There are important considerations an employer should take into account when implementing these types of deferred compensation plans.
By: Maxwell Briskman Stanfield
Despite the ghostly name, phantom stock is not quite as mysterious as it sounds. In fact, it is used in deferred compensation plans that are useful for the right employees at the right companies.
Phantom stock provides an employee benefit measured by, and tied to, the value of an employer’s common stock. What makes it a “phantom” is that, unlike actual stock that conveys a piece of equity ownership in a company, phantom stock does not bestow any actual equity ownership. However, just like its counterpart, the value of phantom stock fluctuates, year-to-year, based on the value of the company.
Offering employees phantom stock avoids unintentionally providing them voting rights or other unanticipated minority rights. Furthermore, it eliminates the complexity, fees and extra documentation that comes with offering common stock as a benefit. Phantom stock plans remain beholden to certain laws and regulations, but they are less complicated for employers and still give employees a stake in the company’s success, on the whole.
For companies that implement phantom stock plans, there remain important considerations. A properly drafted phantom stock plan would describe the following:
- How many shares of phantom stock or the percentage interest to be granted to the employee.
- How the phantom stock’s value will be determined, which can include appraisal, written formula or state stipulation. This would take into account any and all adjustments the parties deem to be appropriate (for example, exclusion of certain gains or losses, or additions of dividends paid to shareholders).
- What the triggering events are for valuation, meaning those events that entitle an employee to receive the benefit under the plan.
- How the employee receives value from the phantom stock, including when the payments will commence and whether they would be disbursed in a lump sum or in installments.
Beyond those points, there are tax considerations a business must keep in mind. As a form of deferred compensation, phantom stock plans must comply with Internal Revenue Code Section 409A, at the risk of financial penalties for any violations. Payroll departments must also be aware the value of phantom stock shares are subject to Medicare and FICA taxes as they vest.
An attorney experienced in business matters can help a company determine if offering a phantom stock plan is the right decision, craft a properly structured plan and reveal that these types of benefits aren’t as mystifying as they might seem at first. If you’re interested in learning more, contact Maxwell Briskman Stanfield. A link to his contact information is included below.
This material is for informational purposes only. It is not and should not be solely relied on as legal advice in dealing with any specific situation.