Compensation Basics for Apple Employees

Apple compensates its employees through salary, RSUs and cash bonuses. In the absence of tax planning, all three are taxed at ordinary income tax rates.

Restricted Stock Units

Apple provides its employees with stock awards by way of restricted stock units (RSUs), which come in three forms:

• Initial RSU grant

• Annual stock refresher

• Out-of-cycle bonus

Initial RSU Grants

Initial RSU grants are negotiated during the hiring process. At Apple, the most common vesting schedule calls for biannual vesting over 4 years. In other words, 8 equal amounts of RSUs vesting every 6 months - the employee receiving one share of stock for each vested RSU.

Ideally, Apple’s stock price will rise over the vesting period, so that the dollar value of the shares received rise over time (even though the number of shares has not changed). For example, here’s how the dollar value of the Apple RSU grant described above would have increased over the period of 2018-2021:

Stock Refreshers

Employees who begin working for Apple before April 1st will be eligible for stock refreshers in their first year. Otherwise, stock refreshers begin in the second calendar year of employment. Stock refreshers are determined by performance on a scale of 5 to 9 and are paid out once a year. Vesting follows the same schedule as most initial RSU grants: 8 vesting dates spaced 6 months apart over a total of 4 years.

Out-Of-Cycle Bonuses

Out-of-cycle bonuses are less predictable and are usually issued to exceptionally high-value employees who Apple considers targets for poaching by competitors.

Taxation of RSUs

RSUs are taxed as ordinary income upon vesting and as a capital gain or loss upon the sale of the shares received. To learn about RSU tax mistakes and how to avoid them, watch our video on RSU taxation.

Tax Withholding on RSUs

When RSUs vest, Apple sells a portion of the resulting shares to cover payroll taxes (social security, medicare, etc.) and withhold income taxes for the IRS and the employee’s state of residence. For those making less than $1 million dollars in annual supplemental wages, the withholding rate is typically 22% of the market value of the shares. However, this is often not sufficient to cover the employee’s tax liability to the IRS. It’s often the case that the employee must pay penalties in addition to the taxes not covered by withholding.

Apple Mega Backdoor Roth

The Apple 401(k) offers a Mega Backdoor Roth, which allows after-tax contributions to be converted to Roth. This conversion forever more shields investment earnings from income tax. In other words, qualified distributions from the account become entirely tax-free (both contributions and investment earnings).

Unlike the Roth IRA, which is capped at $7,000 in annual contributions as of 2024 ($8,000 for those 50 years and over), the Mega Backdoor Roth allows for much more substantial contributions in the tens of thousands of dollars — usually $30,000 or more.

Until recently, Apple’s process for setting up the Mega Backdoor Roth was labor intensive and inefficient. However, with Apple’s move to Fidelity from Schwab / Empower, it has become possible to essentially “set and forget” one’s contributions for a Mega Backdoor Roth.

And with a “self-directed account” at Fidelity, Apple employees can opt to have their account professionally managed by their financial advisor.

Deferred Compensation Plan

Apple provides its Deferred Compensation Plan to non-employee directors, members of a select group of management and/or highly compensated employees, as well as employees designated by the Board of Directors as “officers”. Only those employees or non-employee directors notified in writing by Apple of their eligibility for the plan can participate.

Participating in Apple’s DCP potentially offers three types of tax benefits:

1. Lower current taxes by deferring salary and cash bonuses

2. Tax-deferred growth

3. Lower future taxes through the spreading of distributions over time

*Assumption: Employee resides in California

By using Apple’s deferred compensation plan to defer $200,000 in salary and $100,000 in cash bonuses, the employee in this example has reduced current taxes by roughly $150,000.

Approximate tax savings: $150,000

Receiving a lump sum disbursement of $2,000,000 in deferred compensation would expose the employee to the highest income tax bracket. Instead, the employee could spread distributions of total deferred compensation over a longer time horizon and enjoy lower income tax rates.

Approximate estimated tax savings: $320,000

Other important aspects of a Deferred Compensation Plan:

• Enrollment period for salary deferment.

• Enrollment period for bonus deferment

• Constraints on when one must decide the timing of distributions

• Investments available through the DCP

• Company-based risks

• Individual based risks

If you are eligible to participate in Apple’s Deferred Compensation Plan and would like to speak to an advisor with expertise on the above issues, please set up a time for a consultation and fit meeting.