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A Securities Granting Alternative

LaVerne L. Dotson; JD, CPA

As an alternative to granting an interest in stock or awarding stock options, a hospital or healthcare employer may establish a so-called phantom stock or shadow stock plan to its employees.

“Unit” Accounts

Under these arrangements the employee is treated as if he or she had received a certain number of shares of the company stock, but instead of actually issuing shares, the employer establishes an account for the employee.

The employer then issues “units” to the employee’s account. The number of units that the employee receives under such a contractual arrangement is pegged to the price or value of the company’s stock.

Once the units have been credited to the employee, the equivalent of dividends on these units are generally paid to the employee and are reinvested to purchase additional units or deferred with interest.

The plan normally provides for appropriate adjustment in the value of units if changes are made in the capitalization of the stock with respect to which the units are priced. Benefits under such a plan are usually deferred for a specific period of time or an event such as death or retirement. When benefits are payable, they may be paid in cash, either in a lump sum or installments, or in the form of stock.

Tax Considerations

The phantom stock is taxed like any other nonqualified deferred compensation plan. The granting of the phantom stock units is not taxable to the employee. When the cash or stock is distributed to the employee, it is taxed as ordinary income, equal to the amount of cash received or the value of the stock. If the stock distributed is subject to a substantial risk of forfeiture, it will be subject to taxation when such risk lapses in accordance with Code § 83(b).

Assessment

Because a phantom stock plan does not require the actual issuance of shares of the employer’s stock, it may enable the employer to offer much of the practical benefit of stock ownership without causing dilution of equity, securities law problems as to stock that would otherwise have been issued, or other problems such as risking the loss of S corporation status.

Conclusion

And so, what has been your experience with these so-called phantom-stock plans?

Related Information Sources:

Practice Management: http://www.springerpub.com/prod.aspx?prod_id=23759

Financial Planning: http://www.jbpub.com/catalog/0763745790

Risk Management: http://www.jbpub.com/catalog/9780763733421

Healthcare Organizations: www.HealthcareFinancials.com

Administrative Terms: www.HealthDictionarySeries.com

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