Stage 4: Documentation

The company is now ready to convert its conceptual and strategic decisions into the appropriate documentation. Customarily, three documents will be used: a formal plan document, an employee plan agreement, and an employee plan summary.

Formal Plan Document

The company will need to adopt a formal Plan Document that outlines essential plan terms and conditions. This document will normally contain certain language required by ERISA and IRC Section 409A. It will outline the promises and commitments being made by the employer and the requirements to be met by plan participants in order to receive plan benefits. It may include definitions of plan terms, an explanation of the valuation methodology, descriptions of payment triggering events and much more. The document will establish the effective date of the plan.

The Plan Document may be drafted by any involved party such as a company officer, inside legal counsel or an outside consultant. However, considering the significant legal responsibilities of a phantom stock program, the document should always be reviewed and finalized, if not completely drafted, by benefits counsel.

Employee Enrollment Forms

Commonly the Plan Document will contain most of the vital elements of the plan but it will not be specific to any single employee. The Plan Agreement connects individual employees to the plan itself. By executing the Agreement they become a party to the plan.

The Plan Agreement will identify facts pertinent to the employee (name, other identifying information, beneficiary) and may also include plan relative information. For example, it will typically advise them of the number of grants, the grant date and possibly the vesting schedule or maturity date. By keeping these items in the Plan Agreement the plan sponsor can vary information from one participant to another while keeping all employees subject to the same general plan terms.

Each time an employee is to receive grants, the employer would provide a Plan Agreement which, following completion and execution, entitles the employee to all privileges of the plan.

Employee Plan Summary

It is customary, though not required, to provide employees a clearly written digest of the plan. This Summary is an adjunct to the formal Plan Document. It may outline such things as (a) plan operation, (b) grant procedures, (c) valuation method, (d) vesting schedule, (e) payment events, and (f) any other plan elements helpful to the participants. The Summary contains a “plain English” explanation of plan terms as opposed to the legalese of the Plan Document or Plan Agreement.

At the end of stage four the company has formally adopted the plan and is prepared to present it to employees.