Stock Appreciation Right

[jpod]

Assume an SAR otherwise meets the criteria for the exclusion from 409A in the -1(b)(5) regulation. Can you still meet the exclusion if the right to time the exercise belongs to the service recipient (rather than the service provider)? I realize that this is not a traditional "SAR," but I cannot find anything in the reg that says it must be the service provider who has the right to time the exercise. What we are trying to do is to give the employer the right to time the payment of phantom equity appreciation, and not necessarily limited to 409A-permitted payment events.

[Guest Mr. Kite]

Assume an SAR otherwise meets the criteria for the exclusion from 409A in the -1(b)(5) regulation. Can you still meet the exclusion if the right to time the exercise belongs to the service recipient (rather than the service provider)? I realize that this is not a traditional "SAR," but I cannot find anything in the reg that says it must be the service provider who has the right to time the exercise. What we are trying to do is to give the employer the right to time the payment of phantom equity appreciation, and not necessarily limited to 409A-permitted payment events.

Let me see if I have this right. On the grant date, the employer gives an "SAR" such that, on the "exercise date" chosen by the employer, the employee will receive $$ equal to the difference between the grant-date FMV and the "exercise date" FMV, and the "SAR" will expire at some point to the extent the employer does not exercise it.

This doesn't appear to meet the definition of "SAR" under 1.409A-1(b)(5)(vi)(A) and (H), which indicates that in an SAR arrangement the individual (i.e., the employee) has the right of exercise. On the other hand, however, even if this isn't an SAR, it doesn't appear to be deferred compensation either. The employee doesn't have a legally binding right to receive the $$ at any time before the employer decides to make the payment, and presumably the "SAR" will expire if the employer doesn't pull the trigger. Assuming the $$ is paid within the short-term period following the "exercise," then I don't see 409A becoming an issue.

[Guest Mr. Kite]

See also 1.409A-1(b)(1) -- "A service provider does not have a legally binding right to compensation to the extent that compensation may be reduced unilaterally or eliminated by the service recipient...." This section includes other rules related to the employer's discretion, and may provide the answers depending on the specific provisions of the employer's SAR arrangement.