What Should You Be Doing With Your Company Stock?

November 28, 2016

Companies offer benefits to their employees in many different ways - health insurance, cafeteria plans, and retirement savings plans being some of the most popular. One component of retirement benefits is company stock. Through Employee Stock Purchase Plans, Qualified and Non-Qualified Stock Options, and Company Stock inside 401k plans, there is an opportunity to profit personally as the company grows.

The decision on what action to take, if any, can be very confusing. It’s important to note that there are restrictions on when company stock can be sold. If you do not have the right to sell shares, then your decision becomes very easy. Either you must wait until you have the right to exercise, in the case of stock options, or for a window of time each year to sell Company Stock inside a 401(k).

We will focus on two important considerations: the investment and tax strategies.

Varying types of company stock have different tax implications and are usually best treated on a case-by-case basis. Stock Options are unique in that they have a designated price, called an exercise price, at which the stock can be purchased. The hope is that the current market share price is higher than the exercise price, allowing the shares to be bought below the market price. Both qualified and non-qualified stock options have this feature. However, only the non-qualified options have a tax implication upon exercise, whereas qualified do not. This emphasizes the importance of coordinating non-qualified options with your other income.

Another unique tax consideration is Net Unrealized Appreciation, or NUA, impacting Company Stock inside a 401(k). The price at which shares are purchased inside the 401(k) creates a “cost basis.” The difference between the “cost basis” and current market price is NUA. This NUA, if distributed properly under IRS rules, is taxed for many people at a lower long-term capital gains rate, rather than their higher marginal tax rate. The catch is that you are taxed upon distribution out of the 401(k). This, again is where tax planning needs to be done, as you are forfeiting the opportunity to spread the taxable distributions over your lifetime. A tax advisor is strongly recommended for all forms of company stock as there are specific rules and timing implications to them.

Arguably, the most important consideration of when to reduce company stock is the investment risk. The obvious hope is that the company will experience high growth and greatly increase the value of the shares – but the opposite is a real and scary possibility. Far too often many retirement savers have what is called, concentrated equity. This comes from having too much of your portfolio allocated to one company. While there are different rules of thumb on how much is too much, having no more than 10% of your stocks allocated to one company is a reasonable starting place for some. For many, less is more appropriate. Again, this assumes you have the opportunity to reduce your exposure in the first place.

I, and many other advisors, have seen cases where individuals lost a significant portion of their life savings when their company falls in price, or even worse, goes bankrupt. This usually results in either working longer than they planned or reducing their lifestyle plans in retirement. If you have the right to sell company stock, this type of risk is avoidable. An investment portfolio review should be done roughly once per year. This is something we at Kemp Harvest do for our clients. A periodic review of your portfolio allows us to gauge what risk you 

are taking now, and if reducing risk is necessary.

If you, or someone you know does not have a retirement plan, the time to start is now. The earlier you start to plan, the better, and Kemp Harvest Financial Group can help you do just that. Please feel free to contact us at our Harleysville office to begin your retirement process!


The opinions voiced in this article are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement. To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk.