Tax errors can be costly! Don't draw unwanted attention from the IRS. Our Tax Center explains and illustrates the tax rules for sales of company stock, W-2s, withholding, estimated taxes, AMT, and more. Whether it is expected or not, job loss is an upheaval that gives you a lot to think about. However, as you clear off your desk, don't forget your stock compensation. Too many departing employees have lost valuable potential gains because they were unaware of the post-termination rules—or even the vesting dates—of their stock grants.

Post-termination rules are especially important for vested stock options, which expire forever if they are not exercised within a certain brief timeframe after the end of employment.

It would be a shame to miss a chance to take some extra income on board as you go, especially if you are setting sail into a horizonless sea of unemployed job-hunting or if you are retiring. This article series aims to inform you about common corporate practices with stock compensation when employees lose their jobs.

Part 2 covers general important aspects of job termination that apply to all stock grants.

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When you're ready, test your knowledge of job-termination issues with our quick quiz on stock compensation and job loss. Above all, you must know your company's rules. After reading these articles, you should study your stock grant documents and put any questions to your stock plan administration. With restricted stock and restricted stock units, upon job termination you almost always forfeit whatever stock has not vested.

Exceptions can occur, depending on the vesting terms of your employment agreement or stock plan, such as special provisions for disability , retirement , or an acquisition. You keep any shares that vested before your termination date.

In certain uncommon situations where you paid for the restricted stock, as may be the case at a privately held company where you exercise options to get restricted stock, the company may choose to repurchase your shares. The capital gains tax rules apply to any gain or loss on the purchase. If you forfeit the shares, tax withholding will not be refunded, and the forfeit itself will not trigger any tax loss. The situation is similar if you made a Section 83 b election unavailable for RSUs and paid taxes on the value at grant.

Vesting is also the crucial factor for performance share grants upon job termination, but of course with performance shares the vesting depends on the achievement of stated performance goals rather than on a stated length of employment. When you leave your job for standard reasons e. If you have overlapping or concurrent grants that are outstanding, you forfeit the value of them all. Another scenario, though it is unlikely in a standard job termination, is possible.

Instead of making you ineligible for any part of the payout because you are not employed by the end of the performance period, the plan can provide that any payouts under outstanding awards may be based on the actual results at the end of the performance period as if you were employed throughout the period. It is also possible that the date for measuring performance may change to the date you terminate, so in that case you still receive some pro rata portion of the award according to either actual performance as of that date or performance at the end of the period.

You would then lose any payout from the grant that corresponds to the portion of the performance period occurring after termination. If your grant has a sliding scale i.

In general, you have rights only to stock options that have already vested by your termination date. If the options have a graded vesting schedule, you are allowed to exercise the vested portion of the option grant, but most commonly you forfeit the remainder.

The importance of your post-termination exercise period cannot be stressed enough.

While the typical timeframe is 90 days after termination, your period for exercise will be dictated by your employer's plan design and the reason for your termination. If the options are not exercised by the specified date, they expire and are canceled. While some companies send registered letters to outgoing employees with the number of shares they can buy and the cost, along with how many days they have to exercise the options, no law requires this.

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It is your obligation to know your personal grant information and the terms of your stock plan. Companies uphold these rules, procedures, and deadlines very strictly. Court cases reinforce the fact that keeping track of your stock compensation when you leave your job is entirely your obligation.

If you're curious, see the following rulings: Chevron Corporation US 4th Circuit Court of Appeals, No. Gillette US 1st Circuit Court of Appeals, No. Pfizer US 3rd Circuit Court of Appeals, No. It does not matter if you made an honest mistake or only narrowly missed a deadline. Furthermore, you should not rely on spoken information about your post-termination exercise period.

Your stock plan documents and related statements are the only reliable and binding sources that determine how long you have to exercise options after termination. When measuring the post-termination exercise period, most companies' stock plans start the clock on the date of termination, meaning the actual end of employment status, not the date you give notice.

Look at how or whether your plan defines termination, employment, and continued service. You should also look for details in your stock plan to get clear answers on the rules of post-termination exercise. For example, do you lose your vested stock options on the day you terminate, or do you have a given number of days after termination to exercise them?

At job termination, you continue to own stock purchased under an ESPP during your employment. However, your eligibility for participation in the plan ends.

Any funds withheld from your salary but not used to purchase shares before the end of your employment will be returned to you, normally without interest, within a reasonable period. For plans that are tax-qualified under IRC Section , the tax code lets your company keep the pre-termination payroll deductions in the plan to purchase shares when the purchase period ends and purchase occurs no more than three months after the termination date.

However, most plans do not permit this, because the ESPP is intended to be a benefit for current employees. This means that if your employment ends before the purchase date, under most plans shares are not purchased for you on a pro rata basis. Elsewhere on this website, the FAQs on job termination provide further details on some of the situations and topics presented in this article.

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You may want to consult them as well when you dig out your stock grant documents. Following this article's details on specific types of stock compensation, Part 2 covers general important aspects of job termination that apply to all stock grants, such as changes in employment relationship, the post-termination tax treatment, and severance issues. Matt Simon is the copyeditor and content-manager at myStockOptions.

Need a financial, tax, or legal advisor? Search AdvisorFind from myStockOptions. Key Points Know your company's rules for the treatment of stock compensation upon job termination. Examine your stock grant agreement, any offer letter or employment agreement, and other company materials about your stock plan, such as FAQs.

Direct questions about these things to your stock plan administration. Your company's rules for stock comp upon job loss are important. Don't miss a chance to gain some extra income on your way out. Post-termination rules are especially important for vested stock options, which expire forever if they are not exercised within a brief timeframe after you leave.

Companies and courts strictly uphold corporate termination rules, procedures, and deadlines. With an ESPP, don't assume your company will keep pre-termination payroll deductions to continue buying shares for you till the purchase period ends. Few companies do this. People who read this article also read: Your Stock Grants May Come With Strings Attached UPDATES! How Does Your Stock Plan Compare? Part 1 Job Loss And Your Stock Grants Part 2: Changes Of Employment Status, Post-Termination Tax, Severance Stock Option Terms: What You Can Expect UPDATES!

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