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Receiving Employer Securities

[By LaVerne L. Dotson; JD, CPA]

There are a number of different methods, other than qualified retirement plans [403(b) and 401(k)], by which hospital stock may be transferred to hospitalists, or other medical employees.

Stock Bonus Plans

The first and simplest method is a stock bonus, whereby the employer makes an outright grant of shares to the employee. In this case, the employee immediately owns his or her shares and has full voting and dividend rights. The employee is taxed at ordinary income rates on the full value of the stock when it is received. This sort of arrangement is very beneficial to the employee, since he or she is able to acquire stock for a cost of the income tax payable on receipt of the stock.

Of course, cash flow may not always be sufficient to support increased income taxes due for non-cash compensation.

Thus, if the employee receives $10,000 worth of stock, he or she has essentially acquired the stock for $2,500, if he or she is in the 25% marginal tax bracket.

Further Restrictions May Apply

However, the hospital employer may insist that when the shares are granted the employee satisfy certain conditions either relating to continued employment for a period of time or attainment of certain performance goals. Until the restrictions are met, the shares cannot be sold and remain subject to forfeiture.

Using restriction periods ensures that employees will hold their shares and helps support employee retention.

Moreover, because grants can be made contingent on meeting specific goals, employers may create a stronger performance linkage than stock price alone.

Assessment

Of course, as soon as the rights to the stock are not subject to a substantial risk of forfeiture, the employee is subject to ordinary income taxation. The amount to be included in income is the excess of the fair market value of the stock at the time it is no longer subject to the risk of forfeiture.

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OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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• FINANCE: Financial Planning for Physicians and Advisors
• INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors
• Dictionary of Health Economics and Finance
• Dictionary of Health Information Technology and Security

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