Stock Plans

A stock plan is a form of employee compensation that provides your employees with either stock or an amount of cash that is based on the performance of your company’s stock. There are numerous types of stock plans that you can offer to your employee, including employee stock ownership plans (ESOPs), restricted stock plans, stock appreciation rights (SARs), stock option plans, and employee stock purchase plans.

Employee Stock Ownership Plans (ESOPs)/Stock Bonus Plans

A stock bonus plan is an employer-sponsored retirement plan, similar to a profit-sharing plan, that provides benefits to employees in the form of an employer company’s stock. The most common type of stock bonus plan is the employee stock ownership plan (ESOP). Generally, an ESOP requires you to establish a trust and contribute either new shares of your own stock or cash contributions to the trust on behalf of your participating employees (generally, a full-time employee over the age of 21). If you make cash contributions, the trust fiduciary then uses the contributions that accumulate within the trust to purchase your company’s stock. The trust fiduciary must also set up accounts within the trust for each participating employee.

The trust fiduciary allocates the shares of your company’s stock among the various accounts according to a pre-established formula. As your employees’ length of service with your company increases, they acquire rights (known as vesting) to the shares in their individual account. Generally, an employee must be 100 percent vested within a certain time period (usually within six years). Once the employee receives an actual distribution of the shares (usually after retirement or termination of employment), he or she can choose to either hold or sell the stock. If the stock is not publicly traded, the employee must have the right to sell (also known as put) the stock to your company at its fair market value.

Restricted Stock Plan

Under a restricted stock plan, you transfer shares of your company’s stock to an employee, usually at little or no cost to the employee and subject to certain restrictions or limitations. Generally, the restrictions prevent the employee from selling or transferring the stock and require the employer to forfeit the stock if the employee fails to meet the terms of the restricted stock program, for example, if the employee leaves employment within a certain number of years. As owners of the shares of restricted stock, employees have voting and dividend rights. However, the Internal Revenue Service (IRS) considers you to be the owner of the restricted stock for tax purposes until the stock becomes unrestricted (i.e., until the transfer and forfeiture restrictions have lapsed).

Stock Appreciation Rights (SARs)

If you would like to provide your employees with a benefit that is tied in with your company’s success without having to relinquish stock ownership, you can offer your employees stock appreciation rights (SARs). SARs provide your employees with compensation (usually a cash bonus) that equals the difference between the value of the stock when the SARs are granted and the value of the stock when the SARs are exercised.

Stock Option Plan

A stock option plan allows you to grant selected employees options to purchase stocks in your corporation. Typically the option price is the value of the stocks on the date the option is granted. The option may have a term of several years, but also may not be exercisable by the employee unless and until specified conditions are satisfied. A stock option can be either an “incentive stock option” (ISO) or a “nonqualified stock option” (NQSO). An ISO meets certain IRS requirements and provides some tax advantages to the employee. An NQSO does not meet the IRS requirements for ISOs and therefore does not provide the same tax advantage as an ISO. However, NQSOs are more flexible and may produce tax advantages to the employer.

Employee Stock Purchase Plan

An employee stock purchase plan is an arrangement meeting certain IRS requirements and allows your employees to purchase a specific amount of company stock at a specific price (usually at a discount from the stock’s fair market value). The employee usually purchases the stock through a salary reduction program. Funds are withdrawn from your employee’s salary and accumulate in an account. The employee can then make stock purchases from the account. The tax advantages of an employee stock purchase plan to the employee are similar to the tax advantages of an ISO.

If you have questions or need assistance, contact the experts at Henssler Financial:

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• Email: experts@henssler.com
• Phone: 770-429-9166