J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

2.15 Stock Appreciation Rights (SARs)

Stock appreciation rights, or SARs, enable employees to receive the benefit of an increase in value of the employer’s stock between the date the SARs are granted and the date they are exercised. When the SARs are exercised, cash or stock may be delivered as payment for the post-grant appreciation. For example, when your employer’s stock is worth $30 a share, you get 100 SARs exercisable within five years. Two years later, when the stock price has increased to $50 a share, you exercise the SARs and receive $2,000.

If IRS tests are satisfied, the employee is taxed when the post-grant appreciation is received. The situation has been complicated by the enactment of Code Section 409A (2.7), which restricts deferrals of income under nonqualified deferred compensation plans. However, the IRS has provided an exception to the Section 409A rules for SARs issued with an exercise price equal to the stock’s fair market value when the rights are granted.