Chapter 6 Flashcards
What is a stock bonus plan?
A type of defined contribution profit sharing plan where employers contribute stock to the plan and contributions are discretionary but must be substantial and recurring.
What are the special requirements for stock bonus plans?
Participant’s must have: pass through voting rights, the right to demand employer securities when taking distributions, a put option to the employer, distributions that begin within one year of normal retirement, death and or disability, or within five years for other modes of employment termination, and distributions must be completed within five years of commencement of distributions.
What are the advantages to stock bonus plans?
The value of the employer stock contributed is tax-deductible for the employer and stock bonus plans give participants vested interest in the performance of a company.
What are the disadvantages of stock bonus plans?
The employee has the risk of a non-diversified portfolio, the put option could create cash flow problems for the employer, and the employer incurs valuation costs at contribution of stock.
T/F Eligibility, coverage, and vesting for stock bonus plans is the same as all qualified plans
True.
T/F Employees have a right to immediately diversify pre tax elective deferals and after tax contributions only after three years of service?
False, in stock bonus plans employees have a right to immediately diversify their contributions
T/F Participants in stock bonus plans have the option to diversify employer contributions only after three years of service.
True.
What does NUA stand for?
Net unrealized appreciation
How is NUA calculated
Fair market value at date of distribution less value of stock at date of employer contribution= nua.
T/F In stock bonus plans the appreciation of employer stock is taxed as long term capital gain and the cost of contributions is taxed as ordinary income.
True
In the year of distribution of employer stock:
The stock value at date of the employer contribution is taxed as ordinary income. NUA the net unrealized appreciation is treated as deferred long-term capital gain.
At the date of sale of employer stock
The taxpayer must recognized the deferred long-term capital gain. Any subsequent gain/loss will be taxed at short or long term capital gain based on holding period since date of distribution.
What are the key differences between stock bonus and profit sharing plans?
In stock bonus plans, the contribution comes in the form of stock and valuation is needed annually. Stock bonus plans get voting rights and distributions are in the form of stock. Profit sharing= ordinary income.
What is an ESOP?
Employee Stock Ownership Plans. It is a fined contribution profit sharing plan, which is established as a trust. Participants receive allocations of employer stock from the esop. The employer receives a tax deduction for the value of the stock contributed to the plan.
Leveraged ESOP
The ability has the ability to deduct contributions and deduct interest paid to the lender.
Who is involved in leveraged ESOP
Bank, ESOP Trust, and Shareholder. Bank loans money to ESOP trust and gets guarantee from company. ESOP trust buys stock from principal shareholder and transfers their stock into the trust.
What are the advantages of an ESOP for the employer?
Creates a market for stock in a privately/closely held corporations. Helps retain employees and improves employee loyalty. Employer ownders may create a diversified portfolio without recognition of capital gain and corporation can borrow against stock. Corporation can improve current cash flow of the corporation by taking a tax deduction on stock contributions.
What are the disadvantages of ESOP for the employer?
Dilutes owndership, administrative costs, may strain employer cash flow to met payout requirements to departing employees at certain times, period appraisal costs are expensive, personal liability concerns for officers or management who also serve as trustees of ESOP’s. Certain cash flow uncertainty in the future.
