Introduction to Stock Plans: Phantom Stock Plans - 14 July 2009

Introduction to Stock Plans: Phantom Stock Plans

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This
is part one of a three-part series introducing different stock plans
one should consider for their business. This is only meant to be an
introduction; a trusted professional should be contacted to discuss
what stock plan is right for your business. This first installment 
focuses on phantom stock plans.



A phantom stock plan is a plan whereby an employee is awarded units
whose value is related to the value of the employer’s common stock;
however, the units do not represent actual stock of the employer and
distributions under the plan may be in cash.  Phantom stock plans
(often also called stock appreciation rights) are often used when the
employer, for various reasons, does not desire to give its employees
shareholder status and, thus, seeks an arrangement that does not result
in the actual issuance of its stock to employees.  This is often true
with respect to privately-held companies.  The issuance of common stock
to employees of privately-held companies will create additional
shareholders with voting and other rights of minority shareholders
under state law.  In addition, the issuance of common stock to
employees creates problems when the employee leaves the employer due to
termination, retirement or death. If the employee owns employer stock
at that time, arrangements must be made, generally through a stock
restriction agreement, to obligate the employee and his family to sell
the stock to the employer or the majority shareholder following
termination of employment. Such an arrangement may impose difficult
cash burdens upon the employer or the majority shareholders at the time
of the purchase under the stock restriction agreement.



Phantom stock plans generally involve the granting of a stated number
of stock units which are credited to the employee’s account.  Each unit
has the equivalent value of an outstanding share of the employer’s
common stock.  The benefit provided to the employee equals the
appreciation in the value of the phantom stock between the date the
employee is credited with the phantom shares and the date the benefit
is paid.  Instead of merely paying a benefit equal to the appreciation
in value of the phantom stock between the date the phantom shares are
granted and the payment date, it is possible to structure the benefit
so that it equals the entire value of the phantom shares as of the
payment date.



Payment of the benefit generally occurs upon termination of employment
as a result of retirement, death or disability, or at a specified
future date.  The benefit can be paid out in installments over a period
of years.



No tax is payable by the employee at the time the phantom stock is
credited to the employee’s account.  The employee is taxed when the
benefit is actually paid.  There is no deduction available to the
employer upon the initial crediting of the phantom stock to the
employee’s account under the phantom stock plan.  When the employee is
paid the benefit, the employer is entitled to a compensation deduction
for the same amount as the employee includes in income.

This comes to us from the Pennsylvania Law Monitor - http://palawblog.stark-stark.com/2009/07/articles/business-corporate/introduction-to-stock-plans-phantom-stock-plans/