This chapter covers restricted stock compensation plans. The focus on when such a plan would be used is for employee retention and discouraging certain types of employee conduct. Advantages and disadvantages are discussed, with special mention of S corporation considerations. | An arrangement to compensate executives by giving them shares of stock subject to certain restrictions or limitations Usually is stock of employer corporation or subsidiary What is it? Copyright 2009, The National Underwriter Company employee can defer taxation until year restricted stock option becomes ‘substantially vested’ employee gains interest in increased value of company stock grants an equity interest that can be removed if executive leaves prematurely or goes t work for competitor executive has advantages of stock ownership, but not taxed until substantially vested Advantages Copyright 2009, The National Underwriter Company employer does not get tax deduction until employee becomes substantially vested in plan employer may have no control over amount and timing of tax deduction S corporations must be careful to not create a second class of stock, causing loss of S election issue of new shares of stock can dilute company ownership market value of stock may bear little relationship to executive performance Disadvantages Copyright 2009, The National Underwriter Company Employee retention Discourage misconduct Provide incentives What Can be Accomplished With Restrictions on Stock Copyright 2009, The National Underwriter Company under Section 83, value of restricted property tax deferred to employee until ‘substantially vested’ unless employee makes Section 83(b) election to include it in income in year received Tax Implications Copyright 2009, The National Underwriter Company Substantial vesting property is NOT vested as long as property is subject to ‘substantial risk of forfeiture’ not transferable to a third party free of this risk of forfeiture Tax Implications Copyright 2009, The National Underwriter Company Substantial risk of forfeiture generally exists IF employee must return property unless complete specific term of service employee fails to meet incentive targets employee goes to work for competitor a forfeiture due to . | An arrangement to compensate executives by giving them shares of stock subject to certain restrictions or limitations Usually is stock of employer corporation or subsidiary What is it? Copyright 2009, The National Underwriter Company employee can defer taxation until year restricted stock option becomes ‘substantially vested’ employee gains interest in increased value of company stock grants an equity interest that can be removed if executive leaves prematurely or goes t work for competitor executive has advantages of stock ownership, but not taxed until substantially vested Advantages Copyright 2009, The National Underwriter Company employer does not get tax deduction until employee becomes substantially vested in plan employer may have no control over amount and timing of tax deduction S corporations must be careful to not create a second class of stock, causing loss of S election issue of new shares of stock can dilute company ownership market value of stock may bear little
