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Change in Distribution Policy of Nonqualified Plan


Guest Gertrude

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Guest Gertrude

I was granted Phantom Stock from my prior employer (ESOP Co) because my ESOP allocation was reduced as I had contributed the maximum allowable to the 401k plan and therefore hit my 415 limit. The amount of my Phantom Stock grant was equal to the number of shares I did not receive on my ESOP allocation due to the 415 limit. At the time, the Phantom Stock plan stated that it would be paid out in the same mannerism as the ESOP distributions. The ESOP plan (co is a S corp) converts my company stock to other investments (similar to those provided in a 401k plan) and allows me to rollover these investments out of the ESOP and into a qualified retirement plan over a 5 years period ($25k per year for up to 5 years).

Now I am being told that the Phantom Stock will not be paid out until after my ESOP investments are distributed (IE, in the fifth of 5 years), and that the funds will not be invested at all during these years (the $ amount is frozen).

Had I known this, I would have reduced my 401k contribution because these Phantom Stock funds will not be invested over a 5 year period and are at risk of being lost if the company goes bankrupt...are there any rules governing modifications to the distribution policy of nonqualified plans? Does the state law (California) protect me at all in this instance?

Also, doesn't the Phantom Stock payment need to be treated as Ordinary Income with income taxes withheld? (They are proposing that they will issue the check after five years with no taxes withheld).

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