Chapter 6: Stock Bonus Plans & Employee Stock Ownership Plans

Question 1

What is a Stock Bonus Plan

Answer 1

A plan established and maintained by an employer to provide benefits similar to those of a profit sharing plan.

Question 2

What is an ESOP

Answer 2

a qualified plan that invests primarily in “qualifying employer securities”.

Question 3

Stock Bonus Plan requirements

Answer 3

1. participants must have pass through voting rights on employer stock held by the plan.
2. Participants must have the right to demand employer securities on distribution.
3. Participants have the right to demand employer repurchase employer securities if they are not publicly traded.
4. distributions can begin with one year of normal retirement age, death or disability OR with 5 years of employment termination.
5. Distributions must be fully paid within 5 years of commencement.

Question 4

For stock bonus plans containing publicly traded stock, employees have what rights?

Answer 4

the right of diversification with 3 fund type choices
1. cash
2. bond
3. stock

Question 5

In a stock bonus plan, after separation from service, when do distributions begin?

Answer 5

no later than the end of 5 plan years.
In the case of disability, death or acheiving normal retirement - no later then the end of the next plan year.

Question 6

Defined Contribution Profit Sharing Plans (2)

Answer 6

Stock Bonus Plans
ESOPS

Question 7

Advantages of Stock Bonus Plans and ESOPs

Answer 7

1. employer stock contribution is tax-deductible
2. Employees have vested interest in the performance of the company
3. Funding Flexibility due to discretionary contributions

Question 8

Disadvantages of Stock Bonus Plans and ESOPs

Answer 8

1. Employee portfolio is nondiversified
2. Put “repurchase” option could create a cash-flow problem from employer
3. Employer must get a valuation (with the help of an appraiser) at each contribution of Stock
4. Ownership and control of company is diminished as stock shares are granted to employees.

Question 9

Special Taxation Treatment of Lump Sum Distributions in Stock Bonus Plans

Answer 9

NUA

Question 10

Do Profit Sharing Plans get special NUA tax treatment for lump sum distributions?

Answer 10

NO

Question 11

When is NUA treatment lost in a ESOP or Stock Bonus plan?

Answer 11

When the stock is sold before distribution.

Question 12

If participant is younger than 59 1/2 can they still get NUA treatment?

Answer 12

NO

Question 13

What happens at the time of the lump sum distribution of stock in a Stock Bonus Plan or an ESOP?

Answer 13

At the time of lump sum distribution the fair market value of all stock must be determined.
1. contribution fo value of stock is immediately taxeds as ordinary income.
2. NUA = Fair Market Value - Employer Contribution
NUA is taxed at Long Term Capital gains rate only when the stock is sold.

Question 14

If stock is not sold immediately after a lump sum distributions, what are the consequences?

Answer 14

1. changes in the stock after the FMV will be taxed after the sale of stock as using capital gains.
2. stock held 1 year or less received short term gain/loss treatment / stock more than one year long term capital gains treatment
3. Stock held until death: NUA does NOT receive Step-up in basis.

Question 15

How is an ESOP established?

Answer 15

As a trust

Question 16

In a leverage ESOP the interest payment provides what?

Answer 16

An additional deduction for the employer

Question 17

Is social security integration allowed in an ESOP?

Answer 17

No

Question 18

Diversification Requirements for ESOP participants

Answer 18

If participant is a qualified participant then they may diversify:
1. up to 25% cumulatively for the first 5 years and the qualified election period
2. up to 50% during the 6th (final) year.

Question 19

Qualified Participant in a ESOP

Answer 19

At least age 55 and complete 10 year of participation in the plan

Question 20

Substantially Equal Periodic Payments (SEPP)

Answer 20

If elected, equal periodic payment must be paid no longer than 5 years
EXCEPTION: if the ESOP account is valued at more than 1.33M then the distribution period can be extended an additional year for each additional 265K of value up to a total of 10 years.

Question 21

Can Substantially Equal Periodic Payments get NUA treatment?

Answer 21

NO

Question 22

If employee demands employer to repurchase stock at FMV…

Answer 22

The repurchase must occur within 60 days of distribution OR
The repurchase must occur no less than 60 days during the following plan year.

Question 23

What does the PUT option do for employee’s Stock plan

Answer 23

it requires that the employer buy back their stock at FMV, this is especially important for employer’s stock that is not publicly traded, since there is no market to sell off the shares to.

1. it reduces the risk to the employee of not being able to sell stock at FMV and
2. it increases the employer’s cash flow risk because the plan sponsor must stand ready to use this case to repurchase possibly large amount of stock.

Question 24

What is the Qualified Election Period of an ESOP?

Answer 24

the 6 plan year period beginning with the first plan year which the individual first became a qualified participant.