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The SARs Alternative to Stock Transfer
LaVerne L. Dotson; JD, CPA
An alternative to the actual transfer of corporate securities or shares to a doctor, nurse or other hospital employee is the issuance of so-called stock appreciation rights (SARs).
A Contractual Agreement
SARs are a contractual arrangement that, when exercised, entitles an employee to receive, in either stock, cash, or a combination of the two, an amount equal to the appreciation in the employer’s stock subsequent to the date the SARs were granted (or related to such appreciation, if the SARs are valued higher than the FMV of the stock when the SARs were granted).
Tax Consequences
The grant of SARs does not constitute the constructive receipt of income even though the option is immediately exercisable, because the exercise of the option means that the grantee will not get the benefit of additional appreciation of the stock on which the value of the SARs is based.
Any declarable income with SARs occurs at the sale, not acquisition.
Income received from the exercise of SARs is ordinary, and is equal to the amount of cash received or the value of the appreciated stock received. This amount will generally be reportable in the income of the employee in the year of receipt; however, if the SARs are exercised for stock and the stock is subject to a substantial risk of forfeiture, it will be subject to tax when the substantial risk of forfeiture lapses pursuant to IRC Code § 83, discussed in the Executive-Post previously.
Hospital or Medical Employer Deduction
When the SARs are exercised, a deduction is available to the hospital or medical corporate employer.
Assessment
The income from the SARs is also subject to withholding and employment taxes on the employer and employee. As a practical matter, if the individual is an employee at the time the tax is determined, there will often be very little additional payroll taxes to pay, because he or she will already have exceeded the Social Security taxable wage base.
Conclusion
Does the above information agree with your experience with SARs; please comment and opine?
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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