Chapter 5 and 6 - Profit Sharing Plans and ESOPs Flashcards
Profit Sharing Plans - Defining Characteristics
- 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
ER contribution rules:
- 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
EE contribution rules:
Maximum contribution is the lesser of 100% of EE contribution OR $61,000
4 types of Allocations
- standard
- social security integration
- age-based profit sharing plan
- new comparability plan
Standard allocation:
all EEs get the same
Social Security Integration
can only use the excess method
Age-based profit sharing plan method
older EEs get larger contributions
New compensatory plan
based on job classification
- Cash or deferred arrangement plan (CODA) 401k characteristics
- 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
ER contributions in a 401k can be in the form of
matches, profit sharing, or additional contributions to satisfy nondiscrimination tests
Maximum EE contribution in coda / 401k
$20,500 maximum deferral by EE
can government entities establish a 401k
no
EE contributions to 401k are exempt from
income tax
ER contributions to 401k are exempt from
income and payroll tax
- Stock Bonus Plan Characteristics
- 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
pass through voting rights are
the right to tell a plan how to vote. on company issues
Put option to ER is
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
publicly traded companys offering stock bonus plans have to offer
3 other investment options to allow EEs to diversify portfolio
- Employee Stock Ownership Plan (ESOP) characteristics
- 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
In an ESOP Employees basically own
the ER
ESOP non-recognition of gains
- 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
In an ESOP, distributions must be made within 1 year at year-end if the following occurs
EE retires, becomes disabled, or dies
In an ESOP, distributions must be made after the 5th year following if
other separation occurs
