How do you avoid 409A with a phantom stock plan?
How do you avoid 409A with a phantom stock plan?
It is possible to create a phantom stock plan that avoids the application of 409A rules. The key requirement would be to (a) use cliff vesting (any incremental vesting must trigger immediate payment), and (b) pay benefits within 2½ months of the end of the year in which the awards vest.
Is phantom stock deferred compensation?
A phantom stock plan is a deferred compensation plan that awards the employee a unit measured by the value of a share of a company’s common stock, or, in the case of a limited liability company, by the value of an LLC unit. However, unlike actual stock, the award does not confer equity ownership in the company.
Can you sell phantom stock?
Since phantom shares are not the same as real stock, you don’t have to worry about employees voting down key decisions, such as selling the company.
Can an S Corp have phantom stock?
Consequently, an S corporation may have a phantom stock plan without terminating its S corporation election. To avoid losing the “S election,” the phantom stock plan must be structured carefully. Some of the criteria for an effective phantom stock plan for an S corporation includes: Liquidation rights must be limited.
Does 409A apply to phantom stock?
Phantom stock is considered deferred compensation and is therefore subject to Section 409A, unless an exemption applies. As such, where an exemption does not apply, the payment triggers must comply with Section 409A.
Does 409A apply to restricted stock?
Restricted Stock. a. The transfer of restricted stock is not subject to 409A, regardless of whether a Section 83(b) election has been made to include the value of the restricted stock in income.
How is phantom stock paid out?
Phantom stock is a contractual agreement between a corporation and recipients of phantom shares that bestow upon the grantee the right to a cash payment at a designated time or in association with a designated event in the future, which payment is to be in an amount tied to the market value of an equivalent number of …
Is a phantom stock plan subject to 409A?
How do phantom stocks work?
A phantom stock plan is an employee benefit plan that gives selected employees (senior management) many of the benefits of stock ownership without actually giving them any company stock. This type of plan is sometimes referred to as shadow stock. Rather than getting physical stock, the employee receives mock stock.
What does 409A apply to?
Section 409A applies to anyone subject to U.S. federal income taxation who receives nonqualified deferred compensation, including (1) U.S. tax residents and (2) nonresidents of the United States who earn U.S.-source compensation.
What is the difference between phantom stock and stock appreciation rights?
A stock appreciation right (SAR) is much like phantom stock, except it provides the right to the monetary equivalent of the increase in the value of a specified number of shares over a specified period of time. As with phantom stock, this is normally paid out in cash, but it could be paid in shares.
Does phantom stock Get distributions?
Because participants in phantom stock plan are not shareholders, they are not entitled to dividends per se. However, the phantom stock plan may call for phantom dividends. Such payments might be included in a plan once a participant is vested in full value shares that have not yet been redeemed (or cashed in).