AbbVie’s Restricted Stock Unit (RSU) plan – grants, vesting, taxes, wealth building, and more
AbbVie offers a stock grant program that's sure to knock your socks off! The program, available to manager level and above employees, is designed to align the interests of the employees with those of the company and its shareholders. It's structured to provide long-term incentives through the award of Restricted Stock Units (RSUs).
Here's how it works: the RSUs are awarded annually. The number of shares granted is determined by an employee's position within the company. The final value of the grant is the number of shares granted and the fair market value of the stock at the time each part vests. But here's the kicker, these bad boys don't vest all at once - they vest over a period of three years. For example, if an employee is awarded 1,200 RSUs in February 2022, the value of these shares will be $0 as they have not yet vested. But in February 2023, one-third of this grant will vest, leaving you with 400 AbbVie shares. And that's when the real fun begins! Let's say they're worth $100 a piece. That's $40,000 of taxable income. You'll have to pay taxes on the value of those 400 shares, but don't worry, the plan will withhold some shares to cover your tax bill (we’ll talk more on that in a bit). For easy math, if the withholding you specified is 25%, you'll now have 300 shares left. These shares will be deposited into your E*Trade account, free and clear (E*Trade is the custodian AbbVie uses for the Long-Term Incentive program).
(Unfortunately, AbbVie doesn’t allow you to customize the withholding for you own situation. There are two withholding levels – 22% if you receive for under $1,000,000, and 37% for over $1,000,000. This means you’ll most likely need to do some individualized tax projections for yourself to ensure you withhold the appropriate amount over the course of the year.)
But the excitement doesn't end there! In February 2023, you'll likely receive another RSU grant for the current year. That means in 2024, you'll receive the second vesting portion of the 2022 grant, and the first vesting portion of the 2023 grant. And if you've been in the program longer than three years, you'll receive stock from three different grants each year. Depending on the stock price and grant amount, this can lead to a large number of AbbVie shares being added to your investments each year. It's like a second birthday every year!
Now, let's talk strategy. There are two options: do you hold onto the stock and hope it grows, or cash it out and diversify your portfolio? It's a tough call. Holding onto a single stock can lead to some serious wealth if it performs well, but it also comes with some serious risks—as British Petroleum (BP) found out in 2010 when the Deepwater Horizon spill happened. Their income was cut, and their RSU values were almost worthless. Your wealth and income are wrapped up in one company, and that can be a risky game to play.
Here's the headline: it's important to consider the potential risks involved in having a significant portion of your wealth and income tied to one company. While the potential for growth may be high, unforeseen events such as market downturns or internal changes can greatly impact your financial stability. However, as an AbbVie employee, you may have an inside track on the company's performance and future prospects, which can give you an advantage in making this decision. It's important to weigh the pros and cons and make a decision that aligns with your personal risk tolerance. I'll give you a hint though: diversification is key. Given the risks involved, it is recommended that AbbVie employees diversify their holdings across many different investments.
And now we come to the taxes. You knew this had to be mentioned! Understanding the tax implications of your stock grants is a big part of making informed decisions about whether to hold or sell your shares. If you decide to hold onto those sweet, sweet AbbVie shares, you need to know the ins and outs of how the government is going to get their cut. When shares vest, 22% of those shares will be withheld based on the fair market value of the shares at the time of vesting as a form of withholding. The price of the share on the day they vested, that's your new basis. Any growth after that, the government is going to want a piece of that too.
This value becomes your cost basis for the shares and any appreciation above that value will be subject to capital gains taxes when you sell. Sell these shares within 12 months, and the gain will be taxed at your income tax rate. If you wait more than 12 months to sell them, the gain will be subject to capital gains rates. Just by waiting a little longer, you can save 15-25% in taxes. It's important to consult with a financial advisor or tax professional to fully understand the tax implications of your stock grants. In conclusion, the AbbVie stock grant program can be a wild ride with significant potential for growth, but it also comes with inherent risks. However, with the right strategy, you can come out on top. By understanding the program's structure, tax implications, and risks, you can make informed decisions. And remember: always diversify. To give you a deeper understanding of the key takeaways and principles discussed in this article, here are some examples that gives an inside look at some real-life clients and the strategies we’ve recommended to protect their wealth and income. Let's see how it works in practice!
Ensuring accurate tax withholding
James has been part of the RSU program for the last three years. In February of this year, he's going to receive vesting from three different grants. In total he'll receive 500 shares of AbbVie with an approximate value of $75,000. While the standard withholding is 22% on these vesting shares, James' household tax bracket is the 35% bracket. If James and his wife are not making estimated payments throughout the year or aggressively deferring their income, they're going to have a large tax balance at the end of the year, potentially owing penalties and interest. By running a projected tax return at least once a year, we can determine exactly what James' family's tax liability is going to be and determine what amounts of income to defer and estimated payments to be made to prevent any surprises coming at tax time.
Dealing with concentrated positions
Mary has been managing her own portfolio and has been focused on building up her savings outside of her AbbVie shares. Having been part of the RSU program since its inception, she's now built up an AbbVie position of $800,000. She has no desire to give this money away and is in a manageable tax bracket at this point. Using an outside manager, Mary utilizes a covered call option strategy to generate extra income just by holding these shares. This extra income is used to further invest in diversified holdings and accelerate her retirement date.
Generational wealth transfer
Bob and Susan both work at AbbVie and both receive RSUs each year. In total they receive about $60,000 in shares each year. They have seen how holding stock for a long period of time can accelerate the wealth building process. As their shares vest each year, they give them to their two grandchildren with the expressed desire that these shares be held and used to fund their grandchildren's fortunes. The thought is if they gift each grandchild $30,000 in shares for the next 10 years, the future wealth of the entire family will be forever changed.