Chapter 38 Employee Benefit & Retirement Planning Restricted Stock Plan Copyright 2009, The National Underwriter Company1 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?

Chapter 38 Employee Benefit & Retirement Planning Restricted Stock Plan Copyright 2009, The National Underwriter Company2 1.employee can defer taxation until year restricted stock option becomes ‘substantially vested’ 2.employee gains interest in increased value of company stock 3.grants an equity interest that can be removed if executive leaves prematurely or goes t work for competitor 4.executive has advantages of stock ownership, but not taxed until substantially vested Advantages

Chapter 38 Employee Benefit & Retirement Planning Restricted Stock Plan Copyright 2009, The National Underwriter Company3 1.employer does not get tax deduction until employee becomes substantially vested in plan 2.employer may have no control over amount and timing of tax deduction 3.S corporations must be careful to not create a second class of stock, causing loss of S election 4.issue of new shares of stock can dilute company ownership 5.market value of stock may bear little relationship to executive performance Disadvantages

Chapter 38 Employee Benefit & Retirement Planning Restricted Stock Plan Copyright 2009, The National Underwriter Company4 1.Employee retention 2.Discourage misconduct 3.Provide incentives What Can be Accomplished With Restrictions on Stock

Chapter 38 Employee Benefit & Retirement Planning Restricted Stock Plan Copyright 2009, The National Underwriter Company5 1.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

Chapter 38 Employee Benefit & Retirement Planning Restricted Stock Plan Copyright 2009, The National Underwriter Company6 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

Chapter 38 Employee Benefit & Retirement Planning Restricted Stock Plan Copyright 2009, The National Underwriter Company7 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 unlikely event does not constitute a substantial risk of forfeiture, e.g. commit embezzlement Tax Implications

Chapter 38 Employee Benefit & Retirement Planning Restricted Stock Plan Copyright 2009, The National Underwriter Company8 2.IRC Section 83(b): executive can elect within 30 days of property receipt to recognize as income when received 3.stock may have restriction that reduces stock value rather than forfeiture provision, if so, value of stock included in income when received, but at reduced value Tax Implications

Chapter 38 Employee Benefit & Retirement Planning Restricted Stock Plan Copyright 2009, The National Underwriter Company9 4.value of stock taxed as compensation income in year employee becomes substantially vested 5.gain on subsequent sale taxed as capital gain 6.employer receives tax deduction when employee becomes substantially vested Tax Implications

Chapter 38 Employee Benefit & Retirement Planning Restricted Stock Plan Copyright 2009, The National Underwriter Company10 1.Equity based compensation is very useful as an executive incentive in high growth companies. 2.A stock plan can be more valuable than cash compensation. 3.A restricted stock plan can be used to keep a recent retiree available for consulting services for a specified length of time. True or False?

Chapter 38 Employee Benefit & Retirement Planning Restricted Stock Plan Copyright 2009, The National Underwriter Company11 4.An employee may have to pay tax when restricted stock is received even though, under state law, the employee does not completely own the stock. 5.The ability to treat subsequent gains in stock value at favorable capital gain rates makes a Section 83(b) attractive to executives. True or False?

Chapter 38 Employee Benefit & Retirement Planning Restricted Stock Plan Copyright 2009, The National Underwriter Company12 Hoes does a restricted stock plan affect an employer’s accounting statements? Discussion Question