a voluntary resignation (which would otherwise constitute a separation from service) should be used as a payment trigger. Payment upon voluntary resignation may incentivize an employee to quit in order to get paid, which could be seen as contrary to the intent of the plan and counterproductive for the operation of the plan. The final design consideration is to formulate the timing of the payment of the benefit following the occurrence of a payment trigger, which can be structured as a lump sum payment upon the occurrence of the payment trigger or payment over time—for example, in equal annual installments over a period of five years. To the extent the timing of the payment will occur over a period of time, the application of Code Section 409A should be considered as such a structure may create non-qualified deferred compensation. Reasons will vary as to how to structure the timing of the payment, such as whether a release claims will be conditioned on the payment, whether the company has cash flow considerations to take into account (particularly if the benefits will be of significant amounts), and whether the company wants to mitigate potential tax liability for the recipient. Those are only a few factors to consider in structuring the timing of payment of any benefit under a phantom equity or equity appreciation rights arrangement and each employer will have nuances to consider in designing any payment terms. In addition to the above structuring and design considerations, significant compliance and regulatory issues must also be addressed in creating and implementing a phantom equity or equity appreciation rights plan, such as application of Code Section 409A, proper document drafting, and general tax consequences and reporting obligations. Even with the potential costs and time needed to appropriately implement an equity-based incentive compensation arrangement, the benefit of incentivizing an employee to think like an owner without giving up actual equity in a company significantly outweighs the perceived costs associated with implementing an equity-based incentive compensation arrangement. Peter Langdon is an attorney in Koley Jessen’s Employment and Benefits Department. With extensive experience advising clients on employee benefits, executive compensation, nonqualified deferred compensation, and general employment law matters, Langdon is well equipped to navigate the complex landscape of employee benefits. For further inquiries, contact him at peter.langdon@koleyjessen.com. 13 nescpa.org
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