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Phantom Stock

Phantom Stock Plans (PSP) are written, contractual agreements between the company and key employees. While usually designed to parallel actual stock ownership, they allow the company to provide a future incentive without the potential intrusion of an actual minority shareholder. Owners' compensation is not subject to any oversight or criticism from other holders of shares. Most of these plans involve the granting of stock units credited to key employee accounts. The key benefit under these plans equals the appreciation in value between the date of crediting the account (grant) and the date the benefit is paid.

A PSP can be configured in an unlimited number of ways. The stock account can also include credits for cash bonuses, stock dividends and stock splits. Or, the PSP can be simplified to trigger upon a specific event, such as a recapitalization or sale of the company. Payment of the benefit may be tied to a vesting period, and to retirement, death or disability. Often the benefits are paid as cash installments. The company must be a C corporation to create a different class of shares (e.g. preferred and voting rights versus common and non-voting). The company cannot be an S corporation since there is only one class of stock in an S.

The employee receives an account credit, with no tax payable. His tax is paid when the payout benefit is received. The company gets no deduction upon the phantom stock crediting, but only upon payment of the benefit. And, these accounts cannot be pre-funded by the company. There is a one time filing of the plan with the Department of Labor to fulfill the ERISA requirements. These plans are a form of deferred compensation subject to the tax implications of Internal Revenue Code Section 409A.

Plan designs usually include credits to the stock account based upon one or more of these types of metrics:

  1. Allocation based on salaries for all participants
  2. Profit share based upon designated earnings
  3. Increased value of the stock

We provide these initial and updated business and per share valuations.

Categories: General

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