EQUITY AWARDS PROGRAM RESTRICTED STOCK UNITS (RSUs)

Transcription

1 EQUITY AWARDS PROGRAM RESTRICTED STOCK UNITS (RSUs)

2 2 The following questions and answers provide general information about CVS Caremark Corporation s Equity Program and answer frequently asked questions from program participants. All samples shown in this document are for illustrative and educational purposes only. In the event of a conflict between these questions and answers, and the terms of a plan document or agreement, the plan document or agreement shall govern. This document is not intended as financial or legal advice. You should consult your accountant, attorney, or tax professional if you have specific questions or issues concerning your equity. RESTRICTED STOCK UNITS 1. What are restricted stock units? Restricted stock units ( RSUs ) are granted under the 2010 Incentive Compensation Plan (the 2010 ICP ). RSUs are defined as a promise by CVS Caremark to deliver a certain number of shares of stock in the future, subject to certain conditions (e.g. continued employment). Terms and conditions of RSU grants are defined in the recipient s RSU agreement and in the 2010 ICP. 2. What is an RSU agreement? An RSU agreement is a contractual document between CVS Caremark and the RSU recipient which outlines the terms and conditions of the RSU award. The document outlines the recipient s rights and obligations as a recipient of the RSU award under the 2010 ICP, including vesting and termination provisions. A separate agreement is provided for each RSU award. 3. What is the difference between Restricted Stock and RSUs? The main difference between restricted stock and RSUs is that restricted stock awards are treated like shares of common stock when they are awarded. When Restricted Stock is awarded, shares are registered in the recipient s name, and the recipient is entitled to have full voting rights on the shares and to receive any dividends paid by the company. In contrast, RSUs represent the promise by the CVS Caremark to deliver stock in the future. RSUs do not carry voting rights. You may, however, receive dividend equivalents at the Company s discretion. If you are entitled to receive dividend equivalents on your RSUs, it will be indicated in your RSU agreement. 4. What is a restricted period? A restricted period (or vesting period) is the length of time, either in whole periods or in installments, before shares will be issued to you in settlement of your RSUs. 5. How is the vesting period determined? The Management Planning and Development Committee of the CVS Caremark Board of Directors (the Committee ) determines the length of vesting periods on the date RSUs are approved, as stated in your RSU agreements. The vesting period on the more recent awards of restricted stock units is typically four years; however, this can vary with each award. 6. Are my RSUs taxable? Employees receiving RSUs are not taxed at the time of grant. Instead, the employee is taxed when RSUs vest and shares are issued. The value of your vesting RSUs, which is calculated by multiplying the Fair Market Value (FMV) of CVS Caremark common stock by the number of units on the RSU vesting date, is reported as income, and is subject to payroll taxes.

3 3 7. How will taxes be withheld from my RSUs being released? Payroll taxes are due when your RSUs are released. Remittance of payroll taxes may be made as an advance estimated payment (an reminder will be sent to you approximately 30 days prior to release/vesting date(s); you can log into your E*Trade account to calculate an estimated tax payment), or, at your election, CVS Caremark will withhold the equivalent number of RSUs to cover all taxes due from the RSUs being released. The amount of payroll taxes due is based on the FMV of your RSUs on the date the restrictions lapse. Both your taxable compensation and all taxes paid by you will be reflected on your W-2 for that year. 8. What tax rates will be applied? The IRS considers the taxable compensation in connection with the release of RSUs to be supplemental wages (i.e. wages that are not regular wages, like bonuses, commissions, posttermination payments, income from stock option exercises). Therefore, CVS Caremark collects federal income tax at the supplemental withholding rate (25%) for the release of RSUs. State and local taxes (if applicable, state and local tax rates can vary) will also be due, as well as Medicare taxes (1.45%). Additionally, Social Security tax (4.2%) will also be due up to the maximum taxable wage base. The IRS requires that if an employee receives supplemental wages over $1 million in a calendar year, then the supplemental wages in excess of $1 million is subject to mandatory withholding at a higher income tax rate (35%). 9. When will I receive my shares of stock? Shares of CVS Caremark common stock will be deposited into your E*Trade account upon vesting of your RSUs. If you elected to have shares withheld to cover your taxes, the number of shares deposited into your account will be net of taxes. 10. Are my dividends taxable? All dividend equivalents paid to you prior to the release of shares are treated as wages and will be included in your W-2 for the year in which they are paid to you. After your shares have vested and have been issued to you, dividend payments will be considered as dividend/interest income and should be reported as such on your income tax return. 11. Will I receive anything at year-end about my dividends? The total dividend equivalent amount paid on your RSUs during the vesting period will be included on your W-2. You will receive a Form 1099 from CVS Caremark s transfer agent, currently Computershare, indicating the dividends paid on shares that vested and have been released. 12. Can I transfer my RSUs? RSUs may not be transferred, sold or pledged by you during the vesting period (or prior to the applicable settlement date), except by will or the laws of descent and distribution. 13. What happens if I voluntarily leave the Company? In the event that you voluntarily terminate your employment relationship with the Company, any unvested RSUs will be forfeited unless otherwise explicitly provided under your respective RSU agreement. 14. What happens to my RSUs upon my death?

4 4 In the event of your death, vesting of all your outstanding RSUs is accelerated, and shares will be deposited into your E*Trade account, net of any tax liability, to be claimed by your beneficiary(ies). 15. When can I sell my shares that have been released? Once your RSUs have vested and shares have been released to you, you are able to sell the shares at any time, subject to compliance with securities laws and CVS Caremark s Policy Statement on Securities Trades by Company Personnel (the Insider Trading Policy ). Any gain/loss you incur will be subject to capital gain/loss tax treatment (in addition to the payroll withholding taxes outlined above). Capital gains are calculated on the difference between your acquisition cost (value of your shares on the date the shares are released to you) and your sales proceeds. 16. My RSU agreement for my award says that RSUs are subject to forfeiture or recoupment in the event there is material fraud or financial misconduct. What does that mean? In 2009, the Committee adopted forfeiture and recoupment provisions for all equity awards granted in 2009 and later. An award recipient will be required to repay to the Company the value of any pre-tax economic benefit derived from an RSU award if the Board determines that material fraud or financial misconduct has occurred. You should carefully read your RSU agreement to understand fully the recoupment provisions of your RSU award. 17. What is Section 409A of the Internal Revenue Code and how does it apply to my RSU award? Section 409A of the Internal Revenue Code applies to certain forms of compensation and defines a set of rules that must be followed with respect to that compensation in order to avoid violations and potential penalties. CVS Caremark intends the RSUs to comply with Section 409A. The provisions of s Universal 409A Definitions Document are incorporated by this reference. To the extent required to avoid a violation of Section 409A, payment of any amounts subject to Section 409A of the Code shall be delayed until the date of payment that will result in compliance with Section 409A. EXAMPLE: RELEASE OF RSUs 1,500 Shares Awarded on 4/2/ % Vesting After Four Years 1,500 shares released on 4/2/2016 $45.00 FMV at time of release times 1,500 shares = $67,500 stock value/taxable compensation. As noted in #8 above, payroll withholding taxes due would be as follows: Federal 25%: $16, State 6% (will vary): 4, Social 4.2% (if applicable): 2, %: Total Tax Liability: $24, You can remit payroll taxes by either depositing sufficient funds into your E*Trade account (prior to your vesting date you can log into your E*Trade account to calculate an estimated tax payment), or you may elect to have shares withheld in payment of taxes. In the example above, approximately 550 shares would be withheld to cover your tax liability ($24,738.75/$45.00), with 950 shares being deposited into your account.

5 5 Approximately 30 days prior to your release date, you will receive a reminder of your RSU vesting date, tax liability, and methods of payment available. Upon receipt of your shares, you will be free to sell, transfer and/or pledge the shares (subject to compliance with securities laws and CVS Caremark s Insider Trading Policy). All share sales should be reported on Schedule D of your Income Tax Return. Taxable compensation and all withholding taxes will be included in your W-2 for the year your shares are released to you. NOTE: If shares are sold within 12 months from the date of release, any appreciation (or depreciation) from the FMV on the date of release ($45.00 in the example above) will be a short-term capital gain/ (loss). If the shares are sold after 12 months, any appreciation (or depreciation) from the FMV on the date the restrictions lapse will be a long-term capital gain/loss). Short-term capital gains are taxed at ordinary income tax rates. Long-term capital gains tax rates are lower than ordinary income tax rates. The long-term capital gains rate is currently 15% if you are in the 25% tax bracket or higher. Sale of above shares less than 12 months from release date: short-term capital gain Date of Sale: 8/15/16 Sale Price: $50.00 Short-Term Capital Gains Subject to Ordinary Income Taxes : $7,500 (1,500 shares x $5 per share gain) Sale of above shares more than 12 months from release date: long-term capital gain Date of Sale: 10/15/17 Sale Price: $55.00 Long-Term Capital Gains Subject to 15% rate (if tax bracket is 25% or greater) : $15,000 (1,500 shares x $10 per share gain) Above examples assumes shares were not withheld in payment of taxes.

6 6 CVS Caremark Equity Program The CVS Caremark Equity Program is administered by the Management Planning and Development Committee (the Committee ) of the CVS Caremark Board of Directors (the Board ). Members of the Committee are appointed by the Board. The Committee is responsible for the approval and most administrative duties relating to the Equity Program. The Committee has the authority to interpret the 2010 Incentive Compensation Plan (the 2010 ICP ), construe the terms, adopt rules and regulations, prescribe forms, and make all determinations under the Plan. files annual, quarterly, and special reports, proxy statements, and other financial information with the U.S. Securities and Exchange Commission (SEC). If you are interested in reading the Plan documents the Company is required to file with the SEC, visit the SEC Web site at OTHER IMPORTANT INFORMATION The SEC allows companies to incorporate by reference the information they file with SEC. This means CVS Caremark may tell you about important information by referring you to the documents on file. The information incorporated by reference is considered to be part of this brochure. Later information filed with the SEC will update and supersede this information. The incorporated documents to this brochure include those listed below (and any future filings made with SEC under Section 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934 (the 1934 Act)): The Company s most recent Annual Report on Form 10-K, The Company s most recent Quarterly Report on Form 10-Q, and The description of the Company s common stock contained in the Company s registration statement filed under the 1934 Act, including all amendments and reports updating the description. All such documents are, or will be, deemed to be incorporated by reference in this summary. Those documents, this summary and any document containing the information specified in Part I of Form S-8 provided to colleagues as specified by Rule 428(b)(1) of the Securities Act of 1933 (the 1933 Act) constitute a prospectus under Section 10(a) of the 1933 Act. The incorporated documents described above, the most recent CVS Caremark Annual Report to Shareholders and any other documents required to be delivered to you pursuant to Rule 428(b) under the 1933 Act, can be accessed via CVS Caremark Investor Relations website at Purpose The primary purposes of the Equity Program are to: attract and retain employees of CVS Caremark, provide an incentive for eligible employees to work toward increasing the value of CVS Caremark s common stock, and provide eligible employees with a stake in the future of CVS Caremark, helping to align our employees interests with the interests of CVS Caremark stockholders. Type of Equity The two most common types of equity used at CVS Caremark are: Stock Options