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Privately Held SAR & 409A

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#1 cac1134


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Posted 18 October 2005 - 11:23 AM

Think of a SAR with a strike price of at least FMV on date of grant. On exercise, employee gets cash equal to 40 percent of the spread and on each of the first and second anniversary of the exercise, she gets another 30 percent. deferred comp subject to 409A? If yes, any exemption? Thanks for your help.

#2 RBJ


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Posted 14 November 2005 - 03:43 PM

I'm thinking that the SAR you describe would be subject to 409A. There are three conditions to the SAR exemption described the final regs. The first two are (1) that the amount payable can't exceed fair market value at the time of exercise minus fair market value at the date of grant; and (2) the exercise price must equal at least fair market value at the date of grant. Assuming that the SAR you describe satisfies the first two requirements (it might not if you credit interest on the 2nd and 3rd installments), the third seems problematic. The requirement is that the SAR cannot provide for "any feature for the deferral of compensation other than the deferral of recognition of income until the exercise of the Stock Appreciation Right." The three year payment method would not seem to fit this requirement.