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The hidden financial risk that awaits airline and hospitality workers

A United Airlines ticketing agent checks the mobile device of a passenger as he tries to check in for a flight in the main terminal of Denver International Airport.

David Zalubowski | AP

Paychecks aren’t the only thing at risk for workers in the airline and hospitality industries. Their nest eggs could be on the line, too.

Travel restrictions have squeezed airlines, which are expected to lose $84.3 billion this year, according to the International Air Transport Association.

The specter of large job losses is also right around the corner, as airline employees face a grim choice: take severance now or risk layoffs in October.

Hotels will continue to take their lumps this year, too, as PricewaterhouseCoopers is forecasting a year-over-year 41.4% decline in occupancy for 2020.

As if the prospect of losing income weren’t bad enough, workers in these industries have a risk that’s lurking in their savings portfolio: overexposure to their employer in the form of company stock.    

“You’re exposed to an escalated level of risk if the company hits hard times during a downturn,” said Samuel Deane, founder of Deane Financial Partners in New York.

“Layoffs occur, and that can compound the problem,” he said. “We’ve seen employees out of work with declining investment accounts and no financial security to fall back on when you need it most.”

The devil is in the details

Equity compensation — when you’re paid in shares of company stock — give employees some skin in their employer’s success.

But it’s easy for an employer’s shares to become too large a portion of your portfolio. For instance, millennials eligible for stock compensation said that 41% of their net worth came from these holdings, according to a July 2019 survey by Charles Schwab.

That number should be closer to 10% to 15%, Deane said, so workers should plan on selling tranches of their shares periodically.

“You may have to be more deliberate setting up a systematic liquidation and diversification strategy,” said Anna N’jie-Konte, founder of Dare to Dream Financial Planning in Kensington, Maryland.

Work closely with your financial advisor and your accountant before you proceed.

Four flavors

Generally, employees will run into four types of stock compensation:

1. Restricted stock units grant employees shares at a future date. You don’t receive the actual stock holding on the day of grant. Rather, there’s a vesting period first.

With so-called RSUs, you pay taxes when your holdings vest and you receive the shares.

2.  Stock options give you the right to buy a specified amount of stock at a set price — the strike price — after a vesting period at some point in the future.

When you exercise the option, you are buying shares at the strike price.

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As a result, the option has value when it’s “in the money” — or when the price of the stock at exercise is greater than the strike price.

The taxes you’ll owe on your options will depend on what you have.

3.  Incentive stock options don’t carry tax load at receipt or exercise. Instead, workers pay capital gains taxes after they sell the stock they purchased.

They may also qualify for preferential long-term capital gains treatment — a top rate of 20% — if they meet a set of rules from the IRS.

High-income workers with so-called ISOs could be subject to the alternative minimum tax on the difference between the market price and share price at exercise. Talk with your CPA before you proceed.

4.  Finally, employees with non-qualified stock options pay ordinary income taxes — a top rate of 37% — at exercise. If your shares appreciate and you sell them, you pay a capital gains tax, too.

Three steps forward

How workers diversify their employee stock holdings will depend on what they hold. Whatever they do, they shouldn’t go it alone.

Start with these three steps:

1. Know what you own: Do you have options? Restricted stock? Get a sense of what you hold, how much and whether there are any applicable vesting schedules.

2. Talk with your advisor: Stock compensation doesn’t stand alone. Work with your advisor to find a plan on when to exercise, sell and diversify or build up a cash pile.

“You’ll want a strategy on whether to keep the shares granted or diversify away into something that more matches your risk tolerance,” said Deane.

3. Get a team together: Taxes are an important part of the picture. Don’t be afraid to get your accountant involved in your strategy so that you can mitigate the taxes owed.

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