Stock Savings Plan

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Stock Savings Plan

What Is a Stock Savings Plan?

In order to provide tax benefits to employees who are in the middle or high-income group, the employer provides an employee stock savings plan. These plans are part of the retirement benefits that these employees are entitled to. This also saves the company funds because instead of liquidating funds to pay in the form of immediate money, it can offer them stock for part of the ownership. It also acts as an incentive for them to stay on with the company.

The employee makes a contribution to the plan subject to a certain ceiling. The contribution made by the employee does not attract any taxation when they are working, but when they receive it post-retirement, it will be taxed.

When Do You Need a Stock Savings Plan?

When an employer wants to retain important employees who are holding a senior position in the company, they offer them a stock saving plan as an incentive. This agreement will mention that the employee, being in a certain category, has been offered this plan.

The agreement mentions that the stocks are being offered subject to certain conditions being fulfilled. The employee will need to exercise his or her option to purchase the stock at the agreed price.

Inclusions in a Stock Savings Plan

As per the stock savings plans definition, it provides a certain class of employees with stocks of the company which need to be purchased by the employee on termination of service. The following information can be found in this agreement:

  • Name of the parties to the agreement
  • The effective date of the agreement
  • Accelerated exercise of option during the change of control
  • Consideration to be paid for the stock
  • Vesting date and the grant date for the stock
  • Treatment of stock for employees that have left the organization
  • Unvested stock treatment for employees that have the stock
  • The right of the company for first refusal
  • Due date for exercising the option
  • Restricted stock and control on the transfer of stock
  • Assignment and nominee status
  • Lockin period of the shares
  • Face value of the stock

How to Draft a Stock Savings Plan?

While drafting a plan, the following points need to be kept in mind:

  • Purpose of the agreement
  • Termination of the contract due to wilful negligence of the employee
  • The performance benchmark for the employee to be eligible for the plan
  • Determination of the fair market value of the stock
  • Defining the successor of the employee
  • Ensuring that the agreement adheres to the governing law of the state
  • Dispute resolution clause
  • Legal impact on shares due to change in control

Benefits of a Stock Savings Plan

There are benefits for both the employer and employee in case of a stock saving plan. The employer is able to retain a valuable employee who will contribute to the revenue of the company. The employee will get a share of the profits when he or she exercises their option of owning the shares. If there is a breach of contract by the employee, the stock option is cancelled.

Types of Stock Savings Plan

There are two different types of stock saving plan, non-qualified stock options and incentive stock options. Under non-qualified stock options, you need to pay tax when the option is exercised. They are taxed according to your tax bracket.

Under incentive stock options, when exercised, the stocks are taxed at separate rates. These options need to be exercised within a certain period, post termination of employment.

Key Terms in Stock Savings Plan

The key terms found in such plans are:

  • Purpose of the plan
  • Definitions used such as affiliate and annual performance goal
  • Shares available in this category
  • Plan administration including the Option Committee authority
  • Option terms like exercise price and termination
  • Conditions for exercising options
  • Duration for refusing options
  • Right of first refusal
  • Face value of shares
  • Lockin period

What Happens in Case of Violation?

When you violate a stock saving plan, then the injured party can take action against you. You will have to pay money damages, including lost profits. The contract can be cancelled under rescission or a new contract drawn under reformation.

Sample for Stock Savings Plan

A sample of the agreement can be downloaded from below.

Stock savings plan

Stock savings plan


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