Tax 83(b) election Grant Date No current taxation - tax deferred until shares vest. Taxpayer taxed as ordinary compensation income at grant date on spread at grant date (difference between fair market value at grant date minus amount paid for stock, if any). Tax withholding and inclusion in income tax return for year of grant required. Forfeiture No tax consequence. No risk of paying tax and forfeiting shares without tax benefit. Taxpayer is not permitted to claim a tax loss on the forfeiture; no recovery of taxes paid at grant date on Special Tax 83(b) election. Vesting Taxpayer taxed as ordinary compensation income at vesting date on spread at vesting date (difference between fair market value at vesting date minus amount paid for the stock, if any). Tax withholding and inclusion in income tax return for year of vesting required. No tax consequence. Vesting does not trigger inclusion in income of any appreciation in value of shares; no further tax until sale or other disposition. Holding period Holding period begins at vesting date, when the compensation element of restricted stock is included in income. Holding period begins at grant date, when the compensation element of restricted stock is included in income. Subsequent sale of shares (assuming shares held as capital asset) Taxpayer is taxed on capital gain on difference between sale price minus taxpayer's basis (the amount included in income at vesting plus the amount paid for the shares, which should be equal to the fair market value of the stock at vesting). Whether such capital gain would be short- or long-term gain would depend on the time between the beginning of the holding period at vesting and the date of the subsequent sale. Taxpayer is taxed on capital gain on difference between sale price minus taxpayer's basis (the amount included in income at grant date plus the amount paid for the shares, which should be equal to the fair market value of the stock at the grant date). Whether such capital gain would be short- or long-term gain would depend on the time between the beginning of the holding period at grant date and the date of the subsequent sale.

 

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