Author Topic: RSU fair market value snafu  (Read 416 times)

appleshampooid

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RSU fair market value snafu
« on: November 02, 2018, 09:06:06 AM »
My first batch of RSUs with my employer vested yesterday, 11/1. We also reported our Q2 earnings and unfortunately the stock dropped about 15% in pre-market trading.

Even more unfortunately, the stock price used in the FMV calculation was the closing price the previous day. But the shares sold to cover taxes were sold on the market during the day, at the 15% lower price. The result? In order to withhold ~30.5% of my grant to cover taxes*, 36% of my shares ended up being sold.

This is not my first go-round with RSUs, and at my previous employer who issued them, this never came up. The price used for FMV was also close to, if not exactly, the price used to sell-to-cover. This was 8+ years ago, but I looked at a couple of my old tax returns to confirm that the transactions listed on Schedule D for the STC action always showed a small loss of exactly the trade confirmation.

This morning I started digging through the legalese in my company's plan documents to see if I have any recourse. Based on a couple of sections that I found, it seems that they should have used the closing price on 11/1 (the lapse or vest date) for the FMV calculation, but our stock plan administrator says it is the previous day's close. I don't see that anywhere explicitly specified.

Pretty pissed off because the income number (shares X the higher price on 10/31 close) is taxed as wage income. I do realize that STC transaction will incur a big capital loss, but it still doesn't make up for the additional tax paid and shares sold.

Anyone been in a similar situation?

Admittedly I'm getting way too worked up over this, given that I still just got a big chunk of money. But pedantry is one of my hobbies so I'm just trying to keep my blood pressure low while I "discuss" the situation. I doubt anything will change, but I really with they would give us more control over the tax situation. We are not allowed any other option besides sell-to-cover, despite most RSU plans allowing several options (e.g. sell all at vest date, provide cash to cover the taxes, etc.)

*the ~30.5% number is odd; it would have been a flat 34.75% to cover federal, state, and FICA, but I was already just short of the SS max for the year so it ended up being a weird number.
« Last Edit: November 02, 2018, 09:09:36 AM by appleshampooid »

mizzourah2006

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Re: RSU fair market value snafu
« Reply #1 on: November 07, 2018, 07:50:40 AM »
That sucks. Our shares were granted years before they vested, so if we got $25k in grants and the share price the day of the grant was $100 we'd get 250 shares. Then the next year when 25% of them vested you were taxed on the current share price. I've never had where you get your award and then they vest to you the next day. It's definitely still possible that the RSUs vest a year later and the market is down, but I think that's the entire point of having RSUs. So you are a part owner in the business and part of your income is a result of the success or failure of the business.

appleshampooid

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Re: RSU fair market value snafu
« Reply #2 on: November 12, 2018, 08:46:21 AM »
That sucks. Our shares were granted years before they vested, so if we got $25k in grants and the share price the day of the grant was $100 we'd get 250 shares. Then the next year when 25% of them vested you were taxed on the current share price. I've never had where you get your award and then they vest to you the next day. It's definitely still possible that the RSUs vest a year later and the market is down, but I think that's the entire point of having RSUs. So you are a part owner in the business and part of your income is a result of the success or failure of the business.
You misunderstand, or I misspoke :)

I was granted the shares when I joined, more than a year ago. They vested on 2018-11-01, but for income tax and cost basis purposes, used the share price at close of business on 2018-10-31. The difference between that price and the price at which shares were sold to cover taxes was more than 15% due to the wild swing when we announced earnings prior to market open on 2018-11-01.

The stock plan administrator was unable to point to anything in the formal plan document, but was able to cite a PowerPoint presentation that said it was previous day's close for FMV pricing .

I'm sure that PP is legally binding...seriously though, in the absence of an exact provision in the plan documents, it does specify that they have the power to make any such decisions as necessary. So I'm sure it's on the up-and-up, and just sucked for this specific vesting event. Hopefully future vests won't be as affected.

mizzourah2006

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Re: RSU fair market value snafu
« Reply #3 on: November 12, 2018, 11:58:29 AM »
That sucks. Our shares were granted years before they vested, so if we got $25k in grants and the share price the day of the grant was $100 we'd get 250 shares. Then the next year when 25% of them vested you were taxed on the current share price. I've never had where you get your award and then they vest to you the next day. It's definitely still possible that the RSUs vest a year later and the market is down, but I think that's the entire point of having RSUs. So you are a part owner in the business and part of your income is a result of the success or failure of the business.
You misunderstand, or I misspoke :)

I was granted the shares when I joined, more than a year ago. They vested on 2018-11-01, but for income tax and cost basis purposes, used the share price at close of business on 2018-10-31. The difference between that price and the price at which shares were sold to cover taxes was more than 15% due to the wild swing when we announced earnings prior to market open on 2018-11-01.

The stock plan administrator was unable to point to anything in the formal plan document, but was able to cite a PowerPoint presentation that said it was previous day's close for FMV pricing .

I'm sure that PP is legally binding...seriously though, in the absence of an exact provision in the plan documents, it does specify that they have the power to make any such decisions as necessary. So I'm sure it's on the up-and-up, and just sucked for this specific vesting event. Hopefully future vests won't be as affected.

Huh, that is extremely weird. It seems like it would be a huge positive if the shares were more valuable at the time of vesting, but definitely not good if the shares are down. Seems a little odd from an IRS perspective though. It's not considered individual income until it vests, why would the IRS be ok with you paying taxes on the value of the RSUs a year ago instead of when it actually gets given to you? Seems like an accountant question.

appleshampooid

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Re: RSU fair market value snafu
« Reply #4 on: November 13, 2018, 06:30:42 AM »
That sucks. Our shares were granted years before they vested, so if we got $25k in grants and the share price the day of the grant was $100 we'd get 250 shares. Then the next year when 25% of them vested you were taxed on the current share price. I've never had where you get your award and then they vest to you the next day. It's definitely still possible that the RSUs vest a year later and the market is down, but I think that's the entire point of having RSUs. So you are a part owner in the business and part of your income is a result of the success or failure of the business.
You misunderstand, or I misspoke :)

I was granted the shares when I joined, more than a year ago. They vested on 2018-11-01, but for income tax and cost basis purposes, used the share price at close of business on 2018-10-31. The difference between that price and the price at which shares were sold to cover taxes was more than 15% due to the wild swing when we announced earnings prior to market open on 2018-11-01.

The stock plan administrator was unable to point to anything in the formal plan document, but was able to cite a PowerPoint presentation that said it was previous day's close for FMV pricing .

I'm sure that PP is legally binding...seriously though, in the absence of an exact provision in the plan documents, it does specify that they have the power to make any such decisions as necessary. So I'm sure it's on the up-and-up, and just sucked for this specific vesting event. Hopefully future vests won't be as affected.

Huh, that is extremely weird. It seems like it would be a huge positive if the shares were more valuable at the time of vesting, but definitely not good if the shares are down. Seems a little odd from an IRS perspective though. It's not considered individual income until it vests, why would the IRS be ok with you paying taxes on the value of the RSUs a year ago instead of when it actually gets given to you? Seems like an accountant question.
Hmm, we're still not connecting somehow :P. The price at grant date doesn't matter.

Grant date - 2018-02-01 - share price $75 - this price is not relevant to the discussion
day PREVIOUS to vest date - 2018-10-31 - share price at COB $110, (this is the price that was used for income tax and cost basis purposes)
Vest date - 2018-11-01 - share price at open ~$95, doesn't change much during the day (this is the price at which shares were sold to cover taxes)

mizzourah2006

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Re: RSU fair market value snafu
« Reply #5 on: November 13, 2018, 06:52:03 AM »
ahh ok. Yeah, that's just unfortunate. It's odd that they set it up to vest right at earnings release, which is usually the most volatile time for a stock. I never really noticed if there was a date difference between the date used and the actual day we got the shares, but ours were vested on a random day in March about 3 weeks after Q4 earnings were released, so any volatility from earnings was gone. Just out of curiosity do they lock in your RSU valuation the day before earnings reports or the day after earnings?

appleshampooid

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Re: RSU fair market value snafu
« Reply #6 on: November 13, 2018, 06:57:59 AM »
ahh ok. Yeah, that's just unfortunate. It's odd that they set it up to vest right at earnings release, which is usually the most volatile time for a stock. I never really noticed if there was a date difference between the date used and the actual day we got the shares, but ours were vested on a random day in March about 3 weeks after Q4 earnings were released, so any volatility from earnings was gone. Just out of curiosity do they lock in your RSU valuation the day before earnings reports or the day after earnings?
It's just bad luck in my case. Your first batch of shares vests 1 year after the next first of the month after you start. I started on 2017-10-02, so my first batch vested on 2018-11-01. Just bad luck that is earnings day. If I had started a week earlier it wouldn't have been an issue. TBF if we ever make a profit (lol) the price might actually shoot up in that interval, which would be nice (although would incur a capital gain on the STC transaction - steady would be my preference).

Not sure what you mean by RSU valuation? The FMV used for taxes/cost basis is the closing price the day before you vest (as noted above). The decision on how many shares to give you is set in stone when you are hired, and it's a set number of shares regardless of the price. Later on might get more shares depending on performance and promotions.

mizzourah2006

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Re: RSU fair market value snafu
« Reply #7 on: November 13, 2018, 07:05:35 AM »
The decision on how many shares to give you is set in stone when you are hired, and it's a set number of shares regardless of the price. Later on might get more shares depending on performance and promotions.

Yes, this is what I was referring to. Where I worked you were given say $30k/yr in shares. So if the valuation was $100/share you got 300 RSUs. If it was $50/share you got 600 RSUs, etc. But ours were granted to everyone in the company on the same day and vested to everyone in the company on the same day.

PDXTabs

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Re: RSU fair market value snafu
« Reply #8 on: November 13, 2018, 12:32:01 PM »
The decision on how many shares to give you is set in stone when you are hired, and it's a set number of shares regardless of the price. Later on might get more shares depending on performance and promotions.

Yes, this is what I was referring to. Where I worked you were given say $30k/yr in shares. So if the valuation was $100/share you got 300 RSUs. If it was $50/share you got 600 RSUs, etc. But ours were granted to everyone in the company on the same day and vested to everyone in the company on the same day.

I think you are still missunderstanding. You said that [t]hen the next year when 25% of them vested you were taxed on the current share price. That's what we are discussing, the OP's current share price.

mizzourah2006

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Re: RSU fair market value snafu
« Reply #9 on: November 13, 2018, 03:35:21 PM »
The decision on how many shares to give you is set in stone when you are hired, and it's a set number of shares regardless of the price. Later on might get more shares depending on performance and promotions.

Yes, this is what I was referring to. Where I worked you were given say $30k/yr in shares. So if the valuation was $100/share you got 300 RSUs. If it was $50/share you got 600 RSUs, etc. But ours were granted to everyone in the company on the same day and vested to everyone in the company on the same day.

I think you are still missunderstanding. You said that [t]hen the next year when 25% of them vested you were taxed on the current share price. That's what we are discussing, the OP's current share price.

I know that's what we are talking about. I was responding to this part:

Quote
Not sure what you mean by RSU valuation? The FMV used for taxes/cost basis is the closing price the day before you vest (as noted above). The decision on how many shares to give you is set in stone when you are hired, and it's a set number of shares regardless of the price. Later on might get more shares depending on performance and promotions.

Again, my question was out of curiousity, because if you were granted $30k in shares and the grant happened after earnings reports that could have a huge impact on the # of RSUs you get. He cleared it up by stating that share price is irrelevant in his case as he is simply granted a specific # of shares regardless of price and I simply outlined how it worked at my company and why I had the question.

He pretty much answered his own question. It's a standard practice that they have where the lock the night before they vest and his just happen to vest the day after the earnings report. It's just bad luck on his part. Earnings aren't always on the same day every year, so perhaps he won't have that issue again.
« Last Edit: November 13, 2018, 03:37:43 PM by mizzourah2006 »