PDF Executive Compensation: 409A Tips and Current Plan Design Issues Companies should consider the possibility of such unexpected fluctuations in value, regardless of whether it relies on a third-party valuation. The companys stock option and stock appreciation right (SAR) plans will need to carefully define performance based pay in order to qualify phantom stock payments for the full tax deduction. By simulating stock ownership, without actually providing it, management ensures that equity does not become diluted for other shareholders. The company cannot offer conventional kinds of ownership plans because of corporate restrictions, as would be the case, for instance, with a Limited Liability Corporation, partnership, a sole proprietorship, or an S corporation concerned about the 100-owner rule. ", Investopedia requires writers to use primary sources to support their work. However, there is one key difference between the two plans. 1.1 Financial statement presentation and disclosure requirements. Phantom Unit Plan - SEC Handbook: Investments September 30, 2022. Companies can choose what the triggers areexamples include a separation from service, a change in control, or a specified future date or fixed payment schedule. Other equity or allocation formulas could be used as well. If they do, they could be subject to ERISA rules (see below). Should participants receive the base value of the phantom stock units, or only participate in growth over and above the base value? Second, the equity of the company must be valued in a defensible, careful way. If the issuing phantom stock price is $30, and the companys share price at redemption is $100, the cash payment per phantom stock would be capped at $50 $30 = $20. Income Type: Write cash payment for cash income over $200. Phantom stock can also be changed at the leadership's discretion. Phantom stock plans are deferred compensation plans and, as such, must be designed and documented to conform to the requirements of section 409A. Statutory Stock Option Plans require shareholder approval within 12 months before or after adoption by the board of directors. Phantom stock may behypothetical, however, it stillcan pay out dividends and it experiences price changes just like its real counterpart. Lastly, GAAP accounting also permits C-corporations to book a deferred tax asset (DTA) for future distributions, helping offset the overall accrual. Visit rsmus.com/about for more information regarding RSM US LLP and RSM International. Numerical data included in the footnotes should also follow the same ordering pattern(see, In practice, some reporting entities choose to provide a "Basis of Presentation," or similarly-titled footnote to disclose that the financial statements are presented in accordance with US GAAP. Cash accumulated to pay for the benefit may be subject to an excess accumulated earnings tax (a tax on putting too much money in reserve and not using it for business). 2019 - 2023 PwC. Company name must be at least two characters long. S-X 4-01 (a) (1) requires financial statements filed with the SEC to be presented in accordance with US GAAP, unless the SEC has indicated otherwise (e.g., foreign private issuers are permitted to use IFRS as issued by the IASB). (If based only on the appreciation, this is commonly referred to as a stock appreciation right.) Learn more about how they work. Are you still working? <> EBPAQC Alert No. 451 - AICPA Less expensive than offering employees an employee stock ownership plan (ESOP). How It Works, Taxation, and Types of Plans, Stock Compensation: Definition, How It's Used, and Typical Vesting, Publication 5528 (6-2021): Nonqualified Deferred Compensation Audit Technique Guide. Now each tranche of vested awards is treated as a separate award. During the installment payout period, should earnings be credited on the balance at a specified interest rate? Get reusable documents specific to your state in the most extensive online forms library, with 24/7 access to your acquired samples. The presentation and disclosure requirements discussed in this guide presume that the related accounting topics are considered to be material and applicable to the reporting entity. Whether granted up front or over a period of years, the phantom stock units may either be immediately vested or subject to any vesting schedule determined by the company. The phantom stock plan should specify what events should trigger, or give rise to, a valuation (i.e., what events should entitle the employee to receive benefits under the plan) and at what precise point the value of the phantom stock units should be determined. If payments are to be made in installments, the phantom stock unit plan or grant agreement should also specify whether interest will accrue on the unpaid installments. A phantom stock plan constitutes a deferred compensation plan. Report your phantomstock and income from phantom stock in Part 2. . Select a section below and enter your search term, or to search all click Phantom stock also provides organizations with certain restrictions in place to provide incentives tied to stock value. In most cases, a valuation is required upon the employees termination, death, or disability. Equity Alternatives: Restricted Stock, Performance Awards, Phantom Stock, SARs, and More. The member firms of RSM International collaborate to provide services to global clients, but are separate and distinct legal entities that cannot obligate each other. There are a number of situations that might call for one or more of these plans: This article provides a brief overview of the design, implementation, accounting, valuation, tax, and legal issues for the four kinds of plans it covers. All rights reserved. Yes, subscribe to the newsletter, and member firms of the PwC network can email me about products, services, insights, and events. Structured Query Language (known as SQL) is a programming language used to interact with a database. Excel Fundamentals - Formulas for Finance, Certified Banking & Credit Analyst (CBCA), Business Intelligence & Data Analyst (BIDA), Financial Planning & Wealth Management Professional (FPWM), Commercial Real Estate Finance Specialization, Environmental, Social & Governance Specialization, Business Intelligence & Data Analyst (BIDA), Financial Planning & Wealth Management Professional (FPWM), A cash payment from Company A as the difference between the current common share price and phantom stock issue price: ($70 $50) x 500 = $10,000; or. Her expertise is in personal finance and investing, and real estate. The vesting and forfeiture provisions contained in the phantom stock plan or individual grant agreement determine whether and when the executives rights are vested. Do Not Sell or Share My Personal Information (California). Investing for Teens: What They Should Know, Rolling Over Company Stock from a 401(k): When It Doesand Doesn'tMake Sense, Taxation on Non-Qualified Deferred Compensation Plans, Using Phantom Stock as an Organizational Benefit. However, unlike actual stock for which the increase in value on a disposition may be eligible for favorable capital gains tax rates, phantom stock unit payouts are taxable to the employee at ordinary income tax rates. Fi4X\c_Txa/BCCB[SU& w!l C** For example, if the issuing price of the phantom shares is $50 and the companys share price at redemption is $20, the plan participant would not reap any benefits. Employee benefit plan financial statement auditors will need to consider whether disclosures related to the COVID-19 pandemic, CARES Act, SECURE Act and other matters should be included in the plan's . A phantom stock plan is a contractual agreement wherein a company promises to make cash payments to employees upon the achievement of certain conditions. Employee Stock Purchase Plan The Company's Employ Stock Purchase Plan (the " ESPP ") enables eligible employees to purchase the Company's common stock at a price per share equal to [ ]% of the lower of the fair market value of the common stock at the beginning or end of each offering period. 1.1.3 Basis of presentation. Stock-based compensation. The plan must be properly vetted by an attorney, with all of the pertinent details specified in writing. 594 0 obj <> endobj Excel shortcuts[citation CFIs free Financial Modeling Guidelines is a thorough and complete resource covering model design, model building blocks, and common tips, tricks, and What are SQL Data Types? Phantom stock can be provided to every employee, either across the board or distributed variably depending on performance, seniority, or other factors. |$8:4; b ,` Q$;G3fU | 32023VngYv#T)WONF1pX20_RD m|aVikx:20@T1& O Parameters and Trading, With Examples, Employee Stock Options (ESOs): A Complete Guide, What Is a Pension? The cash payment per phantom stock would be $30. Our book Equity Alternatives: Restricted Stock, Performance Awards, Phantom Stock, SARs, and More includes a detailed chapter on phantom stock and SARs. 2019 - 2023 PwC. The number of phantom stock units, vesting schedule, form of payment (i.e., lump sum or installments over a period of years), and triggering payment events are typically set forth in individual grant agreements. Reporting entities are required to describe all significant accounting policies in the financial statements. endobj PDF SBP Footnote Disclosure Template - FinTools In other cases, valuation may be required periodically, such as annually, or on a specific future date. These financial statements must include consolidated balance sheets and statements of . 1 0 obj How broadly or narrowly should the plan define what qualifies as cause for termination? These include white papers, government data, original reporting, and interviews with industry experts. 1.1 Stock-based compensation background - PwC Phantom stock plans have financial implications for employees and companies that cut both ways: Pros. This article was originally published on Oct. 12, 2020 and has been updated. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. However, unlike actual stock, the award does not confer equity ownership in the company. This guide does not address the income tax, earnings per share, or cash flow implications of stock-based compensation awards nor other presentation and disclosure matters. A phantom stock option is a bonus tax treatment plan where the amount of the bonus is determined by reference to the. . For both phantom stock and SARs, employees are taxed when the right to the benefit is exercised. Each offering period of the ESPP lasts [ ]. Ready to Speak with a Phantom Stock Expert Now?Call (888) 703-0080 or complete our contact form. Varying accrual schedules can be found in the market. Investments by and distributions to owners during the period. It provides increased incentives as the value of the company increases. In addition, special forfeiture provisions can be included in the phantom stock plan to eliminate the companys obligation to make payments to an executive upon specified events (e.g., if the employee breaches non-compete restrictions in the plan or the employees employment is terminated for cause). What is a Phantom Stock Plan? | Shareworks by Morgan Stanley stream Pros and Cons of Phantom Stock Plans. Refer to the following PwC guide sections for guidance on those matters: Company name must be at least two characters long. A phantom stock plan and stock option plan both award employees from the share appreciation of the companys stock price. hbbd```b``v+A$X{lG#d_b+gHFV #CiDO ` PDF -m|ol|o1h t-m P ub -|;olr-m Q - Shearman & Sterling We use cookies to personalize content and to provide you with an improved user experience. A phantom stock plan refers to a type of deferred employee compensation plan where plan participants benefit from the upside of a company's share price without actually receiving company shares. As of the end of each of the two most recent fiscal years, Statement of changes in stockholders' equity, Present in a separate statement or in the footnotes for each period a statement of comprehensive income is presented. CFI is the official provider of the Capital Markets & Securities Analyst (CMSA) certification program, designed to transform anyone into a world-class financial analyst. Stock appreciation rights (SARs) are a type of employee compensation linked to the company's stock price during a predetermined period. Report any stock that you acquired as a separate lineentry, using the standard instructions for stock. Generally, Rule 701 requires that companies that are required to provide financial and other disclosure provide financial statements for the two most recently completed fiscal years or the period during which they have been in existence if it is shorter. The phantom stock plan should indicate the number of phantom stock units or the participation percentage interest to be granted to the employee. A pension plan is an employee benefit that commits the employer to make regular payments to the employee in retirement. For these companies, phantom stock and stock appreciation rights may be very attractive. 3 0 obj x\oGn?s4"{}C(jli#\>xqWUP AGuu=]l}v;7N\}Y'?>-fzMig7ttb$DQE#MQvyU9^ivn].6OU#%F6E-FM!h~-hEC.auw8P5mM*DK_mo_^%FK^pv7D6Om]D4_^n7V,"vUsBc&S=.|n[1hzRb@QWBY"kFs4Efzr9BaV+ 3PU%i%l |Q{$kdx`Q=Tim?#ecbz)tQNO}lQw+KTgrA:tH{Q+U++; RVv6oP!NS^|O5!=J#($m#k?ppF.=r Phantom stock plans that require the attainment of predetermined metrics (i.e., performance vesting) are expensed as the performance conditions become ascertainable, instead of over the requisite service period. Discover what makes RSM the first choice advisor to middle market leaders, globally. For more information, see Section 409A Fundamentals. endobj To learn why sharing value with those who drive growth is so critical to your pay strategy, download and read our report today! What behavior or performance levels is the company trying to incentivize? Other adjustments that might be considered include subtractions for capital investments made by the shareholders during the course of the plan, additions for any dividends paid to shareholders during this period, and the amount of accrued deferred compensation attributable to the phantom stock units themselves. You can set the default content filter to expand search across territories. For example, a company could exclude gain or loss attributable to operations or sales of certain divisions of the company. Follow along as we demonstrate how to use the site. Does the phantom stock plan comply with section 409A? Stock option plans produce a more favorable fixed accounting result. endstream endobj 595 0 obj <. that do not have publicly traded shares. List of Excel Shortcuts None of these plans should be set up without the detailed advice of qualified legal and financial counsel. Phantom Stock Plans Variation: Elective Phantom Stock Plan Executives can defer salary and/or bonuses Deferrals used to purchase phantom stock - Either fullvalue or appreciation only Earnings on deferrals based on growth in the phantom stock vs a credited interest rate or other notional investment For the Federal Insurance Contributions Act (FICA), deferred compensation is includible as wages in the later of either the year in which the related services are performed, or the year in which the deferred compensation becomes vested. The company is not a company - it is a nonprofit or government entity that nonetheless can create some kind of measurement that mimics equity growth that it would like to use as a basis to create an employee bonus. This is the case even though the amounts are not subject to income tax until actually paid to the employee. Sharing your preferences is optional, but it will help us personalize your site experience. <>>> Phantom stock plans can be a valuable method forcompanies that seek to tie incentive compensation to increases or decreases in company value without awarding actual shares of company stock. Additionally. Both types of plans resemble traditional nonqualified plans in many respects, as they can be discriminatory in nature and are also typically subject to a substantial risk offorfeiturethat ends when the benefit is actually paid to the employee, at which time the employee recognizes income for the amount paid and the employer can take adeduction. For example, vesting may be cliff or graded, time-based, or based on the achievement of specified financial performance goals. Disclosure of accounting policies shall identify and describe the accounting principles followed by the entity and the methods of applying those principles that materially affect the determination of financial position, cash flows, or results of operations. As described in theAccounting section, phantom stock plans require variable accounting. Phantom stock plans are considered "liability awards" for accounting purposes (assuming they will be settled in cash rather than stock). The attributes of phantom stock units should be carefully considered to determine whether it is theright incentive planto meet a companys needs. The company will customarily consider the phantom stock plan a benefit that requires disclosure in an S-8 filing with the SEC. Income Amount: Provide the exact amount of cash income over $200 during the reporting period. Should the payment be made in a lump sum or in installments over a period of years? A phantom stock plan is a deferred compensation plan that awards the employee a unit measured by the value of a share of a companys common stock, or, in the case of a limited liability company, by the value of an LLC unit.