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Wealth management is more than just investment advice – it includes all aspects of a client’s financial life.

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At Virtus Wealth Management, we believe we can help you no matter what age you are, what life stage you are in, or how much money you are working with. We want you to feel educated, empowered, and involved in the planning of your financial future.


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Executive benefits can range in complexity and have significant tax impacts, making them an important piece to carefully plan for in a well-prepared financial plan.  The difference in taxing on non-qualified stock options compared to qualified stock options is significant.  The risk of a phantom stock option can be significantly more than qualified stock options.   There are also deferred compensation plans, including 401(k) plans and other executive benefits.

Maximizing the benefits while understanding the risks is prudent business for any employee, even more so for executives due to the complexities of some of the plans.  Virtus Wealth Management helps executives plan and execute their benefits to maximize value and minimize tax liabilities. One of the most important points we stress with clients is minimizing taxes is very important but should not “wag the dog.”  I have seen multiple times a person not act due to the desire to not pay income taxes of 20% to 30% only to lose 50% or more in the investment when it drops.   Regardless, following are the most common types of executive benefit plans.

Qualified or Incentive Stock Options (ISOs)

ISOs are preferred by most executives over the other common stock options like non-qualified and restricted due to their typical lower income tax treatment.   To receive the favorable tax treatment, the option must be held a minimum of two years; one year after receiving the option and then one year after exercising.  If you don’t exercise the option until year two, you must still hold the stock another year before selling.   If you follow the rules, the gains are taxed as long-term gains and there is no tax as ordinary income.   This is the most favorable from a tax perspective.

Non-Qualified Stock Options (NQOs)

Unlike ISOs, NQOs typically have an amount that is taxed as ordinary income.  There are three important milestones with NQOs; strike, exercise and sale price.  The difference between the exercise and strike price is taxed as ordinary income while the difference between the sale and exercise price is taxed as a capital gain.  It will be either a short- or long-term gain or loss dependent on how long you held the stock before selling.

For example, you are issued 10,000 NQOs at a strike price of $10.  When the stock is at $25 and you have vested, you exercise the options.  Exercising does not mean selling, it just means you take actual ownership of the shares.  The difference between the exercise price of $25 and the strike price of $10 ($15) is taxed as ordinary income, just like your salary.  In this case $15 multiplied by the 10,000 shares would equal $150,000 in ordinary taxes.  The next milestone is when you sell the actual shares.  If one year and one day after you exercised the shares, any gain would be long-term.  If sold under a year from exercising, it would be a short-term gain which is typically a higher rate.

Restricted Stock (RS)

RS is different than either ISOs or NQOs because RS are pure gain while the other two require the stock price to be higher than a strike price to have value.  These are much simpler benefits.  After achieving either a vesting period or objective, you receive an agreed-up number of shares that you can sell and receive the full benefit, i.e. no strike price.  One of the most important decisions with restricted stock from a tax perspective is whether or not to file a Section 83(b) election.   An 83(b) election basically determines when your long-term capital gain clock starts.  Without that election, the total value of the stock at vesting is taxed as income. At that date, the clock to determine if it is a short- or long-term gain or loss starts.  An 83(b) election changes that clock to the grant date.  If you are granted 10,000 shares of stock when it is at $10, the price of the stock is at $25 when vested and you didn’t file an 83(b), the entire $250,000 is taxed as income regardless if you sell the stock at that point.  The vested date then turns into the start of your clock for either short- or long-term gains or losses.

An 83(b) election allows you to record only the grant value as income.  In the case above, your income would be $100,000.  When it vests, the difference between the grant price and price when vested becomes long-term gains or losses.  In the case above, you turned $150,000 ($250,000 less the $100,000) from ordinary income, which is typically taxed at much higher tax rates for executives, to long-term gain.

There are no free lunches though and an 83(b) election has risk.  You cannot reclassify or change your election down the road.  If the stock price is below the grant price at vesting, you already paid ordinary income tax rates on the grant value. You have an unrecognized loss but the taxes already paid cannot be reversed.  The scenario is the same if you are no longer with the company when the options vest.

Restricted Stock Units (RSUs)

Restricted stock units are just like restricted stock except you cannot elect an 83(b) for units.

Phantom Stock options or Grants

In cases where a company’s stock is not listed or for other reasons, the company might issue phantom stock.  In most cases phantom stock is treated like restricted stock.  There are a few differences you must be aware of with these benefits.  First, the IRS can classify these as deferred compensation plans if not structured correctly.  Deferred compensation plans may have an excise tax.  Also, a phantom option is really just an agreement to pay the employee a specific amount at a certain date if certain requirements are met.  The employee does not own equity in the firm.

Non-Qualified Deferred Compensation Plans (NQDCs)

NQDCs are a way to defer salary, and tax liability on that salary, to a later date.  The goal is to defer salary to later years, like retirement, in which you expect your income tax rate to be lower.  There are a lot of benefits to the employer with NQDCs because they are so flexible when being established, specifically, it can be tailored for highly compensated employees while not being offered to everyone.    It is important to note that the payouts, or distributions, are not flexible.  You typically cannot withdraw funds at will because the plans must be structured, including distributions.

How Virtus Wealth Management Can Help

There are many other areas of executive compensation that I just don’t have enough space to discuss in this article.  With all of the benefits discussed above and those that haven’t been discussed yet, the importance of planning cannot be over-stated.  The difference between having a plan or not having a plan can be significant in taxes paid.  Our advisors at Virtus Wealth Management have the experience and training to help you make the best decisions regarding your executive benefits.

We will partner with you to establish a detailed plan with the priority to maximize wealth while minimizing tax liabilities.  Get started today by scheduling a complimentary consultation with our advisors. Our goal is for you to walk away from our initial meeting having received some insight and direction, all at no cost or obligation to you.

The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual.

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