Executives: Equity, Deferred Compensation, and the Last Five Years

Elections and timing

The deferred compensation election is the one you cannot take back

Non-qualified deferred compensation is the largest number on most executive balance sheets that does not appear on a brokerage statement, and it is governed by Section 409A of the Internal Revenue Code, which is unusually unforgiving.

• It can be paid only on one of six events: a time or fixed schedule specified in the plan, separation from service, disability, death, a change in ownership or effective control of the company, or an unforeseeable emergency. “When I need it” is not on the list.
• The election is made before the year you earn the money. The initial election of when and how you are paid must generally be made before the calendar year in which you perform the services. For compensation you will earn in 2027, that decision is made in 2026.
• Changing it later costs five years. A subsequent election is valid only if it does not take effect for at least 12 months, defers the payment by at least five years from the date it would otherwise have been paid, and, for a payment scheduled at a specified time, is made at least 12 months before that date. An executive at 60 who wants to push a payment out of the separation year is looking at 65 or later, not 62.
• If the plan or the election fails, the tax is immediate. The deferred amounts are included in income at once, with an additional 20% tax and an interest charge computed at the underpayment rate plus one point, which the Internal Revenue Service calls the premium interest tax.
• If your employer is publicly traded and you are a specified employee, payments triggered by separation from service cannot be made for six months after you leave. A retirement date in November therefore pays in the following May, in a different tax year, which is sometimes an accident and sometimes the plan.

One more feature deserves emphasis because it is a credit decision, not a tax one. Deferred compensation in a non-governmental plan is an unsecured promise. The money is the employer’s, available to the employer’s general creditors, and is not held in trust for you. An executive with $1.5 million deferred is an unsecured creditor of the company for $1.5 million, on top of a salary and an equity position that already depend on it. That is the same concentration problem the equity page describes, in a form that does not show up on any statement you receive.

Selling stock on a schedule you set in advance

If you are an officer or director, most of the year you either possess material non-public information or cannot prove that you do not. Rule 10b5-1 is the mechanism for selling anyway, and the Securities and Exchange Commission rewrote it in December 2022. The current rule matters to anyone planning an orderly exit from a position.

• Directors and Section 16 officers wait before the first trade: 90 days after adopting or modifying the plan, or two business days after the company discloses its financial results for the quarter in which the plan was adopted, whichever is later, and in no case more than 120 days.
• Everyone else waits 30 days.
• Directors and officers certify that they are not aware of material non-public information and that they are adopting the plan in good faith and not as part of a scheme to evade the rule.
• One single-trade plan per 12 months. Anyone other than the issuer may rely on the defense for only one single-trade plan in any consecutive 12-month period.
• Good faith is required throughout, not only at adoption.

Read the cooling-off period as a planning constraint rather than a formality. A plan adopted in the quarter you intend to retire may not begin selling until after you have left, which puts the sales in a year you may not have chosen. Two further rules run alongside it: Section 16(b) lets the company recover the profit on any purchase and sale within six months of each other, which catches an option exercise paired with an unrelated open-market purchase; and Rule 144 limits an affiliate’s sales in any three-month period to the greater of 1% of the outstanding shares of the class or the average weekly reported volume over the four weeks before the Form 144 is filed, with Form 144 required above 5,000 shares or $50,000 in three months.

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The incentive stock option year, and the alternative minimum tax

Exercising an incentive stock option and holding the shares produces no regular taxable income, and that is exactly why it is dangerous. The spread between the exercise price and the fair market value is an adjustment for the alternative minimum tax in the year of exercise, so the tax arrives in a year with no cash from the transaction to pay it.

The 2026 figures set the size of the window. The alternative minimum tax exemption is $140,200 for a married couple filing jointly and $90,100 for a single filer; it begins to phase out above $1,000,000 and $500,000 of alternative minimum taxable income respectively, and is gone entirely at $1,280,400 and $680,200. The rate is 26% up to $244,500 of excess alternative minimum taxable income and 28% above it. For a two-income North Jersey household already near the phase-out, each additional dollar of ISO spread is exposed at an effective rate well above 28%, because the exemption is disappearing at the same time.

Three constraints bound the planning. Options covering more than $100,000 of stock, valued at grant, that first become exercisable in one calendar year are treated as non-qualified options to the extent of the excess. A qualifying disposition requires holding the shares until the later of two years from grant and one year from exercise, so an exercise in the final working year commits you to holding into retirement. And the option must generally be exercised within three months of leaving employment to keep its incentive stock option character, which is why the exercise decision is made before the resignation letter and not after it.

The final year, when everything lands at once

The year an executive leaves can be the highest-income year of a career, and it is worth planning as one number. Salary through the departure date, a final bonus, severance, accelerated restricted stock units, non-qualified option exercises, and in some plans the deferred compensation itself all arrive within twelve months. Four things follow from that, and each is arithmetic rather than opinion.

• Withholding will not be enough. Supplemental wages, which is what a bonus, severance, an option spread and a restricted stock unit delivery are, are withheld at a flat 22% until the total passes $1,000,000 in the year, and at 37% above that. An executive whose marginal rate is 37% and whose supplemental wages are under a million is under-withheld by roughly 15 points on that income, and the shortfall appears in April with an underpayment penalty attached.
• Two surtaxes sit on top. The additional Medicare tax of 0.9% applies to wages above $200,000 for a single filer and $250,000 on a joint return, and the employer withholds it once wages pass $200,000 whatever your filing status. The net investment income tax of 3.8% applies to the lesser of net investment income and the amount by which modified adjusted gross income exceeds the same thresholds, which are not indexed for inflation, so a year with a large stock sale pays it on the gain.
• The capital gain rate is decided by the same income. For 2026 the 20% long-term rate begins at $613,700 of taxable income on a joint return and $545,500 for a single filer. Selling a concentrated position in the separation year can push the gain from 15% to 20%, and with the net investment income tax the difference is 8.8 points rather than 5.
• Medicare bills you for it two years later. The 2026 premium brackets are set by 2024 income. A couple whose separation-year income lands above $750,000 pays $689.90 a month each for Part B plus $91.00 for Part D, against $202.90 and nothing at the bottom bracket: roughly $13,900 for the couple in that year alone. Form SSA-44 removes a surcharge for a listed life-changing event, and work stoppage is one of them, but it does not erase a surcharge caused by a deliberate sale or exercise.

The practical consequence is that the retirement date, the exercise dates and the 10b5-1 adoption date are one decision, not three, and moving the separation across a December 31 can be worth more than any single tax election available afterward.