Four Solutions for RSUs Vesting During a Blackout

Trading windows are periods in which employees can trade their company's stock. These windows are typically open except in the lead-up to significant corporate developments, such as quarterly financial disclosures or potential corporate transactions. Before such events, companies close the trading window, preventing employees from trading company stock until the material information has been publicly disclosed. 

This practice helps protect the company from the legal and reputational repercussions of insider trading. However, trading blackouts (i.e., periods when the trading window is closed) can also create challenges for those holding or administering equity compensation awards.   

 

One significant challenge arises with the vesting of restricted stock and units. When these awards vest, they are considered income, and taxes are due; however, if an RSU vests during a blackout period, employees could struggle to raise the funds needed to meet their tax obligations because they aren’t able to sell their award shares.  

A further concern is that once the trading window opens and employees sell the stock they acquired under their awards, the price of the company’s stock may have declined and employees will realize a tax loss on their sales (i.e., the income they paid tax on will exceed their proceeds on the sale). When this occurs, employees may feel cheated and this can cause them to devalue the company’s equity program.  

This is a complex issue, and below we have provided four solutions to consider implementing to ensure that trading windows don't create overly burdensome situations for employees. 

 

The first solution is to avoid scheduling vesting events during closed trading windows. Vesting events for RSU grants, stock awards, and stock grants are often predictable, making it possible to align them with open trading windows. This strategy reduces the number of vesting events that occur during blackout periods, mitigating their impact on both employees and stock plan administration. 

For example, two-thirds of respondents to the NASPP/Deloitte Tax 2022 Equity Administration Survey issue grants to newly hired employees on just one day during each month or quarter. If the selected date occurs during an open trading window, it’s likely that awards will vest during an open trading window as well. 

However, even with careful planning, unplanned blackout periods may still coincide with scheduled vesting events, and for this strategy to be as effective as possible, vesting schedules must not be modified for leaves of absence or changes in employee status (this isn't a problem for most companies, since the predominant practice is to not adjust vesting for leaves).  

 

The second solution involves share withholding. Here, 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, not a public market transaction, many companies allow share withholding to occur during closed trading windows. Our 2022 survey on stock found that only 35% companies prohibit share withholding during closed trading windows.  

Share withholding can be beneficial, but it's also essential to consider the potential cash outflow impact on the company. And keep in mind that, unlike our other proposed solutions, it won’t help employees avoid or minimize a tax loss on their awards.  

The third solution involves the use of Rule 10b5-1 plans. These plans allow employees to pre-arrange stock sales at a future date, even during a blackout period. This could be particularly useful for employees looking for an RSU selling strategy that enables them to sell stock to cover their tax obligations on RSU vesting events that occur during blackout periods. 

There is room for flexibility in how Rule 10b5-1 plans are utilized. For instance, the plans could be executed separately, or they could be embedded in the RSU award agreement. However, it's crucial to ensure that the plans align with company stock buyback rules and SEC insider trading regulations, as permitting employees to choose how they will pay their taxes may call into question the validity of the embedded Rule 10b5-1 plan.  

 To be effective, the trading plan must comply with Rule 10b5-1 as amended by the SEC in 2022, even when embedded in the award agreement. This includes ensuring that the trading plan includes the requisite cooling-off period before trades can begin, is entered into and operated in good faith, and, for Section 16 officers and directors, includes the appropriate certifications.  

The SEC’s rule helpfully exempts trading plans used to cover taxes due on RSU awards from the prohibition on overlapping plans, which means that using a 10b5-1 plan in this context doesn’t prevent the employee from establishing a 10b5-1 plan for another purpose. Trading plans used to cover taxes due on RSU awards are also exempted from the limitation on single-trade plans. 

Because RSUs aren’t considered wages for federal income tax purposes until the underlying shares are released to the award holder, a fourth solution might be to delay the release until the trading window opens. To utilize this approach, it must be permitted under the terms of the plan and the award agreement. In addition, to avoid having to comply with Section 409A, the shares must be released no later than March 15 of the calendar year following the year in which the award vests (this allows the delay to be treated as a short-term deferral, which is exempt from Section 409A). 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).  

Depending on the company's policies and the needs of the employees, a combination of the above strategies may be used. For instance, Rule 10b5-1 plans might be employed for some employees or vesting events, and share withholding might be used for others. Ultimately, the chosen strategies should align with the employees' best interests and the company's policies. 

 

Whatever your approach, while it is important to align RSU vesting schedules and strategies with the company's insider trading policy. In some cases, the policy might need to be updated to permit specific transactions to occur during blackout periods. The key here is to strike a balance between ensuring compliance with SEC rules, protecting the company's interests, and supporting the employees' needs. 

Blackout periods can create challenges for employees and stock plan administrators alike, but there are a number of strategies that can be used to mitigate these issues. By carefully considering the needs of employees in relation to company policy, you can develop a solution that meets the needs of all parties involved. 

In addition to the strategies discussed in this blog post, there are a number of other factors that companies should consider when developing a blackout period policy. These factors include the length of the blackout period, the types of transactions that are permitted during the blackout period, and the communication that is provided to employees about the blackout period. 

By taking the time to carefully consider these factors, companies can develop a blackout period policy that is fair to employees, protects the company's interests, and complies with SEC regulations.