Liz feels that her employer has reached its pinnacle

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per share. Liz feels that her employer has reached its pinnacle and is about to start a dramatic descent as a recession is imminent and they are about to lose their largest customer to an international start-up. What are Liz's options? A: With a SAR, Liz has the option to realize the value whenever she likes. She can pull the trigger right now and realize a gain of $130 per share ($150 - $20) times all shares that she has rights to. Q: What is the difference between Phantom Stock and Stock Appreciation Rights? A: Phantom stock and stock appreciation rights are very similar. They both offer units of appreciation which are linked to the financial performance of a company without involving actual ownership. Phantom stock will have an exercise date which is selected by the employer. On the other hand, stock appreciation rights generally have a flexible exercise date which can be selected by the covered employee. Restricted Stock Can you imagine a birthday where you are given a brand new iPhone with the understanding that, if you fail to meet a specific behavior target, then you will lose the iPhone? That is essentially how restricted stock works. Restricted stock is a gift of shares from the employer to an employee, but the gift contains a caveat that all shares are forfeited if the employee leaves the company within a certain window of time. This is a great way to retain key talent! While the restricted shares are owned by an employee, they will collect any dividends paid to those shares. This form of equity-based compensation is a great way to encourage employee loyalty and to marry the employee to the performance of the company. From the employee’s perspective, this method of compensation is more secure than a traditional non-qualified deferred compensation plan because the stock is registered in the employee’s name and is therefore not subject to the creditors of the employer. Once the substantial risk of forfeiture has been removed, the shares will become taxable to the employee. At this point in time, the value in the company’s stock is treated as ordinary income and the employer will, therefore, receive a tax deduction. There is one special tax advantage available to recipients of restricted stock. This is known as the §83(b) election . An employee with restricted stock can use the §83(b) election to be taxed on the value of the stock at the grant date. They have 30 days from the grant date to make this election. Using §83(b) means that the grant date price is taxed and with an appreciating stock, this could be a significant saving. Even greater saving is possible because the grant price now becomes the cost basis and any addition appreciation (or depreciation) will be taxed as a capital gain. The holding period begins on the grant date, which means that as long as the period of restriction is at least 1 year and 1 day, then any gain beyond the grant price is taxed at the very favorable long-term capital gains tax rates. However, this is very risky for the employee. If they make the §83(b) election to be taxed at the grant date, there is no tax
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  • Spring '14
  • VOSS,JAMESA
  • Cash balance plan

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