During the COVID-19 pandemic, corporations have less cash to reward their key employees. Non-qualified stock options (NQSOs) and restricted stock will likely continue to be common forms of executive compensation. Top-level employees aren’t the only ones who receive these bonuses; more and more, entry-level hires also get them, which means they may come up more often in your casework.
In our July webinar, Lisa Zeiderman, Esq. and Managing Partner of Miller, Zeiderman & Widerkehr, LLP and Stacy Francis, President and CEO of Francis Financial revealed how to find these assets. To explain how to handle, divide, and distribute NQSOs and restricted stock, they also answered such questions as:
- How do you find out if your client or their spouse has executive compensation?
- Are they marital?
- Are they vested?
- Will they be valued?
- How will they be divided?
- What are the tax implications?
- For support purposes, will they be considered an asset, income, or both?
Stock options, restricted stock, and other forms of executive compensation are among the easiest assets to hide. Many of your clients, especially if they’re not in charge of household finances, might not realize that their spouse has these potentially high-income benefits. As Stacy and Lisa revealed in the webinar, you can follow the breadcrumbs to see where they lead. But, first, it helps to understand how NQSOs and restricted stock work.
How Do You Handle Non-Qualified Stock Options?
As an incentive for hard work, an employer will give an employee the option to buy company stock in the future based on the price on the day it was granted (“strike price”). But, they may have to meet certain conditions to benefit from them, including:
- If the company performs well, the stock price will increase over the strike price, giving the options value and rewarding the executive for their role in the company’s success.
- NQSOs may not be exercised for a period of time, usually between one and five years, before they “vest.”
- Vesting schedules come in a variety of shapes and sizes: graded vesting (receiving a certain percentage of shares after each year of service) or cliff vesting (for a designated number of years)
As Lisa said, one of the challenges is how to separate stock options in a divorce, as there are some unique considerations. They’re not as easy to divide as a brokerage or a savings account – you can’t necessarily split them.
Not every stock rises in price. As Stacy said, some stocks are worthless if the strike price is higher than the current stock price.
Transferring NQSOs to the Non-Employee Spouse
Companies can’t just transfer stock to a non-employee spouse; an instructive trustee should hold the stock or options and decide when the non-employee spouse can exercise them. Lisa ensures that she covers this in her drafting. You need to make sure the non-titled spouse will have a written agreement that mentions how to handle the options, including restricted stock, and the tax ramifications.
Sometimes considered “golden handcuffs,” employees who leave or are fired forfeit their rights to NQSOs. The different types of vesting schedules can affect how you can protect your clients in your settlement agreements.
Lisa generally advises against having the titled spouse buy out the value of the other spouse’s stock. For example, during the pandemic, we don’t know what will happen to a stock or a company. She prefers to use an “if and when” or “true-up” agreement that names when the stock will vest and includes language to cover the tax ramifications. “We don’t want the titled spouse to pay taxes for the stock the non-titled spouse will receive.”
How Restricted Stock Awards and Units Work
As the term implies, restricted stock awards and units have some limits. Like stock options, employees can’t sell them when they receive them, but when they’ve vested. If the employee is terminated or fails to meet performance benchmarks, they can give up their ownership or be subject to “clawbacks” or return of the stock. As part of a merger with clawbacks, the employee typically forfeits the restricted stock units (RSUs), but often receives the same value of the RSUs in the new company. It doesn’t change the classification of whether they’re marital, and it’s done to maintain the same vesting schedule.
Why a Little More Financial Knowledge is a Valuable Thing
As Stacy said and Lisa agreed, “learning all this information is invaluable for your clients. It’s something that really does separate you from the majority of other lawyers out there.”
Watch our webinar to learn more about finding and dividing RSUs and stock options, the tax implications, and important case laws involved.
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