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Planning for Life's Unforeseen Events: Protecting Your Stock Compensation

Planning for Life's Unforeseen Events: Protecting Your Stock Compensation

December 06, 2023

When it comes to your stock compensation, disability and death are two occurrences that can play a significant role. These unexpected life events can have a profound impact on your financial future. It’s essential to understand how your stock options, restricted stock, restricted stock units (RSUs), and ESPP participation are affected when life takes an unanticipated turn.

Impact In the Case of Disability

Stock Compensation

Disability is typically not defined by law in the context of stock plans. Instead, it’s outlined within the specific plan. You must understand how your plan defines disability because it determines how your stock compensation treats it.

Some stock plans define disability by referencing the company's long-term disability insurance plan. Other plans may have their own definition, often created by plan's administrative committee.

For temporary disabilities where your employment is unaffected, some plans continue vesting as if you’re an active employee, while others may pause vesting. Always check your plan documents to understand the impact of short-term and long-term disability on vesting and forced separation from employment.

It’s important to note that disability under other company benefits and compensation plans doesn’t automatically apply to stock grants. For total and permanent disabilities, most stock plans consider it equivalent to employment termination, resulting in vesting cessation.

Stock Options

If you have stock options or Stock Appreciation Rights (SARs), you should be able to exercise your options during the period specified in your plan document or option agreement. Many plans provide a more extended exercise period after a disability-related termination. According to a 2019 survey, 60% of companies allow exercising options up to 12 months after disability termination.

Incentive stock options (ISOs) have specific rules. You can exercise your ISOs within more than three months but not exceeding one year after termination. However, ensure the plan has a special disability definition for ISOs, resembling the Social Security total permanent disability definition.

Restricted Stock and RSUs

Your stock plan and grant agreement determines the treatment of unvested restricted stock and RSUs upon disability. Most companies allow for accelerated vesting of all unvested awards or pro-rata vesting with acceleration.

Payments Under Disability Policies or Pension Plans

Stock options can be considered prior earnings in disability and pension benefits calculations. The outcome depends on the terms and definitions in your benefit plans.

Stock plans may have varying approaches to handling leaves of absence, such as sabbaticals or maternity leave. However, special rules apply to ISOs, which are convertible into Non-qualified Stock Options (NQSOs) if the leave of absence extends beyond three months.

Impact in Case of Death

Stock Compensation

The treatment of stock compensation upon death also depends on the terms of the company's stock plan and your grant agreement.

Stock Options

Vested stock options typically don’t expire when the option holder dies. The person's estate or beneficiary may exercise vested options according to the option grant's terms and deadlines. Usually, the exercise periods are 12 months or the entire remaining term, as reported by a survey. For unvested stock options, treatment varies. Some plans may accelerate vesting in certain circumstances or upon board approval.

Restricted Stock and RSUs

The terms outlined in your company's stock plan and the grant agreement determine how your unvested restricted stock and RSUs get handled in the event of death. Companies typically employ accelerated vesting, where all restrictions on unvested awards get lifted, granting full vesting. Thus, the estate or beneficiaries can assume ownership of the stock units. They can also go with pro-rata vesting with acceleration, where the estate or beneficiaries forfeit part of the unvested awards while the remaining portion accelerates in vesting.

Performance Shares

Check your grant for details on performance awards because they have special provisions related to termination for death, disability, or retirement, which may differ from those in other stock grants.

Employee Stock Purchase Plans (ESPPs)

When employment ends, most Section 423 ESPPs automatically withdraw the former employee from participation in an offering period. In the case of death, payroll deductions get refunded to the estate. Some companies allow ESPP share purchases without following the usual post-termination purchase requirements.

Company Shares Owned at Death

Shares owned by the deceased are part of the estate and are passed to beneficiaries as designated in the will. If there is no will, state laws determine the distribution among relatives.

Any Questions?

As always, if you have any questions about this topic or any stock compensation concerns, please feel free to reach out. The world of stock compensation is complex especially without someone in your corner, helping you benefit the most from your stock options.