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. 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. Stock appreciation rights (SARs) are a type of employee compensation linked to the company's stock price during a predetermined period. Reporting Stock Acquired through a Phantom Stock Plan. PwC. EBPAQC Alert No. Yes, there is. How frequently will phantom stock units be granted (e.g., a single upfront grant or annual grants)? 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. Click here to extend your session to continue reading our licensed content, if not, you will be automatically logged off. 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. It should be noted that even if payments are made after the grantee terminates service, the nature of the payment is generally still treated as compensation for tax purposes and reported on Form W-2. She has worked in multiple cities covering breaking news, politics, education, and more. A foreign parent may wish to award phantom stock units to executive employees of a U.S. subsidiary to avoid the complications of selling stock on a foreign exchange. For more information, see Section 409A Fundamentals. endobj 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. 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. If they do, they could be subject to ERISA rules (see below). Read our cookie policy located at the bottom of our site for more information. In most cases, a valuation is required upon the employees termination, death, or disability. Unlike SARs, phantom stock may reflect dividends and stock splits. With that said, the company typically follows a valuation policy for the issuing price of phantom shares. Now each tranche of vested awards is treated as a separate award. What's the purpose? This can apply to a limited liability corporation (LLC), a sole proprietor or S-companies restricted by the 100-owner rule. The cash payment per phantom stock would be $20. This may restrict some of the flexibility of the plan design. How broadly or narrowly should the plan define what qualifies as cause for termination? 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. Ready to Speak with a Phantom Stock Expert Now?Call (888) 703-0080 or complete our contact form. We use cookies to personalize content and to provide you with an improved user experience. Each member firm is a separate legal entity. Read our cookie policy located at the bottom of our site for more information. Investments by and distributions to owners during the period. Our book Equity Alternatives: Restricted Stock, Performance Awards, Phantom Stock, SARs, and More includes a detailed chapter on phantom stock and SARs. This is the case even though the amounts are not subject to income tax until actually paid to the employee. 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 cash payment per phantom stock would be $30. 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. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. The first issue is figuring out how much phantom stock to give out. The two main types of phantom stock plans are: In an appreciation only phantom stock plan, the plan participant receives a cash payment equal to the difference between the companys stock price at redemption and the issuing price of the phantom stock. Accounting topics or transactions that are not material or not applicable to a reporting entity generally do not require separate presentation or disclosure, unless otherwise indicated. Please seewww.pwc.com/structurefor further details. On redemption, in a phantom stock plan, the plan participant receives a cash payment. Unlike SARs, phantom stock may reflect dividends and stock splits. Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. 2019 - 2023 PwC. Internal Revenue Service. Refer to the following PwC guide sections for guidance on those matters: Company name must be at least two characters long. 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. Income Amount: Provide the exact amount of cash income over $200 during the reporting period. An employee stock ownership plan (ESOP) enables employees to gain an ownership interest in their employer in the form of shares of company stock. If so, at what rate? At the time the payment becomes taxable, the company is entitled to a deduction in a corresponding amount (subject to general limitations under section 162 with respect to the amount being reasonable and not excessive). Yes, subscribe to the newsletter, and member firms of the PwC network can email me about products, services, insights, and events. In other cases, valuation may be required periodically, such as annually, or on a specific future date. A Startup's Equity Attracts New Hires "As a small employer in biotech, we don't currently offer a match in our 401(k) but we offer an employee stock purchase plan where employees can save up to 15 . Choose from timely legislation and compliance alerts to monthly perspectives on the tax topics important to you. Will any funding mechanism be used to help the company meet fund its future obligations to pay the amount owed to recipients? Stock appreciation rights (SARs) are similar to a phantom stock-based program. The accounting treatment is more complicated if the vesting occurs gradually. The amount of the cash payment is linked to the market value of a predetermined number of shares of the company's stock. Phantom stock is a compensation plan that bestows upon the holder the right to receive a cash payment at a specified future point in time usually in conjunction with a specified future event or milestone. There are also shareholder approval rules related to the deduction limitation under IRC 162 (m). T8g_vwZ4Yj},_A?+:8eg^I_nLzJ.?!(siS&M=pd3+GsQWr3We+$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&? Situations in which a company may not want to issueactual equityinclude: A company can grant an employee a designated number of phantom stock units or a percentage interest in the companys value pursuant to a prescribed valuation method; this can be done once or multiple times. Phantom stock can be provided to every employee, either across the board or distributed variably depending on performance, seniority, or other factors. A type of deferred employee compensation plan where plan participants benefit from the upside of a companys share price without actually receiving company shares. Shares are not actually issued or transferred to the option-. The idea of phantom stock is to provide the benefit of stock appreciation without transferring actual stock to the employee. A phantom stock plan could be a potential, uncapped liability for the issuing company due to the fact that the payment is tied to the share price at redemption. Are you still working? To learn why sharing value with those who drive growth is so critical to your pay strategy, download and read our report today! Description : Provide the name of the employer, write "phantom stock," and indicate whether the phantom stock is vested. To learn why sharing value with those who drive growth is so critical to your pay strategy, download and read our report today! . 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. For example, vesting may be cliff or graded, time-based, or based on the achievement of specified financial performance goals. The attributes of phantom stock units should be carefully considered to determine whether it is theright incentive planto meet a companys needs. At that point, the value of the award, minus any consideration paid for it (there usually is none) is taxed as ordinary income to the employee and is deductible by the employer. For example, the company could grant the employee a 5% interest initially and increase the interest to 10% after the employee completes five years of service. 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). The vesting and forfeiture provisions contained in the phantom stock plan or individual grant agreement determine whether and when the executives rights are vested. But that flexibility is also their greatest challenge. 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. 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. Second, the equity of the company must be valued in a defensible, careful way. when the vesting is triggered by a performance event, such as a profit target. Management might consider materiality of the related account, as well as the requirements of users, such as investors, analysts, financial institutions, and other constituents. Will special vesting rules apply in the case of death, disability, or attainment of specified normal retirement age? The value of a phantom stock unit may be measured by the value of a full share of company stock, or it may be based just on the appreciation in value during a specified time frame. Similar toemployee stock options(ESO), SARs are beneficial to the employee when company stock prices rise; the difference with SARs is that employees do not have to pay theexercise price, but receive the sum of the increase in stock or cash. 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. This alert contains information about EBP financial statement disclosures related to COVID-19, CARES Act, and SECURE Act. For example, assume John was issued 500 phantom shares of Company A in January that are worth $50 per share and are redeemable in March. Depending on the terms and conditions, restricted stock units may . Phantom stock payments are usually made at a fixed, predetermined date. Does the phantom stock plan comply with section 409A? PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Parameters and Trading, With Examples, Employee Stock Options (ESOs): A Complete Guide, What Is a Pension? 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. Description: Provide the name of the employer, write phantom stock, and indicate whether the phantom stock is vested. holder when an option is exercised, but rather the right to receive an award based on the value of the company . Thus, regardless of any vesting schedule, there is no locked-in value inherent in the phantom stock. ERISA (the Employee Retirement Income and Security Act of 1974) is the federal law that governs retirement plans. What percentage of the companys value should be dedicated or reserved for this plan? 451. Ready to Speak with a Phantom Stock Expert Now?Call (888) 703-0080 or complete our contact form. It is for your own use only - do not redistribute. 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. The company must use a formula to estimate the present value of the award at grant, making adjustments for expectd forfeitures. %%EOF Handbook: Investments September 30, 2022. Her expertise is in personal finance and investing, and real estate. Welcome to Viewpoint, the new platform that replaces Inform. The company will customarily consider the phantom stock plan a benefit that requires disclosure in an S-8 filing with the SEC. How should a change in control be defined? 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. After a period of time, the cash value of the phantom stock is distributed to the participating employees. Publicly traded companies will want to be certain their phantom stock structure qualifies as performance-based compensation. increase in value of the shares subject to the option. It provides increased incentives as the value of the company increases. This content is copyright protected. 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). Contact Us Todaydocument.write(checkCookie()), 2019 - PhantomStockOnline.comPowered by VisionLinkAll Rights Reserved. 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. For both phantom stock and SARs, employees are taxed when the right to the benefit is exercised. Other companies may have one or more of these plans but want to supplement them for certain employees with another kind of plan. Unusual or innovative applications of GAAP. Or it could promise to pay her an amount equal to the value of a fixed number of shares set at the time the promise is made. 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. In other words, no actual stock is ever awarded to the employee under a phantom stock plan. However, unlike actual stock, the award does not confer equity ownership in the company. 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. To receive more complimentary information about Phantom Stock from our expert advisors, please provide us with your contact information below. Rather than getting physical stock, the employee receives mock stock. 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. For example, assume the issuing price of the phantom stock is $10. Accounting As described in the Accounting section, phantom stock plans require variable accounting. Sharing equity is a major step that should be considered thoroughly and carefully. 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. Pros and Cons of Phantom Stock Plans. 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. - 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 . Handbook: Financial statement presentation September 30, 2022. 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. There are two main types ofphantom stock plans. Do Not Sell or Share My Personal Information (California). Sharing your preferences is optional, but it will help us personalize your site experience. Once you have viewed this piece of content, to ensure you can access the content most relevant to you, please confirm your territory. 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. 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. <> Statutory Stock Option Plans require shareholder approval within 12 months before or after adoption by the board of directors. A phantom stock plan, also called a shadow stock plan, is a type of deferred employee compensation plan where the type of shares issued to plan participants are phantom shares instead of company shares. Public companies should consider this potentially higher cost for phantom stock when designing their plans. How will the phantom stock units be valued in the event of a merger, consolidation, or a change in control of the company? In addition, companies should be aware that events outside the companys control also affect its value if a third-party appraisal is used. Most companies follow the guidance offered under ASC 718-10-35-8 which reads as follows: The tables below illustrate these two approaches, referred to here as Separate Method and Entire Method. Each assumes a PSO plan with a 5-year vesting schedule equal of 20% per year. Third, tax and regulatory problems may make phantom stock more dangerous than it seems. As the phantom stock units become vested, the value of the phantom stock units is includible as wages subject to FICA taxes. This compensation may impact how and where listings appear. "Full value" plans pay both the value of the underlying stock as well as any appreciation. Phantom equity does not have some of the drawbacks associated with providing actual equity. 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. Your go-to resource for timely and relevant accounting, auditing, reporting and business insights. Care must be taken to avoid giving out too much to early participants and not leaving enough for later employees. Figure FSP 1-1 depicts the reporting periods required by the SEC for financial statements of public companies. Financial statement presentation. The company must record a compensation charge on its income statement as the employee's interest in the award increases. The company's owners want to share the economic value of equity, but not equity itself. In a phantom stock plan, upon redemption of phantom stock, the plan participant receives cash compensation. 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 In-depth guide on presentation and disclosure requirements under US GAAP, plus considerations under SEC regulations. A full set of financial statements for a period shall show all of the following: In any one year it is ordinarily desirable that the statement of financial position, the income statement, and the statement of changes in equity be presented for one or more preceding years, as well as for the current year. SARs often can be exercised any time after they vest. With that said, the value of the phantom stock at redemption is tied to the companys stock price. Finally, if the plan is intended to benefit more than key employees and defers some or all payment until after termination or retirement, it may be considered a de facto "ERISA plan." However, there is one key difference between the two plans. 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. By continuing to browse this site, you consent to the use of cookies. The taxation of the bonus would be much like any other cash bonus--it is taxed as ordinary income at the time it is received. All rights reserved. As such, the sponsoring company must recognize the plan expense ratably over the vesting period. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Phantom stock plans have financial implications for employees and companies that cut both ways: Pros. Sufficient versatility for private and public companies to use. Discover what makes RSM the first choice advisor to middle market leaders, globally. Please see www.pwc.com/structure for further details. All other aspects of the plan would be the same. stream Should forfeiture provisions apply if the employee enters into competition with the company or is terminated for cause? Visit rsmus.com/about for more information regarding RSM US LLP and RSM International. For example, a company could exclude gain or loss attributable to operations or sales of certain divisions of the company. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. As with phantom stock, this is normally paid out in cash, but it could be paid in shares. Otherwise, select the None (or less than $201) category. In March, the common share price of Company A is $70. What behavior or performance levels is the company trying to incentivize? This chapter introduces the general concepts of financial statement presentation and disclosure that underlie the detailed guidance that is covered in the remaining chapters of this guide. These financial statements must include consolidated balance sheets and statements of . 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. It represents a bonus payable at a future date if certain objectives are met or if a specific event occurs, like the sale of the company. Similarly, a major event like thecoronavirus pandemic affects market valuesfor many companies. Employee Stock Ownership Plan (ESOP): What It Is, How It Works, Advantages, What Are Stock Options? 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. Xylophone Technologies Corporation, unvested phantom stock. This is in comparison to a stock option plan, where the plan participant receives common stock. Under ASC 718, companies recognize the fair value of those awards in their financial statements, generally beginning on the date the awards are granted. None of these plans should be set up without the detailed advice of qualified legal and financial counsel. Learn more about how they work. He is a Chartered Market Technician (CMT). Should the payment be made in a lump sum or in installments over a period of years? Phantom stock plans have a lot in common with traditional nonqualified stock plans. Such plans must conform to IRS Section 409A and be vetted by an attorney with plan details specified in writing. Equity Alternatives: Restricted Stock, Performance Awards, Phantom Stock, SARs, and More. Each plan sponsor should make a determination after consulting with its accounting advisors. A pension plan is an employee benefit that commits the employer to make regular payments to the employee in retirement. "Appreciation only" plans do not include the value of the actual underlying shares themselves, and may only pay out the value of any increase in the company stock price over a certain period of time that begins on the date the plan is granted. It is potentially an "uncapped liability" to the company. Report phantom stock if the value of the phantom stock was more than $1,000 at the end of the reportingperiod or ifyou received more than $200 in income during the reporting period. Select a section below and enter your search term, or to search all click Because they can be designed in so many ways, many decisions need to be made about such issues as who gets how much, vesting rules, liquidity concerns, restrictions on selling shares (when awards are settled in shares), eligibility, rights to interim distributions of earnings, and rights to participate in corporate governance (if any). However, the company and the employee would each be subject to Medicare payroll tax since the Medicare tax is imposed on total wages, without any wage cap. 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. It provides a level of reassurance to employees since phantom stock programs are generally backed in cash. 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 . endobj 594 0 obj <> endobj 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? 616 0 obj <>stream For these companies, phantom stock and stock appreciation rights may be very attractive. 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. Select a section below and enter your search term, or to search all click 3 0 obj Provide the exact amount of cash income over $200 during the reporting period. Phantom stock can help in getting an executive team to think and act like equity partners.