February 13, 2017
- Review the books and records of the company.
- Vote for boards of directors or managers.
- Receive profit distributions.
This could lead to disagreement at crucial times, for example, when the majority shareholders want to sell the company.
Phantom stock is a promise to pay a bonus in the future equal in value to a fixed number of company shares. Many closely-held companies find phantom stock attractive because it gives key employees a stake in the financial success of the company without giving away actual stock.
Before implementing a phantom stock plan, the company should consider:
- Whether it has sufficient cash flow to pay bonuses when due.
- The cost of doing annual or periodic valuations of the company’s stock and what approach to take to determine the stock’s value.
- The importance of structuring the plan to comply with:
- the Employee Retirement Income Security Act of 1974 (ERISA), which imposes onerous requirements on employee pension benefit plans, and
- Section 409A of the Internal Revenue Code (Section 409A), which sets out comprehensive rules governing the taxation of nonqualified deferred compensation.
Most phantom stock plans are designed to either:
- Satisfy the requirements of a “top hat plan” which is subject to ERISA but exempt from many of ERISA’s burdensome requirements.
- Avoid ERISA coverage by limiting deferral opportunities.
All phantom stock plans should be drafted to comply with, or be exempt from, Section 409A’s requirements.
Learn more from the experts at Practical Law.