CFP - 2.2 Insurance Flashcards
Is the granting of stock options a taxable event?
No
What are the two types of stock options?
Non-qualified Stock Option (NQSO)
Incentive Stock Option (ISO)
NQSOs can be granted to which of the following:
A. Employee B. Independent contractor C. Family member of A or B D. Beneficiary of A or B E. All of the above
E. All of the above
Is there a limit to the exercise period of NQSOs?
No
When are NQSOs taxed?
At exercise
How are NQSOs taxed?
As ordinary income, subject to payroll taxes for the difference between the exercise price and the current fair market value
What is the tax basis of a stock from an exercised NQSO?
The exercise price plus the ordinary income recognized (approximately equal to the FMV on the date of exercise)
When does holding period begin for the stock of an exercised NQSO?
Date of exercise
When is income recognized by the employee if an NQSO is transferred to a family member or other person?
When the transferee exercises the option
Are gifted NQSOs valued on date of gift or date of exercise?
Date of gift
NQSO transfers are completed gifts on the latter of what two dates?
Date of transfer or date of vesting (when it becomes exercisable)
When is income recognized by the employee if an NQSO is transferred to a charity?
When the charity exercises the option, if the employee is still living
If an employee gifts an NQSO to a charity and then passes before exercise, who pays the income tax?
There is no ordinary income in this case
When can the employee deduct an NQSO gift to charity?
On the latter of the date of transfer or date of vesting
If an employee gifts an NQSO to a charity and then passes within __#__ years of exercise, the employee’s gross estate must include the value the options would have had at the date of death.
3
Who can deduct an NQSO gifted to charity if the employee passes before its exercised?
The estate is eligible for the estate tax charitable deduction
What is an ISO?
incentive stock option
Do ISOs have to be approved by stockholders?
Yes
The expiration date of an ISO cannot exceed _____
10 years from the date of grant
The exercise price of an ISO cannot be less than:
The market price of the stock at the time of grant
The maximum value of stock with respect to which ISOs may first become exercisable in any one year is $XXXXXXX
$100,000
Who can be granted ISOs?
Only employees of the company
Are ISOs transferable?
No, only at death by will
ISOs must be exercised within ______ from the date of retirement or termination
3 months
If ISO stock is sold within ______ year(s) of grant and _____ year(s) of exercise, the gain is considered what type of income?
2, 1, W-2 compensation income. Not subject to payroll tax.
How are ISOs taxed when they are granted?
They aren’t
what is the AMT adjustment for ISOs?
FMV - Exercise price
What is the tax basis of stock from an exercised ISO?
The exercise price
What is the AMT basis?
FMV of the stock on the date of exercise
What tax benefits do ISOs have over NQSOs?
ISOs are not included in gross income. If sold properly, only will incur long-term capital gains.
What is an ISO disqualifying disposition?
Selling ISO stock before the holding period expires (1 year from exercise, 2 years from grant)
1/1/2015 FMV is $20. Exercise price is $10.
stock is sold a year later for $15. The employee will recognize how much ordinary income?
$5
Proceeds from sale - exercise price
No capital gain or loss
What is a cashless exercise?
Employee exercises stock option and the cash required to buy the stock is made up by selling some of the stock
What is an ESPP?
Employee Stock Purchase Plan
Do employees pay income tax on ESPPs?
No
Are ESPPs subject to nondiscrimination rules?
Yes
Do ESPPs need to be approved by shareholders?
Yes
ESPP option grant prices must not be less than the lesser of:
___ % of the FMV on grant date
___ % of the FMV on exercise date
85% and 85%
ESPPs must be exercised within _____ of leaving the company.
3 months
Employee’s owning more than ____% of the company cannot participate in ESPPs.
5%
_____ are stock options designed for key employees, _____ are stock options intended for rank-and-file employees
ISOs
ESPPs
All employees must be included in an ESPP except for (3)
- Employees with less than 2 years of employement
- Highly compensated employees
- Part-time/seasonal employees
No employee can have the right to buy more than $XXXXXXXX of stock per year with an ESPP plan.
$25,000
ESPP recognized ordinary income equals the lesser of…
FMV on grant date - Ex Price
and
FMV on disposition date - Ex price
What is phantom stock?
Fake stock. Anytime the real stock pays a dividend, the phantom stock owner is credited the amount of the dividend to a special account. At retirement or termination, they receive the balance of the account.
When are phantom stock dividends taxed to employee and deducted for employer?
When the payment is received by the employee at retirement or termination
A method for companies to give their management or employees a bonus if the company performs well financially. This plan resembles employee stock options in that the holder/employee benefits from an increase in stock price.
Stock Appreciation Rights (SARs)
Employer stock that is forfeited if the executive’s performance is subpar, if the executive terminates employment before a stated period, or if the executive works for a competitor
Restricted stock
When and how is restricted stock taxed?
W-2 income in the amount of the FMV of the stock, when it is no longer subject to substantial risk of forfeiture.
What is a Section 83(b) election?
Employee elects to recognize the income on received restricted stock immediately
What is the advantage of a Section 83(b) election?
The income recognized equals FMV. All subsequent gains are capital gains and can be taxed lower.
Section 83(b) election must be made within ____ days of receiving restricted stock.
30
Upon the sale of common shares (converted from junior class shares), what is the tax basis?
The amount paid for the junior class shares
What is an employee taxed when junior shares convert to common shares?
Nothing
What option must all cafeteria plans offer?
Cash in lieu of benefits
True or False:
Cafeteria plans are easy and inexpensive to administer
FALSE
True or False:
Cafeteria plans help control employer costs by reducing the cost of provisions for benefits that employees do not need
TRUE
Key employee non-taxable benefits in a cafeteria plan cannot exceed ___% of the total nontaxable benefits provided under the plan to all employees
25%
Cafeteria plans can cover what benefits?
AHDGH
Accident Health Dependent care Group term life HSAs
Cafeteria plans can NOT cover what benefits?
LSEFR
Long term care Scholarships Education Fringe benefits Retirement benefits
Employers with __#__ or fewer employees during either of the previous 2 years can adopt a SIMPLE cafeteria plan.
100
A SIMPLE cafeteria plan in existence cannot exceed __#__ employees during the last year.
200
Are nonemployees eligible for SIMPLE cafeteria plans?
No
Eligible employees for a SIMPLE cafeteria plan must have worked __#__ hours during the preceding year.
1,000
Is an employee under 21 included in a SIMPLE cafeteria plan?
No
Is an employee with less than one year of service included in a SIMPLE cafeteria plan?
No
Is an employee who is a nonresident alien included in a SIMPLE cafeteria plan?
No
Is an employee covered under collective bargaining agreement included in a SIMPLE cafeteria plan?
No
SIMPLE Cafeteria plan contribution requirements are one of the two following…
2% uniform of every employee’s compensation
OR
The lesser of 6% of the employee’s compensation or 200% of the employee’s salary reduction contributions
Are SIMPLE cafeteria plans subject to nondiscrimination rules?
No
What are the 2 types of FSAs?
Health FSA, Dependent care FSA
What is the max amount available for reimburesment for a Health FSA plan per year?
$2,650
What is the max amount available for reimburesment for a Dependent Care FSA plan per year?
$5,000
An employee who participates in Health and Dependent Care FSAs can have a total salary reduction of…
$7,650
How are FSA salary reduction contributions taxed?
Payroll, medicare, SS, and income tax free
Meals and lodging provided by the employer are excluded from income as long as that meet what two criteria?
- Meals are furnished by the employer, on the premises, for the employer’s convenience.
- Employee is required to accept lodging as a condition of employment
Are prepaid legal services as a benefit deductible by the employer?
Yes
Are prepaid legal services as a benefit included in the gross income of the employee?
Yes
Child and dependent care services provided by the employer to enable the employee to work are not included in gross income as long as it doesn’t exceed $XXX for MFJ and $XXX for single filers.
$5,000
$2,500
Is on premise gym access included in employee’s gross income?
No
Are dues paid to a gym/health club by the employer taxable to the employee?
Yes
The annual exclusion ceiling for qualified employer-provided educational assistance is…
$5,250
What are de minimis fringe benefits?
Benefits so small that it would impractical to account for them
What is a Voluntary Employees’ Beneficiary Association? (VEBA)
Trust or corp set up as a welfare benefit plan. Deposits are made by the employer for specified future employee benefits.
