Employee Benefits Deferred compensation: pay me later  Hopefully, lower tax rate when funds are received  Only $1 million of compensation per person can be deducted on income tax return for publicly traded companies  Must agree to deferral prior to earning compensation  Must avoid constructive receipt Funds can’t be set aside for you  Must have risk of forfeiture Unsecured creditor of employer

Employee Benefits Deferred compensation: pay me later  Secular trusts: hold funds for paying deferred comp Not subject to creditors’ claims Consequently, employees are taxed as soon as funds are transferred to trust  Employer also gets deduction at that time  Rabbi trust Subject to creditor’s claims Consequently, not taxed until employee receives funds

Employee Benefits Phantom stock  Units representing company’s common stock shares  Receive payment in 5, 10, 15 years or at retirement based on increase in stock price Payment is ordinary income subject to FICA and company gets deduction  Reduces downside risk to executive if stock price falls

Employee Benefits Nonqualified stock options (NQSOs)  Generally granted with exercise price = stock price at date of grant  Typically can exercise over next 10 years by paying cash or tendering shares owned  If can determine FMV of options at date of grant and no restrictions on options Ordinary income at date of grant = value of options

Employee Benefits Nonqualified stock options (NSOs)  Generally restrict transfer of options so no income at time of grant  Then, ordinary income at date of exercise FMV of stock date of exercise – option price No AMT preference item

Employee Benefits Stock Appreciation Rights (SARs)  Receive payment for increase in value of stock Ordinary income and subject to FICA tax Company gets deduction for same amount  Don’t actually buy stock  May be paid in cash or stock

Employee Benefits Restricted Stock  Exec loses stock if doesn’t work for company until a certain date  Shares not vested until that date Ordinary income when vested  Unless make IRC Sec 83 election to include FMV stock – Purchase price  Then subsequent increase is capital gains Company gets deduction for that amount

Employee Benefits Employee Stock Purchase Plans (ESPPs)  Must meet nondiscrimination coverage tests for qualified plans  Gives employees chance to buy stock at a discount (no more than 15%) Limited to $25,000 stock per year  Similar to ISOs Long-term capital gains (15% maximum rate) if:  Stock sold more than two years after option was granted and  Stock sold more than one year after option was exercised  Always ordinary income for “discount” amount

Employee Benefits Junior Stock  Restricted stock exec can convert into common stock if goals are met  Buys junior stock at a discount since value is less doe to risk won’t be able to convert  Capital gains = sales price – purchase price