Equity planning

RSU vesting after severance: what happens to your unvested shares

RSUs are now the dominant equity vehicle for corporate executives. Unlike stock options, there's no exercise decision to make — shares deliver automatically at vesting. But when an executive leaves before the vesting schedule is complete, the default outcome is simple and often painful: unvested RSUs are forfeited. This guide explains the rules, the exceptions, and what a financial advisor can help you model before you sign.

Default rule: unvested RSUs forfeit at termination

Under a standard RSU award agreement, your employment is a continuous vesting condition. If employment ends — whether via resignation, termination, layoff, or mutual agreement — unvested RSUs are forfeited immediately on the last day of employment (or sometimes after a short grace period, check your plan document).

This applies to every unvested tranche on every active grant. An executive with three grants at different stages — say 25%, 60%, and 80% vested — forfeits the remaining 75%, 40%, and 20% of each on the termination date.

Forfeiture happens automatically; you don't get to elect otherwise. The company is not required to compensate you for forfeited unvested RSUs unless the severance agreement specifically grants acceleration.

Accelerated vesting in severance agreements

The standard forfeiture rule is a starting point, not a ceiling. Executives often negotiate accelerated vesting as part of a severance package. Common structures include:

• Pro-rata acceleration: You receive a fraction of the next scheduled tranche, calculated by months worked in the vesting period divided by months in the full period. Common in "good leaver" provisions tied to layoff or involuntary termination.
• Tranche acceleration: The next one or two unvested tranches vest immediately on termination. Typical for senior roles or companies that want to retain goodwill at separation.
• Full acceleration: All unvested RSUs across all grants vest on the termination date. More common in negotiated departures for C-suite or after change-in-control events.
• Continued vesting during a notice or garden-leave period: You remain on payroll for 30–90 days, and RSUs that hit scheduled vesting dates during that period vest normally. The unvested remainder still forfeits at the end of the notice period.

What you receive depends entirely on what the severance agreement says. If your draft severance agreement is silent on RSU treatment, all unvested RSUs forfeit — the plan default governs.

Vested RSUs that haven't settled yet

A separate question: what about RSUs that have already vested but whose shares haven't been delivered (settled) yet? Vesting and settlement can be different dates under some plan designs, particularly where the company has deferred settlement for tax or administrative reasons.

If RSUs are vested-but-unsettled, they are generally treated as an obligation of the company — you have earned them, and departure does not forfeit them. However, the settlement timing in the plan document controls when shares actually deliver. Review your plan document carefully for any deferral provisions that might push settlement past your last day, and confirm whether shares will be delivered as scheduled or whether termination triggers an accelerated (or delayed) settlement.

Nonqualified deferred compensation rules under §409A can also affect settlement timing on certain RSU structures that have been wrapped into deferred compensation plans.

Tax treatment when RSUs settle

When RSUs settle and shares are delivered, the full fair market value of the shares on the settlement date is ordinary income — regardless of what you paid for them (which was nothing). This is true whether you receive the shares after a normal vesting event, an accelerated vesting under a severance agreement, or a change-in-control cashout.

For tax withholding on RSU settlement income:

• Supplemental withholding rate: 22% on cumulative supplemental wages up to $1,000,000 in the calendar year; 37% on the amount above $1,000,000.¹ Note that withholding is not the same as your final tax liability — if your income is in the 37% bracket, the 22% withholding on an RSU settlement creates an estimated-tax shortfall you need to cover separately.
• Social Security: 6.2% on income up to the 2026 wage base of $184,500.² If you have already earned past the wage base from salary and bonus this year, RSU settlement income is not subject to additional Social Security tax.
• Medicare: 1.45% on all compensation income. An additional 0.9% applies to wages above $200,000 (single) or $250,000 (married filing jointly), with no employer match on the additional 0.9%.
• State income tax: Varies. Multi-state issues arise if you worked in a different state when earlier RSU grants were made — some states assert the right to tax the deferred compensation element based on your work location during the vesting period (source-state taxation of equity).

Basis in shares after RSU settlement

Your cost basis in shares received from RSU settlement equals the fair market value on the settlement date — the same amount you recognized as ordinary income. If you immediately sell, there is no additional gain or loss. If you hold shares after settlement, subsequent appreciation or depreciation is capital gain or loss. Holding more than one year qualifies for long-term capital gains rates (0%, 15%, or 20% depending on taxable income).³

The 3.8% net investment income tax (NIIT) applies to capital gains on shares you hold and later sell, not to the ordinary income recognized at settlement.

Why no 83(b) election applies to RSUs

Section 83(b) elections — which allow you to recognize income at grant rather than at vesting — are not available for RSUs. RSUs represent an unfunded promise to deliver shares in the future, not an actual property transfer at grant. There is nothing to elect at grant time. (The 83(b) election applies to restricted stock, where actual shares are transferred subject to a forfeiture condition.)

Blackout periods and trading restrictions

Executives subject to a company trading blackout — which often accompanies a significant transition, acquisition announcement, or quarterly earnings period — may find that RSUs settle and shares arrive in their brokerage account while they are prohibited from selling. This creates two problems:

• Tax is owed on the value at settlement, whether or not you can sell to fund it. If you had a planned sell-to-cover arrangement and the blackout prevents the sale, you may face a cash shortfall for taxes.
• If the stock price drops during the blackout, you took the tax hit at the higher price and now hold shares worth less.

If you know a blackout is likely at the time of your departure, this is worth addressing in the severance agreement: can settlement be delayed until the blackout lifts, or can the company withhold shares in kind (share-surrender withholding) rather than requiring a cash sale?

Performance-based RSUs (PSUs)

Performance share units (PSUs) add a second condition beyond time-based vesting: a performance target must be met before shares deliver. At termination, both conditions are at issue:

• The time condition typically forfeits unvested performance periods, same as standard RSUs.
• The performance condition for periods that have already closed (but shares haven't settled) is often retained — meaning you may still receive shares for completed performance periods.
• For in-progress performance periods, PSU treatment at termination varies widely by plan. Some plans provide pro-rata vesting at target; others forfeit entirely.

A change-in-control event often converts PSUs to time-based RSUs (at target or actual performance) before the double-trigger protection applies, making CIC treatment considerably more valuable for PSU holders than standard termination.

What to negotiate in your severance agreement

An advisor can help you identify and quantify every RSU-related item before you sign. Specific things to address:

• Explicit acceleration language: How much accelerates, on which grants, effective what date. Vague language like "continued vesting" is often litigated; precise tranche or percentage language is enforceable.
• Settlement timing: Confirm when accelerated shares will actually be delivered. A company can accelerate vesting on paper but delay settlement, leaving you uncertain about timing and cash flow.
• Withholding method: Share-surrender withholding (the company keeps back shares to cover taxes) vs. cash withholding. Each has different cash-flow implications.
• Blackout-period provisions: If a blackout is anticipated, request a settlement delay or alternative withholding arrangement.
• Multi-state tax treatment: If any grants were made while you worked in a different state, get the company's position on state sourcing in writing.
• PSU treatment for in-flight performance periods: Request pro-rata participation at target for performance periods you actively worked during.
• Equity value as part of the overall package: Severance is often all-cash negotiation, but unvested equity value can be larger than the cash component. A financial advisor can model the present value of unvested equity forfeited so you know the total economic value at stake.