Ch 18 ESOP/Stock Bonus Plan

Question 1

Stock bonus plan

Answer 1

defined contribution plan where the accounts are invested in the employer’s stock

Question 2

ESOP

Answer 2

a stock bonus plan the employer can use for borrowing money from the bank

Question 3

What differentiates an ESOP from a stock bonus plan?

Answer 3

leveraging feature of ESOP

Question 4

When is it indicated?

Answer 4

provide tax advantage to employees
employer can borrow money
benefit existing shareholders

Question 5

10 Advantages

Answer 5

1. Employees receive ownership interests
2. performance incentive
3. market is created for the employer’s stock thereby increasing liquidity for existing shareholders
4. ESOP Cannot be integrated with SS
5. employees not taxed until shares are distributed
6. Stock bonus plan can be integrated with SS
7. taxation of unrealized appreciation deferred until shares are sold
8. employer receives tax deduction
9. corporate borrowing cost reduced
10. Existing shareholders can obtain tax benefits

Question 6

3 Disadvantages

Answer 6

1. All qualified plan requirements apply
2. selling shares of stock to employees “dilutes” the stock of existing shareholders and their control of the company
3. Company stock can be a speculative investment

Question 7

How much of a person’s portfolio should be invested in their employer’s stock

Answer 7

5-10%

Question 8

In what terms are participants’ accounts stated in?

Answer 8

the number of shares of the company stock

Question 9

How are benefits distributed?

Answer 9

form of shares of the company stock

Question 10

______ on the company stock can be used to increase participants’ accounts or paid in cash

Answer 10

dividends

Question 11

Plan allocation formulas ____ discriminate in favor of HCEs

Answer 11

cannot

Question 12

If these shares are publicly traded, plan participants must be allowed to ….

Answer 12

vote on their stock on all issues

Question 13

What voting rights must be given to closely-held shares with more than 10% of the plans assets invested in the stock?

Answer 13

Approval or disapproval of any corporate merger, consolidation, recapitulation, reclassification, liquidation or dissolution.
Sale of substantially all assets
A similar transaction deemed by the IRS

Question 14

When can plan participants not demand distributions from an ESOP or stock bonus plan be made in company stock?

Answer 14

Sub chapter S corps

Question 15

If the participant receives stock that is not publicly traded, what may the employer be required to do?

Answer 15

Repurchase company stock (“put option”) under a fair valuation formula

Question 16

If the stock used in the plan is not publicly traded, who must make stock valuations?

Answer 16

an independent appraiser

Question 17

Participants who have reached the age of ___ and have at least ___ years of participation must have an annual election to diversify their investments

Answer 17

55; 10

Question 18

For a ___ yr period after becoming eligible, participants can elect annually to diversify uo to ___ of the acct balance

Answer 18

25%

Question 19

In the last year, diversification up to ___ of acct balance can be elected

Answer 19

50%

Question 20

The plan must offer at least __ options other than employer stock for diversification

Answer 20

3

Question 21

What does leveraging do?

Answer 21

allows an employer to borrow money on a favorable basis

Question 22

What kind of business CANNOT adopt a stock bonus plan or ESOP? why?

Answer 22

Unincorporated businesses (proprietorships and partnerships) because they do not have stock ownership

Question 23

What happens if the stock is received in a lump sum?

Answer 23

additional tax benefit