Stock Appreciation Rights and synthetic equity

[Belgarath]

Seems like every time I look into an ESOP question, I wish I hadn't.

Suppose there is a SAR for a few critical employees. Suppose it basically operates as a cash bonus if the stock (all owned by a 100% leveraged S-corp ESOP) hits a certain strike price.

How do you take this into account for purposes of determining synthetic equity? Since a future stock value is a complete unknown, then is it safe to assume that there would be NO synthetic equity until the strike price is reached? Or is that an unwarranted assumption?

[ESOP Guy]

So are you saying that currently the SARs are out of the money?

If so, they would have no effect on your 409(p) test.

[Belgarath]

Not certain what you mean by "out of the money?" But for example - ESOP is set up with initial stock price of $50.00 per share. There are also 5,000 SAR's granted to the critical personnel, at a strike price of, (pick a number, say $65 per share). If so, then the people granted these rights would, in essence, receive a cash bonus/award of $15.00 for each SAR they hold if the share price rises to $65.

So currently, for determining synthetic equity, these SAR's wouldn't confer any synthetic equity, and wouldn't until the strike price is reached? Is that what you are saying?

Thanks so much!

[ESOP Guy]

By out of money I mean would they would NOT collect anything from the SARs on the date you are testing. So if the stock price needs to be $65/shr for the people to collect on the SAR and the stock is currently $60/shr they have no effect on the 409(p) test.

Once the stock price reaches a price the SARs have value they will have to be factored in your 409(p) test.

[Belgarath]

Excellent. Thanks again!!