Profit Sharing Plans Flashcards

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1
Q

Types of Profit Sharing Plans

A

Stock bonus plan

Profit sharing plan

ESOP

401k

Thrift Plans (after - tax)

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2
Q

Profit Sharing Plan characteristics

A

DC Plan

EE participates in profits

Uses definite predetermined formula for allocating contributions (must nondiscriminatory)

Either Noncontributory or contributory

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3
Q

Profit sharing plan Contributions & Deductions

A

Contributions are discretionary, but must be “substantial & recurring”

Company doesn’t need profit for contribution

Limited to 25% of total ER covered comp

Limited to lesser of 100% of comp or $66,000 per EE per year

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4
Q

401k Vesting

A

EE’s contributions 100% vested

ER match:

2 to 6 graduated (0,20%,40%,60%….)

Or

3 year cliff

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5
Q

ADP Test (Actual Deferral Percentage)

A

Limits EE elective deferrals for the HC based on elective deferrals of the NHC

Ensure the HC aren’t taking too much more advantage of the plan than NHC

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6
Q

ADP Testing Rules for HC and NHC percentages

A

If ADP for NHC is:

0-2% > HC is 2 x ADP for NHC

2-8% -> 2% + ADP for NHC

8% and over -> 1.25 x ADP for NHC

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7
Q

If you fail the ADP test: Correct by any of these?

A

Corrective Distributions
- decreases ADP of HC

Re-characterization: change from pre-tax to after-tax contributions
- Decreases ADP of HC

Qualified Non-elective contributions
- increases ADP of NHC
- 100% vested

Qualified Matching Contributions
- Increases ADP of NHC
- 100% vested
- Made only to EEs who elected to defer in current year

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8
Q

ACP Test (Actual Contribution Percentage)

A

Determined utilizing:
- EE after-tax thrift contortions
- ER matching contributions

Uses same scale and corrective procedures as ADP

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9
Q

Safe Harbor 401k

A

ER contributions are 100% vested at all times!

NOT required to pass ADP or ACP tests

ER must do 1 of following:

3% non-elective contribution to all eligible EEs

Matching contribution
- 100% of EE contribution up to 3% and 50% of EE contribution from 3% to 5%

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10
Q

Stock Bonus Plan - NUA

A

Lump Sum

In-kind distributions of ER securities (ESOP or Stock Bonus Plan)

FMV at Date of distribution
Less: Value of stock at date of ER contribution = NUA

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11
Q

NUA: Tax status in year of Distribution of ER stock?

A

Ordinary Income
- value at date of ER contribution

10% penalty if under age 59.5

Deferred Long-Term Capital gain (NUA)

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12
Q

NUA: Tax status At Date of Sale of ER stock?

A

Recognized deferred
Long-Term capital gain
(Regardless of holding period)

Any subsequent gain/loss short/long term capital gain is based on holding period since date of distribution

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13
Q

NUA: Peter sell stock 6 months after he received it as a distribution from stock bonus plan. When it’s distributed, it had a NUA of $7,500. He also had ordinary income from the distribution of $29,000. FMV of stock at time of sale was $81,000. How much of the sale price is subject to Long-Term capital gain?

A

ONLY the $7,500 is
Long-term capital gain

$81,000 - $29,000 =
$52,000 gain above basis

$52,000 - $7,500 =
$44,500 Short-Term capital gain

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14
Q

ESOP

A

Seller can defer gains if proceeds reinvested within 12 months

Is a DC Profit Sharing Plan
- established as a trust

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15
Q

ESOP Voting Rights

A

Public Company = Participants have voting rights and earn dividends

Private company = Participants must be allowed to vote in major corporate decisions
(M&A, liquidation, sale..)
(Trustee of the ESOP votes in all other matters)

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16
Q

ESOP Contributions

A

Cash: used to buy ER stock, or to pay bank debt (Leveraged ESOP)

Stock: ER gets Tax deduction for value of stock or the cash at date of contribution.
- Subject to 25% of ER covered comp limit
- Dividends paid are deductible

17
Q

ESOP Allocations

A

Age-based

Can NOT use SS integration

401k, 403b, Simple’s, can NOT use SS integration.
(The profit sharing piece of a 401k CAN use SS integration, CODA portion can’t)

18
Q

ESOP Distribution Options

A

Lump Sum, then use NUA

Substantially equal periodic payment requirement option
(Can demand equal distributions for no longer than 5 years, unless account is more than $1,330,000 in which case the period can be extended by 1 year for each additional $265k up to total of 10 years. Can’t do NUA)

19
Q

ESOP Put Options

A

EE can make ER to repurchase stock at FMV on the distribution date

  • w/in 60 days after distribution
    Or
  • w/in 60 day period during following plan year

Reduces EE’s risk, but increases ER’s cash requirements

20
Q

ESOP Diversification Requirement

A

Qualified Participant can force diversification in his account during qualified election period

Is the 6-plan year period after becoming a qualified participant

21
Q

ESOP Qualified Participant

A

At least age 55

Completed 10 years participation in the plan

22
Q

ESOP Diversification Requirement: Amounts and time line?

A

Can diversify 25% of post-1986 stock balance for first 5 years

And

50% of post-1986 stock balance during 6th and final year