Non-Qualified Plans

Question 1

Why offer Non-Qualified DC Plan?

Answer 1

Give benefits to select group of EE’s without limits of Qualified Plans

For Key Execs who make over the Comp limit for Qualified Plans of $330,000

Question 2

Non-Qualified DC Plan: Who makes the contribution?

Answer 2

Employer makes the contribution

Does NOT have tax advantages of a Qualified Plan

Question 3

Non-Qualified DC Plan: Will Employee be taxed on ER contribution?

Answer 3

NO, must satisfy:

EE must have risk of forfeiture

and

Must NOT have constructive receipt of the funds

Question 4

Non-Qualified DC Plan: When would an EE be taxed on the ER contribution?

Answer 4

If EE does NOT have risk of forfeiture or if EE HAS constructive receipt

Must meet both for EE to not be taxed

If NOT met, EE would have Taxable income and Employer would have a tax deduction

Question 5

IRC Section 83

Answer 5

Property transferred to EE in connection w/ performance of services is taxable to extent of the FMV of property if greater than amount paid by the EE

Would be Ordinary Income subject to Payroll tax

“ER gives EE stock w/ FMV of $10 and EE pays $3 for it, then $7 is taxable as ordinary income for EE”

Question 6

IRC Section 83 Ex: “ER gives EE stock w/ FMV of $10 and EE pays $3 for it, how much is taxable to EE, if any?

Answer 6

$7 is taxable as ordinary income for EE

Question 7

Non-Qualified DC Plan Funding Types: Secular Trust

Answer 7

Irrevocable Trust

Holds set-aside funds for executive

Funds are NOT available to ER or ER’s Creditor’s

Question 8

Non-Qualified DC Plan Funding Types: Secular Trust: Does it have Vesting and risk of forfeiture?

Answer 8

Usually, no substantial risk of forfeiture

However, it may require vesting period

• meaning the exec would have risk of forfeiture until meeting vesting period

Without risk of forfeiture, value of trust is taxable to Exec at time it’s Funded

Question 9

Non-Qualified DC Plan Funding Types: Rabbi Trust

Answer 9

Irrevocable Trust

Holds set-aside funds for Exec

Funds are NOT available to ER, BUT may be available to ER’s creditors under bankruptcy

Question 10

Non-Qualified DC Plan Funding Types: Rabbi Trust: Is there Risk of Forfeiture?

Answer 10

YES, therefore assets in the trust are NOT currently taxable to Exec

Question 11

Non-Qualified DC Plan Funding Types: Rabbi Trust: Are assets currently taxable to Exec?

Answer 11

NO

Because it has Risk of Forfeiture

Question 12

Non-Qualified DC Plan Funding Types: Phantom Stock Plan

Answer 12

ER gives fictional shares to Exec

At later time, the stock is valued and Exec will receive the increase in value as Comp

NO actual stock is issued

Question 13

Non-Qualified DC Plan Funding Types: Phantom Stock Plan: Does Exec Have Taxable Income?

Answer 13

YES, when payment is made to Exec (not when fictional shares are given)

Employer will have Tax deduction

Question 14

Non-Qualified DC Plan Funding Types: ESOPs: When/How is Option Price determined?

Answer 14

Option Price = FMV at date of grant

Question 15

ESOP Types: Incentive Stock Options (ISOs)

Answer 15

Statutory stock option

Ties an EE benefit to stock price and may provide special taxation

Only granted to employees

FMV must NOT exceed $100k per year per Exec

Question 16

ESOP Types: Incentive Stock Options (ISOs): How to get Special Tax Treatment?

Answer 16

EE must hold stock for 2 years from date of grant

and

1 year from date of exercise

Question 17

ESOP Types: Incentive Stock Options (ISOs): Taxation at Grant Date?

Answer 17

No taxable income at grant date, unless exercise price is LESS than FMV at date of grant

Question 18

ESOP Types: Incentive Stock Options (ISOs): Taxation Upon Exercise?

Answer 18

No Regular Tax

AMT Adjustment equal to appreciation over the exercise price

Question 19

ESOP Types: Incentive Stock Options (ISOs): Taxation Upon Sale of Stock?

Answer 19

Long-Term capital gain treatment for stock appreciation over Exercise price

Negative AMT Adjustment

ER does NOT have tax deduction related to the ISO

Question 20

ESOP Types: Incentive Stock Options (ISOs): Disqualifying Disposition

Answer 20

Selling stock acquired from ISO before 2 years from Grant date or 1 year from exercise date

Loss of favorable Tax treatment

ER has Tax Deduction equal to Exec’s W-2 Income

Question 21

Incentive Stock Options (ISOs): Disqualifying Disposition: Taxation at Exercise date?

Answer 21

The Appreciation above the Exercise price = Ordinary Income (reported on W-2)

ER has tax deduction equal to Exec’s W-2 Income

Question 22

Incentive Stock Options (ISOs): Disqualifying Disposition: Taxation after Exercise date?

Answer 22

The Appreciation AFTER the Exercise Date =

Capital Gain

Short/Long term based on holding period beginning at exercise date

Question 23

Incentive Stock Options (ISOs): Cashless Exercise

Answer 23

Exec exercises option without Cash

Third-Party lends Exec cash to exercise option

Exec repays lender immediately w/ proceeds and has W-2 income for excess value over Exercise

It’s a Disqualifying Disposition

Question 24

NonQualified Stock Options (NQSO): Is there Favorable Tax Treatment?

Answer 24

NO

Question 25

NonQualified Stock Options (NQSO): Is there Holding Period Requirements?

Answer 25

NO statutory holding period requirements

But Employer’s may put holding period requirements on the stock

Question 26

NonQualified Stock Options (NQSO): Taxation at Grant Date?

Answer 26

No Taxable Income UNLESS Exercise price is LESS than FMV at date of grant

Question 27

NonQualified Stock Options (NQSO): Taxation Upon Exercise?

Answer 27

Exec will have W-2 Income for appreciation over the exercise price

Employer has income tax deduction for same amount

Question 28

NonQualified Stock Options (NQSO): Taxation Upon Sale of Stock?

Answer 28

Exec will have capital gain/loss with holding period beginning at Exercise price

Question 29

Gifting of ISOs: When can they be gifted, if ever?

Answer 29

Unexercised ISOs can NOT be gifted

Only can AFTER exercise date

Question 30

Gifting of NQSOs: When can they be gifted, if ever?

Answer 30

Can be gifted if allowed by Employer

Question 31

Gifting of NQSOs: Tax Status when Donee Exercises?

Answer 31

Employee (donor) will have W-2 Income

Employer has Tax Deduction

Donee’s basis = Exercise price + W-2 amount

Question 32

Gifting of NQSOs: What’s the Donee’s Basis?

Answer 32

Basis= Exercise price + W-2 amount

Question 33

Harry gifted 500 NQSOs w/ Exercise price of $10/share to his son in year 1. In year 3, when stock price was $40/share, son exercised the options. What’s the tax consequences to his son?

Answer 33

Harry will have W-2 income when his son exercises

W-2 amount is the “bargain element”
(stock price - exercise)

$40 - $10 = $30 x 500
= $15,000 (W-2)

Donee’s basis=
Exercise price + W-2

($10 x 500)+$15,000=$20k

= No ordinary income to son, but his basis is $20,000

Question 34

Stock Appreciation Rights (SARs)

Answer 34

Rights that grant the holder cash in an amount equal to:

Excess of FMV of the stock over the exercise price

Essentially a cashless exercise without any right to buy the stock

Question 35

Stock Appreciation Rights (SARs): Taxation at Grant?

Answer 35

No taxation at grant

UNLESS Employee elects IRC Section 83(b)

• EE would have W-2 income for excess value over Exercise price
• ER gets Tax Deduction for the W-2 amount

Question 36

Restricted Stock Plan

Answer 36

Pays Exec w/ Shares of ER stock

Exec does not pay any amount towards the stock

Has restrictions preventing Exec from selling or transferring

• Usually on a vesting schedule
• Creates Risk of Forfeiture

Question 37

IRC Section 83(b) for Restricted Stock Plan

Answer 37

EE election to include value of stock in taxable income at date of GRANT rather than date of vesting or when restrictions are lifted

Question 38

IRC Section 83(b) for Restricted Stock Plan: Tax Status?

Answer 38

Any gain in value over the GRANT date is Capital Gain, rather than W-2 income

If EE does NOT vest
(leaves company), or loses rights, after electing Section 83(b), then NO Tax deductible loss

Question 39

IRC Section 83(b) for Restricted Stock Plan: What’s the EE’s Holding Period?

Answer 39

The date the amount was included in EE’s Gross Income

Question 40

NonQualified DC Plan: Employee Stock Purchase Plan (ESPP)

Answer 40

EE can buy employer stocks at discounted price and get favorable tax treatment of selling it
(if qualifying disposition)

Question 41

Employee Stock Purchase Plan (ESPP): How much Discounted Price can EE Buy at?

Answer 41

No less than 85% of a Date Determined Stock price or an Average price

Date Determined Stock Price Ex:

• Lesser of FMV at Grant date, or exercise date

Question 42

Employee Stock Purchase Plan (ESPP): Purchase Limit?

Answer 42

Limit of $25,000 per year

Based on FMV of stock at date of Grant

Question 43

Employee Stock Purchase Plan (ESPP): Taxation if Held 2 years from Grant & 1 year from Exercise?

Answer 43

The Discount is taxed at Ordinary Income Rates

Remaining Gain is LT/ST with holding period starting at Exercise date

Question 44

Employee Stock Purchase Plan (ESPP): Taxation if NOT Held 2 years from Grant & 1 year from Exercise?

Answer 44

The Discount then becomes W-2 Income

W-2 income = (OI + Payroll)

Question 45

Employee Stock Purchase Plan (ESPP): Taxation of Losses and Holding Period?

Answer 45

Short or Long Term Capital Losses

Holding period begins at Exercise date

Question 46

Voluntary Employee’s Beneficiary Association (VEBAs)

Answer 46

Tax Exempt Trust Vehicle

Provides Out-of-Pocket reimbursement for Healthcare costs

Available to both Employees and Retirees

Does NOT provide Retirement benefits or Commuting benefits

Question 47

Voluntary Employee’s Beneficiary Association (VEBAs): Taxation of VEBA Benefits?

Answer 47

Employer deducts contributions to a VEBA

• Earnings on contributions are NOT taxed to ER or EE
• EE does NOT recognize income on contributions to VEBA