January 12, 2023: Written by Anthony J. Vizzoni, Esq. and Kent L. Schwarz, Esq.
Driver hiring and driver retention continues to be a critical challenge to the successful operation of trucking companies. One business tool available to trucking company owners is the implementation of so-called phantom stock or phantom equity plans to attract and retain key employees, including truck drivers.
A phantom equity plan is an employee benefit plan or contractual agreement that provides select key employees with economic benefits resulting from company performance without actually providing the employee participants with any equity or ownership interest in the company. The participating employees have a contractual right to compensation that can be structured in various ways to mirror equity value and/or to allow participation on a sale of the company. In order to be effective, any company implementing a phantom stock plan should be anticipating future growth so as to offer potential economic upside to the participant employees.
Plans of this type are subject to various tax provisions, particularly Section 409A of the Internal Revenue Code (the “Code”) which provides rules related to deferred compensation. Plans subject to Code Section 409A must comply with various rules related to the timing of deferrals and payout events, reporting, and other matters. Failure to comply can result in acceleration of income for the employee, penalties to the employee, and interest charges. Plans can be structured so as to be outside of the purview of Section 409A, if for example, the appreciation unit is granted at fair market value.[1] The value should be established by a reasonable valuation method, in accordance with Treasury Regulations established under Section 409A, to be fair market value at the time of grant. Permissible payment events under Section 409A are death, disability, separation from service, a fixed time, and a change of control of the company.
[1] Since fair market value is subjective, an employer never can be 100% sure if the grant is outside of Code Section 409A, thus best business practice would be to structure the plan to comply with Code Section 409A.
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