What You Need to Know About Restricted Stock Units (RSUs) and Child Support
Child support in Washington is determined by guidelines that take into account the income of both parents. Since the guidelines consider all sources of income, it is important to understand whether and when the Restricted Stock Units an employee receives should be considered as income for the purpose of making or revising a child support order.
What Are Restricted Stock Units (RSUs)?
Restricted Stock Units (RSUs) are an increasingly popular employee benefit. Unlike stock options, which give employees the right to purchase shares in the company’s stock at a discounted price, Restricted Stock Units (RSUs) are an award of stock. The employee receives shares of the company’s common stock, not just an opportunity to purchase stock at a later date.
Like awards of stock options, however, employees who receive Restricted Stock Units (RSUs) must typically wait for their award to vest before they can sell the stock. The vesting schedule for Restricted Stock Units (RSUs) usually permits only a portion of the full award to be sold at any given time. It may take several years for the full award to become vested.
Stock Options vs. Restricted Stock Units (RSUs)
For a couple of reasons, employees might prefer to receive Restricted Stock Units (RSUs) rather than stock options. While a stock option provides the opportunity for an employee to invest in the company’s stock at a discounted price, it does not cost an employee anything to take advantage of Restricted Stock Units (RSUs).
In addition, the “strike price” of a stock option (the price at which the employee can purchase the stock) is fixed when the option is awarded. A stock option only provides a benefit to the employee if the strike price is less than the market price when the option vests.
If the market price falls below the strike price between the time the employee receives the option and the time it vests, an employee’s stock option may become valueless. Since an employee does not pay for the stock that is awarded as an Restricted Stock Units (RSUs), the employee’s Restricted Stock Units (RSUs) will always have some value as long as the company’s stock has value.
Tax Treatment of Restricted Stock Units (RSUs)
There are also reasons why employees might prefer stock options. While stock options are taxed only when the option is exercised (that is, when the employee purchases the stock), Restricted Stock Units (RSUs) are taxed as income immediately for the years in which they vest.
Rather than requiring the employee to pay income taxes on his or her Restricted Stock Units (RSUs) when they vest, many employers will simply withhold a portion of the Restricted Stock Units (RSUs) award to cover the tax. As a result, the employee will receive far fewer Restricted Stock Units (RSUs) than awarded. Restricted Stock Units (RSUs) are taxed again based on the short-term capital gains tax rate if the stock is sold within one year of vesting or on the long-term capital gains rate if held for longer than one year.
Are Restricted Stock Units (RSUs) Income when Calculating Child Support?
Child support in Washington is calculated with a formula that uses income as a starting point. Are Restricted Stock Units (RSUs) income for the purpose of calculating child support? And if so, do they become income when they are awarded, when they vest, or when the stock is actually sold?
Washington courts have not definitively answered that question. It is a safe assumption, however, that Washington court decisions addressing stock options apply equally to Restricted Stock Units (RSUs).
The formula that determines a parent’s basic child support obligation considers all income of each parent. Monthly gross income includes “income from any source,” unless it is a source that was explicitly excluded from consideration by statute. Sources of income explicitly excluded by the legislature include gifts and prizes, child support from previous relationships, and food stamps. Id.
Because proceeds from exercising stock options are not among the list of exclusions, Washington courts has concluded that those proceeds should be included as income in the child support calculation. In re Marriage of Ayyad, 110 Wn.App. 462, 469 (Div. 1 2002). By the same reasoning, because proceeds from exercised RSUs are not among the list of statutory exclusions, those proceeds should also be included as income when calculating child support.
When the court decided Ayyad, it concluded that the child support obligation should only be based on “exercised stock options converted to cash” and not those which remain held as shares. Stock options that have not been sold are treated as wealth rather than income.
Following that reasoning, if an employee’s Restricted Stock Units (RSUs) award has vested but the employee has not sold the stock, the value of the shares should not be included as income for purpose of calculating child support. Nevertheless, those vested shares held by the employee may still affect the calculation of the child support transfer payment when a party requests a deviation.
RCW 26.19.075 identifies reasons that justify deviation from the basic child support transfer payment. Some sources of income specifically excluded from consideration in calculating the basic child support amount — including gifts, prizes, and child support from previous relationships — may be considered when a court decides whether to deviate from the child support guidelines.
Deviation from the basic child support amount is at the court’s discretion and shall occur only in appropriate circumstances. One reason that may justify deviation is possession of wealth, including savings, investments, or other assets. Since the court in Ayyad treated stock options which have been purchased but not converted to cash as wealth, it is likely that ownership of vested, unexercised Restricted Stock Units (RSUs) could be regarded as wealth that might justify deviation from the child support guidelines.
If you are currently divorcing or about to start the process, please call us at +1 425 374 4045 or contact us online to request an appointment to see how the new alimony tax code provisions may impact you. Weintraub Law Office has offices in Seattle, Bellevue, and Bothell and represents clients in King, Snohomish, and Pierce County.