Chapter 7: Employee Stock Ownership Plans (ESOPs) Flashcards
To satisfy the diversification requirements, a plan must offer three investment alternatives other than employer stock.
True or False?
False. A plan need not offer other investment alternatives — it could instead offer a cash distribution and/or a transfer to another qualified plan that offers such investment alternatives.
Leveraged ESOPs must take a loan from a commercial source.
True or False?
False. The loan can come from any source, as long as it is an arms-length transaction.
ESOPs cannot be integrated using permitted disparity.
True or False?
True
For publicly traded stock, voting rights must be passed through to the participant in the ESOP.
True or False?
True
For closely held stock, voting rights must be passed through to the participant in the ESOP.
True or False?
False. Only on certain issues must voting rights be passed through to shareholders.
Stock bonus plans may make distributions in employer stock.
True or False?
True
ESOPs invest primarily in employer stock.
True or False?
True
Many employers can contribute more to an ESOP than to other defined contribution plans.
True or False?
True
A participant who is age 55 is eligible for IRC §401(a)(28) diversification.
True or False?
False. A participant must be age 55 with ten years of plan participation to be subject to the diversification requirements of IRC §401(a)(28).
Dividends paid to an ESOP may be tax deductible to the employer.
True or False?
True
If an ESOP makes a prohibited allocation or accrual, an excise tax equal to 50 percent of the accrual is imposed on the S corporation, and the disqualified person is deemed to have received a distribution in the amount of the prohibited allocation.
True or False?
True
The definition of family used in IRC §409(p) is much broader than other definitions of family used under other attribution rules that apply to qualified plan requirements.
True or False?
True
Which of the following statements regarding ESOPs is NOT TRUE?
A. A money purchase pension plan can include an ESOP provision.
B. A 401(k) plan can include an ESOP provision.
C. An ESOP can allocate contributions using permitted disparity.
D. The deduction limit may exceed 25 percent of compensation in some ESOPs.
C. ESOPs may not use permitted disparity in their allocation formulas.
Which of the following statements regarding ESOP diversification under IRC §401(a)(28) is NOT TRUE?
A. The right to diversify must be provided annually for six years.
B. Qualified participants must be able to diversify a total of 25 percent of their account balance for five years, and 50 percent in the sixth year.
C. Diversification must be provided at age 55 and ten years of service.
D. In the final election year, the participant must be able to diversify 50 percent of his or her account balance invested in employer stock.
C. Diversification is available to participants age 55 with ten years of participation, not service.
Based on the following information, determine the number of shares currently available for diversification.
*Participant A’s account contains 20,000 shares valued at $2 per share.
*Participant A is age 59 with 20 years of participation.
*Two years ago, Participant A diversified 1,500 shares valued at $4 per share.
A. 2,750
B. 3,500
C. 3,875
D. 5,000
C. Participant A is eligible to diversify a total of 25 percent of the account balance. The total balance is the current balance of 20,000 shares plus the 1,500 shares that were diversified two years ago for a total of 21,500 shares. 25 percent of 21,500 shares is 5,375, less the 1,500 already diversified, leaves 3,875 available for diversification.
