Is this deferred compensation?

[ERISA-Bubs]

We have a business that is 100% owned by one person.  We have set up a restricted stock plan under which participants vest in their stock as the owner sells his ownership.  So, for example, if the owner sells 10%, a participant would vest in 10% of what he is granted.  If the owner later sells another 16%, a participant would vest in another 16% of what he is granted.  I don't think this is a problem because restricted stock is exempt from 409A, so we don't have to follow the payment trigger rules of 409A.

A participant generally has to be employed on the vesting date, but if he terminates employment not for cause or due to death or disability, he can vest if the owner sells any stock during the 12 months following termination.

[QDROphile]

When is the compensation included in income for tax purposes?

What can an employee or former employee do with the stock when it vests?  Sell it to anyone that the securities laws allow, at any price?

[ERISA-Bubs]

included in income under section 83, with the option to make an 83(b) election.

vested stock is granted and then immediately repurchased by the company.

[jpod]

I was about to say with no hesitation that it is not DC subject to 409A, until I read your last post.  When you say "vested stock is granted and then immediately repurchased," do you mean there is no actual transfer of shares until vesting and the re-purchase is compulsory?  If so, Section 83 doesn't apply at all and these are in the nature of RSUs which ARE deferred compensation, but you should fall under the ST Deferral exception.  Or, are you saying that the shares are granted up front, and then automatically repurchased at vesting?  Is it a compulsory re-purchase?  If so, have you considered whether the benefits/burdens of stock ownership are really transferred up front given the automatic and compulsory re-purchase at vesting?  If not, then Section 83 wouldn't apply, but still I think you would qualify for the ST Deferral exception.  Just spit-balling here. 

[ERISA-Bubs]

Jpod, thanks for the thoughts.  I misspoke saying shares are granted on vesting.  They are granted at the grant date and before vesting grantees have voting and dividend rights.  on vesting the restrictions are released but then the shares are automatically repurchased by the company.

Does automatic / compulsory repurchase cause issues?

[jpod]

It may.  You need to work through the regs under Section 83 and the sub-regulatory guidance and any court decisions.  That they have voting and dividend rights and can participate in liquidity events prior to repurchase may be sufficient to have a "transfer" subject to Section 83, but I'm not 100% sure. 

[Luke Bailey]

ERISA-Bubs, as long as you have a "transfer" for 83 purposes, I don't see how you are going to have 409A deferred comp. Check the regs at 1.83-3(a) and confirm whether there is an actual transfer of the stock to the employees based on the terms of the compulsory buyback.