Chapter 5 and 6 - Profit Sharing Plans and ESOPs

Question 1

Profit Sharing Plans - Defining Characteristics

Answer 1

• defined contribution only
• plan established and maintained by ER
• must be nondiscriminatory
• can be contributory or non-contributory
  goal is to encourage EE participation in firm portflio

Question 2

ER contribution rules:

Answer 2

• must be made by tax deadline
• plans are discretionary meaning ER does not have to contribute
• contributions must be substantial and recurring
• no more than 25% of EE compensation can be contributed by ER

Question 3

EE contribution rules:

Answer 3

Maximum contribution is the lesser of 100% of EE contribution OR $61,000

Question 4

4 types of Allocations

Answer 4

• standard
• social security integration
• age-based profit sharing plan
• new comparability plan

Question 5

Standard allocation:

Answer 5

all EEs get the same

Question 6

Social Security Integration

Answer 6

can only use the excess method

Question 7

Age-based profit sharing plan method

Answer 7

older EEs get larger contributions

Question 8

New compensatory plan

Answer 8

based on job classification

Question 9

1. Cash or deferred arrangement plan (CODA) 401k characteristics

Answer 9

• primarily funded by EE contributions
• attached to a profit-sharing plan or stock bonus plan
• ERs can match EE contributions
• vesting: EE contributions vest immediately, ER needs to be at least 3 yr cliff or 2-6 yr graduated
• after-tax contributions allowed
  -no social security integration allowed

Question 10

ER contributions in a 401k can be in the form of

Answer 10

matches, profit sharing, or additional contributions to satisfy nondiscrimination tests

Question 11

Maximum EE contribution in coda / 401k

Answer 11

$20,500 maximum deferral by EE

Question 12

can government entities establish a 401k

Answer 12

no

Question 13

EE contributions to 401k are exempt from

Answer 13

income tax

Question 14

ER contributions to 401k are exempt from

Answer 14

income and payroll tax

Question 15

2. Stock Bonus Plan Characteristics

Answer 15

• completely discretionary
• contributions must be recurring and significant
• participants must have pass through voting rights
• dividends will be paid to EE account
  -put option to ER
• distributions are within 1 year of normal retirement or 5 years after other termination
• vesting: 3yr cliff or 2-6 yr graduated
• coverage starts 1 yr after employment or 2 years with immediate vesting

Question 16

pass through voting rights are

Answer 16

the right to tell a plan how to vote. on company issues

Question 17

Put option to ER is

Answer 17

when an EE can require repurchase or purchase of stock at free market value.
also can sell the stock back to the company at any time for a given price

Question 18

publicly traded companys offering stock bonus plans have to offer

Answer 18

3 other investment options to allow EEs to diversify portfolio

Question 19

3. Employee Stock Ownership Plan (ESOP) characteristics

Answer 19

• founder distributes ownership (stock) of the company to its employees (does not dillute shares)
• established as a trust
• participant receives allocations of stock in the same trust
• ER receives tax deduction on stock distributions

Question 20

In an ESOP Employees basically own

Answer 20

the ER

Question 21

ESOP non-recognition of gains

Answer 21

• must own at least 30% of shares
• seller must reinvest profits into other stocks
• the company cannot be a public company
• ESOP must own shares for at least 3 yrs
  -sellers just own shares for at least 3 yrs before distribution
  -funded only by ER contributions

Question 22

In an ESOP, distributions must be made within 1 year at year-end if the following occurs

Answer 22

EE retires, becomes disabled, or dies

Question 23

In an ESOP, distributions must be made after the 5th year following if

Answer 23

other separation occurs