Ch 18 ESOP/Stock Bonus Plan Flashcards
Stock bonus plan
defined contribution plan where the accounts are invested in the employer’s stock
ESOP
a stock bonus plan the employer can use for borrowing money from the bank
What differentiates an ESOP from a stock bonus plan?
leveraging feature of ESOP
When is it indicated?
provide tax advantage to employees
employer can borrow money
benefit existing shareholders
10 Advantages
- Employees receive ownership interests
- performance incentive
- market is created for the employer’s stock thereby increasing liquidity for existing shareholders
- ESOP Cannot be integrated with SS
- employees not taxed until shares are distributed
- Stock bonus plan can be integrated with SS
- taxation of unrealized appreciation deferred until shares are sold
- employer receives tax deduction
- corporate borrowing cost reduced
- Existing shareholders can obtain tax benefits
3 Disadvantages
- All qualified plan requirements apply
- selling shares of stock to employees “dilutes” the stock of existing shareholders and their control of the company
- Company stock can be a speculative investment
How much of a person’s portfolio should be invested in their employer’s stock
5-10%
In what terms are participants’ accounts stated in?
the number of shares of the company stock
How are benefits distributed?
form of shares of the company stock
______ on the company stock can be used to increase participants’ accounts or paid in cash
dividends
Plan allocation formulas ____ discriminate in favor of HCEs
cannot
If these shares are publicly traded, plan participants must be allowed to ….
vote on their stock on all issues
What voting rights must be given to closely-held shares with more than 10% of the plans assets invested in the stock?
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
When can plan participants not demand distributions from an ESOP or stock bonus plan be made in company stock?
Sub chapter S corps
If the participant receives stock that is not publicly traded, what may the employer be required to do?
Repurchase company stock (“put option”) under a fair valuation formula
If the stock used in the plan is not publicly traded, who must make stock valuations?
an independent appraiser
Participants who have reached the age of ___ and have at least ___ years of participation must have an annual election to diversify their investments
55; 10
For a ___ yr period after becoming eligible, participants can elect annually to diversify uo to ___ of the acct balance
25%
In the last year, diversification up to ___ of acct balance can be elected
50%
The plan must offer at least __ options other than employer stock for diversification
3
What does leveraging do?
allows an employer to borrow money on a favorable basis
What kind of business CANNOT adopt a stock bonus plan or ESOP? why?
Unincorporated businesses (proprietorships and partnerships) because they do not have stock ownership
What happens if the stock is received in a lump sum?
additional tax benefit
