Restricted Stock

[Chaz]

I have been out of the 409A loop for a couple of years so I am a little rusty. I have a question that is not specifically related to 409A but touches on deferred compensation so 409A may be implicated.

Can receipt of restricted stock (NOT restricted stock units) be deferred?

Example: I am awarded a restricted stock award that vests in three years. Can I be given the opportunity to defer receipt of the shares until I, for example, retire?

I don't think so because under Section 83, the shares are transferred to me at grant and when the restrictions lapse I can sell, etc. them. That's when they are taxable.

Anyone have thoughts?

[Chaz]

Does anyone have any thoughts?

[XTitan]

If this was an "ad hoc" grant, then deferring within 30 days of grant should be permitted, given that vesting is more than 12 months after the date of such election.

[ERISA-Bubs]

Restricted stock is not subject to 409A as long as there is further deferral mechanism. In other words, when it is no longer restricted, it is received.

There are two ways I can see around this.

1) you can comply with 409A, but in order to do that the deferral election would have to be made before the year the restricted stock is granted.

2) you can make sure the restricted stock stays subject to a substantial risk of forfeiture until retirement and then pay it out within the short term deferral period. This could be impossible if you want to allow the employee to retire at a date of his choosing. But you could set it up so that the employee has to stay employed until a date certain (maybe the year he turns 65) otherwise he loses the money, and then it's paid within 2 1/2 months after that year.

[Chaz]

My question is really is it actually POSSIBLE (409A aside) to defer restricted stock?

If there is a substantial risk of forfeiture until retirement (as in the example below), there really isn't any deferral. My question is whether a deferral election can actually be made (whenever it is made and, again, 409A aside).

Here's why I think no deferral is possible:

Restricted stock is received by a service provider under Code Section 83 at the time of award subject to restrictions on transfer. Absent a 83(b) election, the shares are not taxable as long as there is a substantial risk of forfeiture. Once there is no longer a SRF, the restrictions on transfer are lifted and the shares are now taxable. There is no way to "defer" receipt of the shares because they were "received" back when the award was made, NOT when there is no longer a SRF.

Am I missing something?

[QDROphile]

You can defer restricted stock the same as any other compensation. In a simple scenario, suppose you have a stock bonus program. The bonuses are restricted stock and the stock vests in three years if the individual is still employed on the vesting date. If you have a deferred compensation arrangement that covers the stock bonus program, a particpant can elect to defer the the bonus. The election has to be compliant with sectioon 409A, e.g in the year before the year that is the year services are performed relating to the bonus. Suppose the participant elects to defer until the later of ten years or termintion of employment. The stock is credited to the deferrd compensation account when the bonus is declared. The phantom stock vests in three years. No income, but the value of the stock is included in FICA wages. The compensation for income tax purposes is deferred until the payment date specified under the deferred compensation plan. At the payment date, shares are issued and delivered to the participant and the value at that time is included in taxable income.

[Chaz]

You can defer restricted stock the same as any other compensation. In a simple scenario, suppose you have a stock bonus program. The bonuses are restricted stock and the stock vests in three years if the individual is still employed on the vesting date. If you have a deferred compensation arrangement that covers the stock bonus program, a particpant can elect to defer the the bonus. The election has to be compliant with sectioon 409A, e.g in the year before the year that is the year services are performed relating to the bonus. Suppose the participant elects to defer until the later of ten years or termintion of employment. The stock is credited to the deferrd compensation account when the bonus is declared. The phantom stock vests in three years. No income, but the value of the stock is included in FICA wages. The compensation for income tax purposes is deferred until the payment date specified under the deferred compensation plan. At the payment date, shares are issued and delivered to the participant and the value at that time is included in taxable income.

You switched from "restricted stock" to "phantom stock" in your response. Those are two different but related concepts. I agree with your description about phantom stock but restricted stock is property subject to Code Section 83 and is delivered (subject to restrictions) in the ordinary course upon award, not upon vesting. How can one defer receipt of something that one has already received?

Another difference is that one can't make a 83(b) election with phantom stock or RSUs.

[QDROphile]

Deferred compensation is always phantom, whether or not it is stock. Deferred cash is phantom cash; the participant simply has a contractual right If it helps you to picture it, then put the the restricted stock certificate in a grantor trust. The deferral election defers the receipt of the stock (the compensation) past the award date. Your comment about receipt of restricted stock begs the question.

I am confused by your comment about a section 83(b) election. If one wants further deferral, one cannot expect to thwart the deferral rules and accelerate inclusion in income or transform the "investment" gain into capital gain, You use either (i) concepts of deferral and section 409A, or (ii) section 83. Deferral under section 409A and risk of forfeiture can interact, but you can't pick and choose your phenomena. You have to coordinate and be coherent.

[Chaz]

I think we are reaching the point of diminishing returns on this thread.

I bring up the 83(b) election just to illustrate my point that restricted stock is transferred to the recipient on the date of award.

I think you and I may be saying the same thing: In order to defer a stock award, the award would have to be in the form of phantom stock or RSUs or something else and that the award could not be in the form of property subject to Code Section 83.

Am I on the right track?

[QDROphile]

I think your statement about section 83 property is too limiting (see XTitan comment, but I did not confirm if it applied correctly to your facts). The deferral will have the effect of making the compensation based on phantom measures, such as phantom stock, but I do not think that affects what is awarded. Restricted stock can be awarded. The compliant deferral will mean that the stock that is awarded is not delivered until later in accordance with the deferral (or never deliverd if the interest is forfeited). We may be saying mostly the same thing, but I split hairs about the labels for different legal interests. For example, there is a big difference between an award (representing a legal right) and delivery (affecting with can be done with the legal right). Tax effects depend on such nuances. As an aside, in my experience the individual does not get a stock certificate representing restricted stock until the restiction lapses. In that sense, restricted stock is effectively phantom stock with respect to the owner even without deferral of compensation.

[gc@chimentowebb.com]

I think I can help you out on this. The question is whether you can defer taxation of restricted stock. The issue is pretty much the same as you face with 457(f). Although 457(f) is not property, the tax principles for Section 83 are generally used to defer taxation on 457(f) deferred compensation.

Key principle for section 457(f) and section 83: Once you are vested, you are taxed.

[ERISA-Bubs]

You absolutely can defer restricted stock. The only question is timing.

If you are going to defer it, it must be deferred compliant with 409A because you are not longer under the restricted property exception to 409A. The election to defer would have to occur in the year prior to the services to which the restricted stock relates. That would be the year prior to the year of the restricted stock grant.

You could make an argument that the restricted stock relates to services performed over the restricted period and try to divide it up. For example, if the restricted period is 5 years, 20% of the grant relates to each year. Therefore, you could take the position that a deferral election made in before the last vesting year could defer 20% of the award. I think this is risky.

But, clearly, if the intent is to defer the entire award, it must be made before the year of grant. There is also the special rule for making elections to defer compensation that requires at least a year of services to vest. But even that special rule would require an election around the date of grant.