Understanding Restricted Stock What is a restricted stock award? Restricted stock is the grant of shares from your company, subject to restrictions. The restriction is on the length of time a participant needs to hold the shares before they can be sold, and is contingent on the employee continuing to work for the company. Generally, restricted stock “vests”—or becomes unrestricted—in increments over a period of time. Unvested awards may be subject to forfeiture if a participant leaves the company. Dividends may be paid, and award holders may have voting rights, during the restricted period. Generally, taxes are due at vest unless an 83(b) election was filed within 30 days of award (or purchase) date. The stock is “restricted” because you cannot sell or transfer the shares until the vesting period (or restriction period), which can be performance-based or time-based, has lapsed. What is a restricted stock unit? Participants are awarded units that can be payable either in cash or shares. For units resulting in shares, upon vesting the units are converted to stock, typically at a 1:1 ratio. Since the underlying shares are not issued until the units vest, you will not have voting rights on unvested units. The units are also not eligible for dividends (since dividends are paid only on actual stock), but do sometimes receive payments that are equivalent to dividends paid on the underlying stock (referred to as “dividend equivalents”). Generally, taxes are due upon the vesting of the unit. What is the difference between a stock option and a restricted stock award/unit? A stock option is the right, but not the obligation to purchase a fixed number of shares of stock at a fixed price for a fixed period of time. Any value you realize from a stock option is dependent on the current value of the stock being higher than your option price. Unlike options, there is generally no upfront cost to you for restricted stock (although taxes are generally due when they vest). As a result, restricted stock always has some value to you even when the stock price drops below the price on the date of grant. An exception exists for awards issued at a par value, which are required to be purchased during a limited time from award date. What is the difference between the terms “award date” and “vest date?” The award date is the day on which the restricted stock award or unit is given to you. At the time it is given, however, it has a restriction on it, prohibiting you from selling or transferring it. The vest date is the date on which that restriction is lifted and you are free to sell or transfer the shares. How much is my restricted stock worth? You can determine the hypothetical unrealized value of your restricted stock by multiplying the number of shares awarded to you by the current market price of the stock. You can also view the current value of your award online at www.benefitaccess.com. continued Are restricted stock award/units taxable? What is a Section 83(b) election and how does it work? Employees are required to pay ordinary income tax on the stock once it vests (unless an 83(b) election has been submitted). Generally there are no tax consequences of the award. When the shares vest, you will realize compensation based on the fair market value of the shares on that date. For example, if you have 100 shares that vest when the fair market value is $20 per share, you will recognize income of $2,000. This income is treated as ordinary income, which means that your company must withhold and report taxes on this income. A Section 83(b) election is a special tax filing with the Internal Revenue Service that requires you to pay the ordinary income taxes due on your restricted stock award when it is granted, rather than when it vests. Despite the fact that taxes have been paid, the shares are still subject to forfeiture if the participant leaves the company. Please refer to your plan documents regarding your specific plan design. (If company offers Withhold-to-Cover tax election) So that you don’t have to pay for the taxes out of your pocket when your shares vest, your company may automatically withhold some of the vested shares to cover the taxes due. Using the example above, if you recognize $2,000 on 100 shares, and paid a default rate of approximately 40% withholding, the amount in taxes due would be $800. Your company would then withhold 40 shares ($2,000 X 40% = $800/$20 per share) to cover the tax expense, and would release the remaining 60 shares to you. You may also have the option to pay the taxes directly to your company, using available funds. (If company offers Sell-to-Cover tax election) So that you don’t have to pay for the taxes out of your pocket when your shares vest, your company may automatically sell some of the vested shares to cover the taxes due. Using the example above, if you recognize $2,000 on 100 shares, and paid a default rate of approximately 40% withholding, the amount in taxes due would be $800. Your employer would then sell 40 shares ($2,000 X 40% = $800/$20 per share) to cover the tax expense, and would release the remaining 60 shares to you. What are the tax consequences when I sell my share? When you sell your shares, you will be required to pay tax on any short-tem or long-term capital gains realized. To calculate your capital gains, subtract the fair market value of the restricted stock at time of vest from the sale price, then multiply by the number of shares sold. Since you will have already paid income tax on the fair market value of the shares at vest, you will only be liable for any capital gains above the fair market value when they vested. If the sale price is lower than the Fair Market Value (FMV), then the participant realizes a capital loss. Can I sell or transfer my restricted stock award? You cannot sell or transfer your unvested restricted stock award or unit. Once the award vests, all restrictions are lifted and the net shares are released to you to hold, sell or transfer. Can I review my restricted stock award shares online? Once your restricted stock award has been granted, it will be displayed on your Morgan Stanley Smith Barney Benefit Access account. Morgan Stanley Smith Barney LLC and its affiliates do not provide tax or legal advice. To the extent that this material or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor. © 2010 Morgan Stanley Smith Barney LLC. Member SIPC. 592028 CCG04084 1/10