Topic: Employee Benefits

  • Maximizing Your Equity Compensation: Understanding RSUs and ISO

    Many companies offer equity compensation programs to attract, motivate, and retain top talent while conserving cash and aligning the interests of the employees and shareholders. While these incentive programs provide a great benefit, they must be carefully managed to avoid upsetting your financial strategy or posing a significant tax burden. Below we discuss two of the most common stock option plans that we help our clients understand and maximize.

    RSU – Restricted Stock Units

    As an employee, you may receive a Restricted Stock Unit (RSU) grant as part of your annual performance assessment or generally as part of your overall compensation package. The majority of RSUs have a vesting schedule, so you don’t receive the full value from the outset (Your employer wants to schedule vesting over a period, rather than all at once, to retain your services!). For example, if your company grants you 400 RSUs, you’ll probably get 100 shares to vest each year (typically on a quarterly schedule) until you vest all 400 shares, at which time you may receive a new grant.

    RSUs give you an interest in the company but no actual value until they are vested. Upon vesting, the Fair Market Value (FMV) of the shares is considered income. You will then have the right to sell the vested shares and receive the cash proceeds or hold the shares for a longer period.

    Regarding Taxes

    Your income will include the FMV of the shares as they vest. You can sell your vested shares and convert them to cash. Alternatively, you may keep the shares, but any gains made after the vesting date would be taxed as capital gains when you sell. If you hold shares and they drop in value, you might be faced with selling those shares at a loss, while paying tax on vesting date FMV you never actually received.

    Your employer typically handles your tax withholding at the vesting date by selling enough shares on your behalf to cover the estimated tax liability and distributing the remainder to you. The IRS requires a statutory 22% withholding rate. Because your vested RSUs influence your taxable income, and effective tax bracket, your employer’s tax withholding rate may not be enough.

    Strategy

    RSUs accrue over time and, if held, can lead to a significantly consolidated position in one firm. An experienced executive might start with 100 shares vested, then 200, then 300, and so on. Suddenly, they discover that a sizable chunk of their holdings, perhaps also a significant percentage of their net worth, consists of company stock.

    Accumulation of company stock can lead to more than just lack of portfolio diversification. Generally, having a sizable stock position in the same company that also pays your salary isn’t advisable. If that organization, for a myriad of reasons, experiences a downturn this could have a double-whammy effect.

    As a result, it may be advisable to sell all RSUs as they vest. There should be no additional taxes owed, because your costs basis will be the FMV at which you received the stock. In fact, keeping RSUs as they vest is the exact same thing as taking each cash bonus and investing it 100% in your company stock. If you wouldn’t do that, you shouldn’t hold all of your RSUs. By converting the shares to cash you will be better able to manage taxes due and invest proceeds in a more diverse manner. This should provide you with greater and more predictable long-term success.

    ISO – Incentive Stock Options

    Incentive Stock Options (ISO) are issued by public companies or private companies planning to go public in the future. They are most typically offered to executives and highly valued employees and are designed to encourage these employees to stay with the company over the long term.

    An ISO provides an ‘option’ to purchase shares in a company at a set price, called the ‘strike price’, for a specified period. Like RSUs, ISOs are typically subject to a vesting schedule that could be several years. As the ISOs vest, you can exercise them at the strike price stated in the grant. Employees may have 10 years to exercise their options before they expire. Once you exercise vested shares, you now own the shares at the strike price. You may hold them or sell them immediately, but there are several things to consider.

    Regarding Taxes

    When you exercise your ISOs, you don’t receive any proceeds, as the exercise is only the purchase of the stock. To qualify for the most favorable tax strategy, ISOs need to be held for 2 years from grant date and 1 year after exercise, allowing for Long Term Capital Gains (LTCG) treatment at sale. Pursuing this strategy, however, can trigger what is known as Alternative Minimum Tax, or AMT.

    This tax liability is created by the spread, or difference between, the Fair Market Value (FMV) and the Strike price you were granted. This is often referred to as the ‘Bargain Element’, and if large enough, will create AMT. This can be very complex and confusing as many employees are unaware of this and are caught off guard by their sometimes-significant tax liability due to AMT. We help our clients understand the AMT involved with their ISO strategy, and the ways that they can use any excess AMT payments as credits against future taxes in years where they aren’t subject to AMT.

    Another option for ISOs is to do a “cashless exercise,” which means you never actually purchase the stock at the strike price, but rather you are simply paid out the spread between the strike price and the current FMV. This is a good choice if you don’t want to worry about AMT, or if you don’t have the cash necessary to buy the shares at the strike price. However, this strategy will cause the spread to be taxed at ordinary income rates instead of capital gains rates, and it effectively forgoes the potential tax benefits offered by ISOs.

    Strategy

    We generally recommend exercising options as soon as they vest and holding for long term capital gains treatment. Your specific strategy may vary based on your goals, but reducing what could be a concentrated position, and reinvesting the proceeds in a more diverse portfolio can lead to more predictable long-term outcomes.

    The Bottom Line:

    The most common misconceptions about equity incentive programs relate to taxation and vesting.

    • RSU: Taxed immediately upon vesting using the FMV of the vested shares, usually vest over a period of years, and you can sell them as they vest. No tax benefit to holding after they vest.
    • ISO: Subject to vesting schedules, may create AMT liability when exercised and held, and must be held for 2 years from grant and 1 year from exercise to apply LTCG. Typically expire after 10 years.

    If your employer offers these unique and valuable benefits, don’t let the financial planning overwhelm you.  Act today and consult with an experienced financial planner and a tax professional to develop a solid strategy for maximizing your wealth. If we can help you in any way, please don’t hesitate to contact us.

    Nathan Garcia
    About the Author

    Nathan Garcia, CFP® has been serving individuals, families, and organizations as a financial advisor and planner since 2001. With a deep understanding of the meaningful, positive impact that quality advice can have, Nathan is committed to helping clients achieve clarity and confidence in their financial futures.

  • Your Financial Guide for a Career Transition

    Navigating a job change is a significant undertaking, especially for those with considerable assets and financial interests. This guide is designed for professionals, including executives, physicians, and business owners as they work through the intricacies of transitioning to new opportunities.

    Here are some important things to consider:

    • Review your compensation plan.

    Understanding your compensation package is important, because compensation is usually a huge part of transition decision. Beyond salary, bonuses, and deferred compensation, it’s essential to assess the long-term value of your total package. For example, if you are re-locating, consider the impact of cost-of-living adjustments.

    Don’t forget to evaluate non-monetary benefits such as professional development opportunities, wellness opportunities, and overall company culture. All of these can have a significant impact on your job satisfaction and overall well-being.

    • Evaluate your retirement plan.

    What do I do with my old retirement plan(s)?

    Roll into an IRA: Working with a financial advisor can help you determine if rolling into an Individual Retirement Account makes sense. The benefits of this option include having more investment flexibility and control. Typically, you will have a broader range of investment options compared to an employer sponsored 401(k) plan. This allows you to diversify your portfolio while also consolidating accounts if you have multiple 401(k)s with previous employers. If you work with an advisor, you will have professional investment management as well as financial planning available. A good financial advisor will also be able to help with tax and estate planning matters, though he/she cannot replace your CPA or attorney.

    or

    Move your old retirement plan to your new employer: Most employer sponsored retirement plans allow for assets from previous retirement plans to flow into the new plan. This is certainly better than leaving the assets with your old employer’s plan, but this option likely does not include the investment options and flexibility as well as professional management and planning found if you roll assets into a managed IRA. That said, it may be your lowest cost option.

    • Understand changes to your health insurance.

    Be aware if there is a waiting period for health insurance with your new employer. If that is the case, look into extending your previous employer’s coverage through COBRA if there is a gap.

    Have a solid understanding of the different health insurance plans offered by your employer and consider factors such as the network of providers, deductibles, co-pays, coverage for prescription drugs and preventative care to name a few.

    Take advantage of  tax-advantaged accounts like Flexible Spending Accounts (FSA)s and Health Savings Accounts (HSA)s if your employer offers them.  These accounts can help you save money on qualified medical expenses. Additionally, HSAs can serve as an additional retirement savings vehicle.

    • Review Stock Options and Equity Compensation Programs.

    If your previous employer offered stock options or equity, be sure to understand the vesting schedules and the implications of leaving.

    Equity compensation can significantly increase your wealth, but also add complexity to your financial and tax planning picture. For example, the decision to exercise stock options should be timed to optimize tax implications and align with your broader financial goals, risk tolerance, and time horizon. Working with a financial advisor can help you make an informed financial decision.

    Melissa Pirosko
    About the Author

    Melissa’s love of investing combined with her desire to help and serve others led her to a career in wealth management. Melissa enjoys working with clients to help them reach their financial goals and focuses on building long term relationships with each of her clients based on integrity and trust.

  • Building a Secure Retirement: The Confluence 401(k) Service Structure  

    Whether you are a business owner offering a retirement plan to your employees or are an employee participating in a company sponsored retirement plan, managing the benefit & saving for retirement both can feel like an isolating process. Too often we see a lack of guidance or knowledge from financial advisors to be able to serve as a resource to the company or its employees.  

    Confluence understands these challenges with a dedicated team of financial advisors collaborating with employee retirement plans. We have built a comprehensive 401(k) service structure – Confluence Standard of Care, designed to offer peace of mind to the employer, while supporting employees to make informed decisions to reach their financial & retirement goals. 

    Our 401(k) Standard of Care service structure centers on four key pillars: 

    1. Personalized Employer Review Meetings:  “One size fits all” does not work when it comes to 401(k) plans. Through regularly scheduled meetings, we collaborate with employers to monitor the employer plan to make sure it continues to fit the company’s needs and goals.  

    During these meetings we will discuss the following topics: 

    • Plan investment analysis: considering the quantitative and qualitative results to ensure we have skillful managers in place. 
    • Courageous plan design: striving to increase an employer’s benefits return on investment while striving to enhance participant retirement outcomes.  
    • Fee benchmarking: every 3 years we lead an RFP driven process to ensure apple-to-apple comparisons and to help maximize a plan’s negotiating leverage. 
    • Fiduciary guidance: to support the employer and mitigate potential liabilities. 

    2. Employee engagement:  Our education team uses highly customized plan participant content structured to help optimize outcomes and increase financial wellness. We deliver multiple types of meetings throughout the year. These meetings run the spectrum from group education to 1on1 individual consultations, and life stage education designed to meet the employee at their individual career stage.  

    3. Regular investment monitoring & investment analysis:  As a member of the Retirement Plan Advisor Group (RPAG), we have access to their proprietary fund ranking system that aims to enhance outcomes, manage risks, and reduce fiduciary exposure. Employers receive quarterly plan “report cards” detailing investments scores.  In addition to the fund scores, Confluence has an internal Investment Advisor Committee that provides guidance on selected investment managers and incorporates a qualitative layer of oversight to the fund analysis programs used.  

    4. Ongoing communication & support: In addition to the processes outlined above, we deliver a variety of additional touchpoints designed to keep employers and participants informed and engaged. This includes informative webinars, quarterly newsletters, and campaigns to address specific plan demographics or concerns.

    By utilizing these services, employers can have the confidence in knowing their 401(k) is managed effectively while employees have the opportunity to understand their benefits options.  

    Our team is here to guide you every step of the way. Should you have any questions or require further information on how our service delivery model can benefit your organization, please do not hesitate to contact us or listen to our podcasts today! 

    Confluence Wealth Services, Inc. d/b/a Confluence Financial Partners is a SEC-registered investment adviser. Confluence Financial Partners only transacts business in states where it is properly registered or notice filed or excluded or exempted from registration requirements. The security of electronic mail sent through the Internet is not guaranteed. All email sent to or from this address will be received or otherwise recorded by the Confluence Financial Partners corporate email system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. Confluence Financial Partners recommends you do not send confidential information to us via electronic mail, including social security numbers, account numbers, and personal identification numbers, unless properly encrypted. A copy of our current written disclosure statement discussing our advisory services and fees continues to remain available for your review upon request or by visiting the following link:https://live-confluencefp.pantheonsite.io/form-adv-2a/

  • ISOs vs. RSUs: Strategies to Optimize Your Employee Stock Benefits

    Employers are increasingly offering stock benefits as part of their compensation packages to remain competitive in the job market. These benefits often come in the form of Incentive Stock Options (ISOs) and Restrictive Stock Units (RSUs) which can be powerful tools for building wealth if managed effectively. However, understanding the differences in these benefits is crucial to maximizing their potential and avoiding costly mistakes.

    What Are ISOs and RSUs?

    Incentive Stock Options (ISOs) give the employee the option to purchase company stock at a fixed price, known as the exercise price. If the company’s stock price increases, you can buy shares at the lower exercise price and potentially sell them at the higher market price, resulting in a profit. The key advantage of ISOs is the potential for favorable tax treatment, where upon a qualifying sale, gains could be taxed at the lower long-term capital gains rate rather than as ordinary income.

    Restricted Stock Units (RSUs), on the other hand, are company shares granted to employees as part of their compensation. Unlike ISOs, RSUs are not options to buy stock; instead, they are actual shares that you receive usually after a certain vesting period. Once vested, RSUs are considered and taxed at their fair market value as ordinary income.

    Know Your Timeline: ISOs typically have a vesting schedule, meaning you can only exercise a portion of your options each year. Additionally, once you leave your company, you usually have a limited time to exercise your vested options.

    Understand the Tax Implications: ISOs offer a potential tax advantage, but they come with conditions. To qualify for long-term capital gains tax, you need to hold the shares for at least one year after exercising the option and two years after the grant date. Otherwise, your profits may be taxed as ordinary income.

    RSUs, while more straightforward than ISOs, still require strategic thinking:

    1. Plan for the Tax Hit: When your RSUs vest, they’re taxed as ordinary income. This means you might face a significant tax bill when your shares vest, even if you haven’t sold them yet. Some companies offer to withhold shares to cover taxes, but you’ll need to plan for any additional tax liability.  If you decide to hold on to the shares after vesting, you may be exposed to additional capital gains taxes if the stock appreciates and you sell at a later date.
    2. Consider Your Investment Strategy: Once your RSUs vest, you can choose to hold or sell the shares. Holding them can be a great way to participate in the company’s long-term success, but it also increases your exposure to the company’s stock. Balancing this with other investments in your portfolio is crucial to managing risk.
    3. Diversify Your Portfolio: It’s easy to get caught up in the success of your company, but putting too many eggs in one basket can be risky. Consider selling some of your vested RSUs to diversify your investments and reduce your exposure to company-specific risks.

    ISOs and RSUs are valuable components of a compensation package, offering the potential to build substantial wealth. However, understanding the details, planning for taxes, and integrating them into a broader financial strategy are essential steps to make the most of these benefits.

    At Confluence Financial Partners, we specialize in helping individuals navigate these complexities, ensuring that your stock benefits work in concert with your overall financial plan. If you have ISOs or RSUs and are unsure how to manage them, let’s have a conversation.

    Jackson Elizondo
    About the Author

    Jackson Elizondo is dedicated to making a positive impact in his community, a commitment that led him to a career in wealth management.