Restricted Stock Plan
Chapter 38
Employee Benefit & Retirement Planning
What is it?
An arrangement to compensate executives by giving
them shares of stock subject to certain restrictions or
limitations
Usually is stock of employer corporation or subsidiary
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Restricted Stock Plan
Chapter 38
Employee Benefit & Retirement Planning
Advantages
1. employee can defer taxation until year restricted
stock option becomes ‘substantially vested’
2. employee gains interest in increased value of
company stock
3. grants an equity interest that can be removed if
executive leaves prematurely or goes t work for
competitor
4. executive has advantages of stock ownership, but
not taxed until substantially vested
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Restricted Stock Plan
Chapter 38
Employee Benefit & Retirement Planning
Disadvantages
1. employer does not get tax deduction until employee
becomes substantially vested in plan
2. employer may have no control over amount and
timing of tax deduction
3. S corporations must be careful to not create a
second class of stock, causing loss of S election
4. issue of new shares of stock can dilute company
ownership
5. market value of stock may bear little relationship to
executive performance
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Restricted Stock Plan
Chapter 38
Employee Benefit & Retirement Planning
What Can be Accomplished With Restrictions
on Stock
1. Employee retention
2. Discourage misconduct
3. Provide incentives
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Restricted Stock Plan
Chapter 38
Employee Benefit & Retirement Planning
Tax Implications
1. under Section 83, value of restricted property tax
deferred to employee until ‘substantially vested’
unless employee makes Section 83(b) election to
include it in income in year received
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Restricted Stock Plan
Chapter 38
Employee Benefit & Retirement Planning
Tax Implications
Substantial vesting
property is NOT vested as long as property is
– subject to ‘substantial risk of forfeiture’
– not transferable to a third party free of this risk of forfeiture
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Restricted Stock Plan
Chapter 38
Employee Benefit & Retirement Planning
Tax Implications
Substantial risk of forfeiture generally exists IF
– employee must return property unless complete specific
term of service
– employee fails to meet incentive targets
– employee goes to work for competitor
a forfeiture due to unlikely event does not constitute a
substantial risk of forfeiture, e.g. commit embezzlement
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Restricted Stock Plan
Chapter 38
Employee Benefit & Retirement Planning
Tax Implications
2. IRC Section 83(b): executive can elect within 30
days of property receipt to recognize as income
when received
3. stock may have restriction that reduces stock value
rather than forfeiture provision, if so, value of stock
included in income when received, but at reduced
value
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Restricted Stock Plan
Chapter 38
Employee Benefit & Retirement Planning
Tax Implications
4. value of stock taxed as compensation income in year
employee becomes substantially vested
5. gain on subsequent sale taxed as capital gain
6. employer receives tax deduction when employee
becomes substantially vested
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Restricted Stock Plan
Chapter 38
Employee Benefit & Retirement Planning
True or False?
1. Equity based compensation is very useful as an
executive incentive in high growth companies.
2. A stock plan can be more valuable than cash
compensation.
3. A restricted stock plan can be used to keep a recent
retiree available for consulting services for a
specified length of time.
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Restricted Stock Plan
Chapter 38
Employee Benefit & Retirement Planning
True or False?
4. An employee may have to pay tax when restricted
stock is received even though, under state law, the
employee does not completely own the stock.
5. The ability to treat subsequent gains in stock value
at favorable capital gain rates makes a Section
83(b) attractive to executives.
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Restricted Stock Plan
Chapter 38
Employee Benefit & Retirement Planning
Discussion Question
Hoes does a restricted stock plan affect an employer’s
accounting statements?
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