Concentration in employer stock

In short

A friend of mine spent thirty years at one company and never thought twice about the shares piling up in his account. If you are holding a large slug of your employer's stock, you are in good company, and there is nothing shameful in it. Your pay, your bonus, and your savings may all rise and fall with one business. That is a lot of eggs in one basket, and the basket belongs to somebody else. Start by adding up how much of your total wealth sits in that one stock, including shares, options, and unvested awards. Then look at the tax cost of moving some of it, because that cost shapes your options. A tax professional can explain what a sale would cost, and your company sets any trading window that applies. Small, planned steps spread the tax cost over time.

The whole of it

What it is

I once watched a neighbor lose a barn to a single spring flood, and what stuck with me was how much of his living had been tied up in that one building. Concentration in employer stock is the same kind of thing. It means a big share of your net worth rides on the fortunes of the company that also signs your paycheck.

You probably did nothing wrong to get here. Stock grants, a purchase plan, a 401(k) that holds company shares, and a few good years can pile it up without a single bold decision on your part. Loyalty and success often produce this very result.

You have probably noticed the trouble already, and it is a doubling of risk. If the company stumbles, the stock may fall at the same moment your job is at risk. Your paycheck and your savings can shake loose together. That is what makes this kind of risk worth a hard look.

Holding a lot of one stock is a choice you are allowed to make. This guide only wants you to make it with your eyes open.

How it works

If you are paid in equity, you may hold more than one kind of company stock, and each kind is taxed on its own terms. Knowing which kind you own is half the battle.

Restricted stock units, often called RSUs, are a promise of shares later. When they vest, meaning you have earned the right to them, their value at that time is generally taxed as ordinary income. Your employer often withholds some shares to cover part of the tax.

Stock options give you the right to buy shares at a set price, called the strike price. Nonqualified options are generally taxed as ordinary income on the gain when you exercise them. Incentive stock options, or ISOs, follow different rules and can trigger the alternative minimum tax, which is a second tax calculation that can raise your bill. The IRS explains all of this in Publication 525, Taxable and Nontaxable Income, and Publication 550, Investment Income and Expenses.

Shares held in a 401(k) have their own special rule called net unrealized appreciation, or NUA. It can allow gains on employer stock to be taxed at long term capital gains rates in some cases, but the rules are strict and depend on how you take the money out. A tax professional can explain how those rules apply to a given account.

Once you own shares outright, selling them creates a capital gain or loss. If you held them more than one year, the gain is long term and taxed at the lower rate. If you held them a year or less, it is taxed like ordinary income. The rate you pay, and the extra tax on high earners called the net investment income tax, are set by law at the current figure, which the official source publishes each year and the current figure, which the official source publishes each year.

Some executives must also follow trading windows and pre clearance rules. Those are set by your company and by securities law, and breaking them can cause real trouble. A plan under SEC Rule 10b5-1 lets insiders set up sales in advance, and your company's legal team is the group that explains how one works at your company.

The numbers, and where to find yours

You cannot judge your risk without a few plain figures, and you may have them already, tucked in places you visit rarely. Your equity plan statement shows shares owned, options granted, strike prices, and vesting dates. Your brokerage account shows your cost basis, which is what you paid or the value when the shares came to you. Your pay stub and Form W-2 show how much income and withholding came from equity pay.

Gather these and add them into one picture. You want three numbers. First, the total value of your employer stock and equity awards. Second, your total net worth, which is everything you own minus everything you owe. Third, the share of the first inside the second.

A friend of mine once told me a rule of thumb for how much of one stock is too much. No official source sets one for you, so treat any percentage you hear as one person's opinion. Your own comfort, your other assets, and your need for steady income matter more than a slogan.

Also check your tax figures. The long term capital gains rates, the net investment income tax threshold, and the alternative minimum tax exemption change by law and by year. The values are the current figure, which the official source publishes each year, the current figure, which the official source publishes each year, and the current figure, which the official source publishes each year. The IRS publishes the current ones on its website, and the site will fill in the verified figures with their source and date.

A worked example

Let me tell you about a woman named Dana. She is an engineering director who has worked at her company for twelve years. She wants to understand her exposure before she decides anything.

Dana adds up her holdings. Her company shares are worth $400,000. Her vested RSUs held in her brokerage account are worth another $100,000. Her other savings, including a diversified 401(k) and a savings account, come to $300,000. Her home equity is $200,000, and she owes no other debt.

Her total net worth is $400,000 plus $100,000 plus $300,000 plus $200,000, which equals $1,000,000. Her employer stock is $400,000 plus $100,000, which equals $500,000. Her share is $500,000 divided by $1,000,000, which equals 0.50, or 50 percent.

Half of what Dana owns rides on one company. That is the number she needed to see. It does not tell her what to do. It tells her where she stands.

Now consider the tax cost of trimming. Dana looks at $100,000 of shares with a cost basis of $40,000. If she sold them, her gain would be $100,000 minus $40,000, which equals $60,000. If she held them more than a year, that gain would be taxed at the long term rate, which she can look up as the current figure, which the official source publishes each year. If she held them a year or less, the $60,000 would be taxed like ordinary income. She can check the current rules for both cases in IRS Publication 550, Investment Income and Expenses.

Dana also sees that selling is not her only option. Stopping new purchases through the company plan is one path, and directing new savings elsewhere is another. Spreading any sales over several years changes the timing of the tax bill. Each path has a cost, and a tax professional can help weigh them.

She chose nothing in a rush, and that was wise. She simply learned her number and wrote down her questions.

Where it goes wrong

I have noticed that smart people stumble here for very human reasons. Pride is one. You believe in your company, and you should, but belief is not a hedge.

Tax fear is another. Some people freeze because the tax bill looks large, and they let a concentrated position sit for years. Avoiding a tax is not the same as avoiding a loss. A stock that falls can cost far more than the tax on selling it.

Ignoring the rules is a third trap. Trading during a blackout period, or missing the deadline on an option, can hurt you badly. Your plan documents spell out the deadlines and the rules.

There is also the trap of anchoring on your purchase price. What you paid is history. The stock does not know or care.

And be careful with the alternative minimum tax on ISOs. Exercising and holding can create a tax bill on gains you have not yet sold. The IRS explains this in Form 6251 and its instructions. That bill is easiest to see before an exercise, not after.

Watch for wash sales too. If you sell at a loss and buy the same stock within thirty days, the loss can be disallowed. IRS Publication 550 covers this rule.

Questions to answer before you leave this page

What share of my total net worth sits in my employer's stock, options, and unvested awards, and how did I work that out? If the company hit a hard patch, how would my job, my pay, and my savings all be affected at once? Which kinds of equity do I hold, and how is each one taxed when it vests, when I exercise it, and when I sell it? What is my cost basis in the shares I already own, and how long have I held them? Do I face any trading windows, blackout periods, or pre clearance rules I need to follow? Have I looked up the current tax figures for long term gains, the net investment income tax, and the alternative minimum tax on the IRS website? Who can I ask, such as a tax professional or a fee only planner, to check my numbers before I act? And what level of risk am I truly comfortable carrying, said plainly, in my own words?