Phantom stock qualifies as a deferred compensation plan. Follow along as we demonstrate how to use the site. A violation of the section 409A rules could cause immediate taxation, plus an additional 20% tax, as well as the assessment of penalties all prior to any actual receipt by the employee. Select a section below and enter your search term, or to search all click The issuing company generally remedies the matter through: For example, an issuing phantom stock price of $50 when the companys current share price is $40. T8g_vwZ4Yj},_A?+:8eg^I_nLzJ.?!(siS&M=pd3+GsQWr3We+$j?8[H+&aF,MhW{N?SJ\[5UQ6#l0E2CpaF}L58\;.F^T cS^yU_JL\FlO9'2H S+?g&Rg(dD I?0xNi-quw4jIq,(h%+JfR=XX82Gc3dv}H-t?+Rz*_o}56*{p4Cj/(%e(ZT^RCdOE >>Lx8tfjRAX&jPu[HlC}.^U0JJ@Ec'Ku& "cXZ RH 4S+TeC= X5Ehnp+j' C,-Jy}htnO%-rcwpb~4wX=4/wp{>B>n;5Z Z?=#-o` ;5N_Lxy'XX9HR9$+ AV@KIDQ9"#a.60DF&? Should participants receive the base value of the phantom stock units, or only participate in growth over and above the base value? <>/ExtGState<>/XObject<>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 612 792] /Contents 4 0 R/Group<>/Tabs/S/StructParents 0>> Is the potential payment opportunity under the phantom stock plan in line with the companys compensation and business objectives in three, five, 10, or 15 years given certain performance assumptions? Employee Stock Ownership Plan (ESOP): What It Is, How It Works, Advantages, What Are Stock Options? Actual payouts of the phantom stock units are usually deferred until a predetermined future date or until the employment relationship is terminated due to retirement, death, or disability. For example, legislative increases or decreases in corporate tax rates may result in companies having more or less cash flow, accordingly (with all else being equal). A U.S. parent may wish to incentivize executive employees of a subsidiary without awarding shares of parent stock to tie their incentive to the subsidiary level value rather than the parent level. SARs are a form of bonus compensation given to employees that is equal to the appreciation of company stock over an established time period. This may restrict some of the flexibility of the plan design. 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. This article was originally published on Oct. 12, 2020 and has been updated. You can set the default content filter to expand search across territories. Phantom Stock for Long-Term Incentive Awards. Some organizations may use phantom stock as an incentive to upper management. Should the phantom stock units pending payment continue to participate in the growth in value of the company? 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). An employee stock option (ESO) is a grant to an employee giving the right to buy a certain number of shares in the company's stock for a set price. A phantom stock program must meet the requirements set forth by the Internal Revenue Service (IRS) code 409(a). 1.1 Financial statement presentation and disclosure requirements. You can set the default content filter to expand search across territories. We also reference original research from other reputable publishers where appropriate. Save time on drafting legal paperwork with US Legal Forms. Similarly, if there is an explicit or implied reduction in compensation to get the phantom stock, there could be securities issues involved, most likely anti-fraud disclosure requirements. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. Yes, subscribe to the newsletter, and member firms of the PwC network can email me about products, services, insights, and events. Third, tax and regulatory problems may make phantom stock more dangerous than it seems. However, there is one key difference between the two plans. Unlike SARs, phantom stock may reflect dividends and stock splits. The company's owners want to share the economic value of equity, but not equity itself. For example, once a triggering event has been identified, the company should consider whether the value should be determined on the exact date of the triggering event; or whether it makes more sense to look forward or back to the nearest quarter or year-end, depending on what financial information may be needed to calculate value. Additional legal documents and agreements, such as a shareholders agreement, may have to be amended or drafted, increasing complexity and legal fees. If funds are set aside, they may need to be segregated into a "rabbi trust" or "secular trust" to help avoid causing employees to pay tax on the benefit when it is promised rather than paid. The company will customarily consider the phantom stock plan a benefit that requires disclosure in an S-8 filing with the SEC. Company name must be at least two characters long. For example, a company can set the issuing price of their phantom shares at $10, $20, or $30 without regard to its share price at the time. Phantom shares are a contractual agreement between the phantom stock plan participant and the employer. 4 0 obj Unlike SARs, phantom stock may reflect dividends and stock splits. If the employees base pay (before adding in the phantom stock unit payment) exceeds the Social Security wage base, no additional Social Security tax would be assessed on the phantom stock payments. Phantom stock can also be changed at the leadership's discretion. IRC Section 162(m) limits the deduction a publicly traded company may take with respect to remuneration in excess of $1 million paid to its top officers. Will any funding mechanism be used to help the company meet fund its future obligations to pay the amount owed to recipients? Her expertise is in personal finance and investing, and real estate. For both phantom stock and SARs, employees are taxed when the right to the benefit is exercised. It is for your own use only - do not redistribute. That assumption applies throughout the guide and will not be restated in every instance. Second, the equity of the company must be valued in a defensible, careful way. The amount of the cash payment is linked to the market value of a predetermined number of shares of the company's stock. Report phantom stock if the value of the phantom stock was more than $1,000 at the end of the reporting period or if you received more than $200 in income during the reporting period. When designing these provisions, the company should take into accountpossible phantom stock valuations and company cash flow. List of Excel Shortcuts Similarly, a major event like thecoronavirus pandemic affects market valuesfor many companies. A phantom stock plan is a costly form of long-term incentive requiring a charge against the company's income statement. Please see www.pwc.com/structure for further details. By simulating stock ownership, without actually providing it, management ensures that equity does not become diluted for other shareholders. Description: Provide the name of the employer, write phantom stock, and indicate whether the phantom stock is vested. Phantom equity shares do not carry voting rights or similar rights associated with stock ownership. A phantom stock plan constitutes a deferred compensation plan. A phantom stock plan is a contractual agreement wherein a company promises to make cash payments to employees upon the achievement of certain conditions. In this case, the company must estimate the expected amount earned based on progress towards the target. Does the phantom stock plan comply with section 409A? Understandably, a lower issue phantom share value provides greater upside for the plan participant upon redemption: *Assume that the common stock price at redemption is $35. The company will customarily consider the phantom stock plan a benefit that requires disclosure in an S-8 filing with the SEC. Less expensive than offering employees an employee stock ownership plan (ESOP). stream Now each tranche of vested awards is treated as a separate award. Report your phantomstock and income from phantom stock in Part 2. For more information, see Section 409A Fundamentals. SARs often can be exercised any time after they vest. 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. Equity grants may give rise to voting rights or unforeseen minority rights under state law. A phantom stock plan and stock option plan both award employees from the share appreciation of the companys stock price. 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 Just as with stock awards, the purpose of a phantom stock plan is to generate an ownership mentality and reward key employees for helping to grow the business value. The purpose of the Chaparral Energy Phantom Stock Plan (the "Plan") is to provide deferred compensation to certain key employees (the "Participants") of Chaparral Energy. Enter phantom stock and cash-settled stock appreciation rights (CSARs). All rights reserved. This compensation may impact how and where listings appear. Reporting entities are required to describe all significant accounting policies in the financial statements. Phantom stock also provides organizations with certain restrictions in place to provide incentives tied to stock value. 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. There are two main types ofphantom stock plans. Get reusable documents specific to your state in the most extensive online forms library, with 24/7 access to your acquired samples. Are you still working? Publicly traded companies will want to be certain their phantom stock structure qualifies as performance-based compensation. The accounting treatment is more complicated if the vesting occurs gradually. The limit does not apply, however, to performance-based compensation. Large cash payments to employees, however, must be taxed as ordinary income rather than capital gains to the recipient and may disrupt the firm's cash flow in some cases. During the installment payout period, should earnings be credited on the balance at a specified interest rate? Choose from timely legislation and compliance alerts to monthly perspectives on the tax topics important to you. A stock option gives an investor the right, but not the obligation, to buy or sell a stock at an agreed-upon price and date. Phantom stock plans are deferred compensation plans and, as such, must be designed and documented to conform to the requirements of section 409A. We use cookies to personalize content and to provide you with an improved user experience. Rather than getting physical stock, the employee receives mock stock. Phantom stock can be provided to every employee, either across the board or distributed variably depending on performance, seniority, or other factors. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. Other reporting entities choose to include this information in a "Significant Accounting Policies" footnote, as described in. 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. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. <> It provides increased incentives as the value of the company increases. To ensure these tax results occur, companies should ensure that the terms of the phantom stock plan are in compliance with section 409A prior to the plan becoming effective. Because the phantom stock units are not actual equity in the partnership, such a plan should not raise any concerns over partners being considered employees. Visit rsmus.com/about for more information regarding RSM US LLP and RSM International. Once you have viewed this piece of content, to ensure you can access the content most relevant to you, please confirm your territory. Phantom equity does not have some of the drawbacks associated with providing actual equity. The plan must be designed and documented to conform to section 409A. The attributes of phantom stock units should be carefully considered to determine whether it is theright incentive planto meet a companys needs. As with phantom stock, this is normally paid out in cash, but it could be paid in shares. As a result, a phantom stock plan allows the participant to reap the benefits of an increasing share price without shareholder dilution. Qualifying Emerging Growth Companies, as defined in the Jumpstart Our Business Startups (JOBS) Act, and Smaller Reporting Companies, as defined in S-K 10(f),are permitted to omit the earliest year income statement and statements of comprehensive income, cash flows, and changes in stockholders equityin an initial public offering. By continuing to browse this site, you consent to the use of cookies. Typically, the valuation will follow an event that triggers phantom stock unit payouts so that the amount of such payouts can be determined. endobj For instance, a company could promise Mary, its new employee, that it would pay her a bonus every five years equal to the increase in the equity value of the firm times some percentage of total payroll at that point. 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. Learn more about how they work. Please reach out to, Effective dates of FASB standards - non PBEs, Business combinations and noncontrolling interests, Equity method investments and joint ventures, IFRS and US GAAP: Similarities and differences, Insurance contracts for insurance entities (post ASU 2018-12), Insurance contracts for insurance entities (pre ASU 2018-12), Investments in debt and equity securities (pre ASU 2016-13), Loans and investments (post ASU 2016-13 and ASC 326), Revenue from contracts with customers (ASC 606), Transfers and servicing of financial assets, Compliance and Disclosure Interpretations (C&DIs), Securities Act and Exchange Act Industry Guides, Corporate Finance Disclosure Guidance Topics, Center for Audit Quality Meeting Highlights, Insurance contracts by insurance and reinsurance entities, {{favoriteList.country}} {{favoriteList.content}}. At redemption, the companys common share price was $30. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below: A free, comprehensive best practices guide to advance your financial modeling skills, Financial Modeling & Valuation Analyst (FMVA), Commercial Banking & Credit Analyst (CBCA), Capital Markets & Securities Analyst (CMSA), Certified Business Intelligence & Data Analyst (BIDA), Financial Planning & Wealth Management (FPWM). 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. What's the purpose? Income Amount: Provide the exact amount of cash income over $200 during the reporting period. Phantom stock plans have financial implications for employees and companies that cut both ways: Pros. On redemption, in a phantom stock plan, the plan participant receives a cash payment. Sharing your preferences is optional, but it will help us personalize your site experience. Each plan sponsor should make a determination after consulting with its accounting advisors. Report the value of the phantom stock by selecting the appropriate category. In addition, Comparative financial statements provide historical context for a reporting entity's financial performance and enable users to identify trends or other relationships. He is a Chartered Market Technician (CMT). Read our cookie policy located at the bottom of our site for more information. Reporting Stock Acquired through a Phantom Stock Plan. Handbook: Financial statement presentation September 30, 2022. 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. In a full value phantom stock plan, the plan participant receives a cash payment equal to the value of the underlying asset (common stock) of the phantom stock at redemption. Thus, regardless of any vesting schedule, there is no locked-in value inherent in the phantom stock. There are also shareholder approval rules related to the deduction limitation under IRC 162 (m). In-depth guide on presentation and disclosure requirements under US GAAP, plus considerations under SEC regulations. All rights reserved. In general, the disclosure shall encompass important judgments as to appropriateness of principles relating to recognition of revenue and allocation of asset costs to current and future periods; in particular, it shall encompass those accounting principles and methods that involve any of the following: Financial statements shall include an explanation that the preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires the use of management's estimates. But that flexibility is also their greatest challenge. A closer look at phantom stock Considered restricted stock units (RSUs), phantom stock units are tied to the value of your company's stock and generally vest over a set period. If they do, they could be subject to ERISA rules (see below). Companies should address the following when formulating aspects of the written plan: Various equity compensation methods, including phantom stock units, can provide great incentive to the employees receiving them and the employer providing them by cultivating increased engagement that can boost company performance. Statutory options include Incentive Stock Options (ISO's) and options granted under an Employee Stock Purchase Plan (ESPP). Click here to extend your session to continue reading our licensed content, if not, you will be automatically logged off. This is the case even though the amounts are not subject to income tax until actually paid to the employee. In each year, the value is adjusted to reflect the additional pro-rata share of the award the employee has earned, plus or minus any adjustments to value arising from the rise of fall in share price. In a phantom stock plan, upon redemption of phantom stock, the plan participant receives cash compensation. 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). Care must be taken to avoid giving out too much to early participants and not leaving enough for later employees. Phantom stock plans are not tax-qualified, so they are not subject to the same rules as ESOPs and 401 (k) plans, provided they do not cover a broad group of employees. Please seewww.pwc.com/structurefor further details. An employee stock ownership plan (ESOP) enables employees to gain an ownership interest in their employer in the form of shares of company stock. Varying accrual schedules can be found in the market. The issuing price of phantom shares in a phantom stock plan is set by the company and not necessarily tied to the value of the companys stock at that time. It creates a sense of ownership in the success of the business. Stock compensation refers to the practice of rewarding employees with stock options that will vest, or become available for purchase, at a later date. About the Financial statement presentation guide& Full guide PDF. Phantom stock plans are not tax-qualified, so they are not subject to the same rules as ESOPs and 401(k) plans, provided they do not cover a broad group of employees. How will the phantom stock units be valued (i.e., based on a formula or an appraisal)? - Financial statements dated within 180 days Must be prepared in accordance with GAAP - Foreign private issuers must provide reconciliation to GAAP Provide audited financial statements (including footnotes) if available If disclosure is not provided to all investors in the offering prior to sale - the exemption is lost for the entire . 607 0 obj <>/Filter/FlateDecode/ID[<48C1A16090314945BC51EFB7EBB391C8><6C0F7AA95DE6A2458300B480FF3472C5>]/Index[594 23]/Info 593 0 R/Length 82/Prev 262895/Root 595 0 R/Size 617/Type/XRef/W[1 3 1]>>stream Even though it's not real, the phantom stock follows the price movement of the company's actual stock, paying out any resulting profits. It is potentially an "uncapped liability" to the company. Other companies may have one or more of these plans but want to supplement them for certain employees with another kind of plan. Despite their name, phantom stock plans are NQDC arrangements, not stock arrangements. In March, the common share price of Company A is $70. It is for your own use only - do not redistribute. A Startup's Equity Attracts New Hires "As a small employer in biotech, we don't currently offer a match in our 401(k) but we offer an employee stock purchase plan where employees can save up to 15 . A cash payment from Company A equal to the current common share price: $50 x 500 = $25,000. Because a phantom stock plan is a nonqualified deferred compensation plan, companies have a lot of flexibility in plan design as long as that flexibility is exercised before the plan becomes effective. At redemption, the companys common share price was $30. In general, if at redemption, the companys stock price is below the issuing price of the companys phantom stock, the plan participant is not entitled to a cash payment. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. 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. endstream endobj startxref 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. Phantom stock payments are usually made at a fixed, predetermined date. Phantom stock is a compensation plan that bestows upon the holder the right to receive a cash payment at a specified future point in time usually in conjunction with a specified future event or milestone.