Restricted stock awards (RSA) are shares awarded to a person, and the shares are subject to certain restrictions before the individual can sell or transfer their shares. Restricted stock awards should not be confused with Restricted stock units (RSU). RSUs are a form of restricted stock, but the mechanics and tax treatment differ significantly from restricted stock awards.
A company generally awards RSA to key employees as part of their total compensation. A startup will also issue RSAs to founders and initial employees.
Characteristics of RSA
- The company issues stock to the employee at no cost or a nominal purchase price.
- The RSA has vesting restrictions that limit the employee’s ability to sell or transfer the shares until a later date, according to the terms of the vesting schedule.
- The employee generally has no income tax event on the award date because the property is subject to forfeiture risk.
- An employee with restricted stock may file a Section 83(b) election.
Example RSA for John Doe
John Doe is hired as the Chief Executive Officer (CEO) for Company Bravo, a Delaware corporation. Company Bravo pays John a salary of $500,000 per year and grants John shares of company stock as restricted stock awards. On June 30, 2023, the company gives John 10,000 shares of stock with a current FMV of $10 per share. John paid zero dollars for the shares.
The stock has vesting restrictions, which state that the shares vest 25% yearly over four years. If John leaves the company, or the corporation fires him, he must return any nonvested shares of stock.
If John decided he wanted to sell his shares on November 30, 2023 (less than one year after the grant date), he would be unable to do so because none of his stock has vested.
U.S. Federal Tax Consequences
There is no immediate tax consequence to John on the grant date. When the stock vests in the future, the fair value of the stock on the vesting date is included in John’s ordinary income. Alternatively, John may file a Section 83(b) election within 30 days of the grant date to include the value of his shares on the grant date in his current ordinary income.
Following the example above, if John decided to not file a Section 83(b) election, the vesting schedule and income inclusions would be the following:
- June 30, 2024, share price is $15 per share. John records $37,500 of ordinary income ($15 times 2,500 shares).
- June 30, 2025, share price is $17 per share. John records $42,500 of ordinary income ($17 times 2,500 shares).
- June 30, 2026, share price is $9 per share. John records $22,500 of ordinary income ($9 times 2,500 shares).
- June 30, 2027, share price is $12 per share. John records $30,000 of ordinary income ($12 times 2,500 shares).
Notice how the amount of John’s ordinary income inclusion varies with the fluctuating stock price.