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Retirment Planning > Deferred Compensation & Employee Benefits > Flashcards

Deferred Compensation & Employee Benefits Flashcards

1
Q

What is section 409A?

A

The part of the tax code that deals with non-qualified deferred compensation.

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2
Q

What is the employer’s tax benefit of a non-qualified deferred compensation plan?

A

The IRS limits deductions for executive comp. to $1M. Deferring compensation allows the company to take this deduction when they aren’t paying the individual as much.

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3
Q

Why is constructive receipt an issue with Non-Q plans?

What are ways of avoiding constructive receipt?

A

Constructive receipt compromises the tax benefits of employers and employees.

Avoidances are:

  • An unsecured promise to pay
  • Benefits are subject to limitations or restrictions
  • The triggering event is beyond the recipient’s control (company is bought, for ex.)
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4
Q

What is the economic benefit doctrine?

A

To be included in income tax, money must be unrestricted, and not subject to forfeit. Thus money put into a trust that the employee has no access to may still be considered income.

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5
Q

What is IRC section 83?

A

When property is transferred to an employee in exchange for service, the difference between FMV and what the employee paid for the property is taxable.

This applies to grants of stock, especially restricted stock, and stock options, but other items too.

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6
Q

What are secular trusts?

A

Money set aside for NQDC. Constructive receipt can be prevented by a vesting schedule or term of employment

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7
Q

What is a rabbi trust?

A

A NQDC trust that is vulnerable to the creditors of the company.

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8
Q

What are the 3 types of NQDC?

A
  • Unfunded promise to pay (subject to risk of forfeiture).
  • Secular trust (subject to vesting or other condition).
  • Rabbi trust (subject to forfeiture).
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9
Q

Why do employers use insurance products for deferred income money?

A

Because it’s not taxed unless the policy is paid out—otherwise employers pay tax on earnings of idle money.

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10
Q

What is a phantom stock plan?

A

Theoretical stock is set aside for the EE at a given value. When the EE retires he gets the difference between the stock’s present value and what it was set aside at.

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11
Q

Other types of NQDC Plans (3)?

A
  • Salary reduction
  • Salary continuation
  • 401k Wrap
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12
Q

When are payroll taxes due on deferred compensation?

A

When it is deferred; they don’t have to wait for constructive receipt.

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13
Q

Are stock options a form of NQDC?

Must they comply with section 409A?

How are they not constructive receipt?

A

They are NQDC. They needn’t worry about 409A if they’re granted at FMV.

They’re vested over time.

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14
Q

What are the 2 types of stock options?

A

Incentive stock options

Non-qualified incentive stock options

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15
Q

What are the requirements of an ISO? (5)

A
  • At the date of grant, exercise price must be at or above FMV.
  • An ISO cannot be transferred, except at death.
  • A > 10% owner cannot receive an ISO except at 110% FMV at grant and term < 5 years.
  • FMV of an ISO must be less than $100k at time of exercise.
  • EE must not sell the stock before both
    • 2yrs from grant
    • 1yr from exercise
  • EE must be employed at time of grant until 3 mos. before exercise.
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16
Q

What is the most tested requirement of ISOs?

A

It’s not an ISO unless the EE holds it for both 2 years after grant, and 1 year after date of exercise.

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17
Q

How are ISO’s taxed? (4)

A
  • No tax at date of grant, if exercise price = FMV at grant.
  • No OI on the bargain at date of grant.
  • AMT on bargain at date of grant.
  • Sales price - Ex. Price = LTCG and AMT reduction in year of sale.
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18
Q

Do employers get a tax deduction for an ISO?

A

NO! There is no W2 income (only LTGC) therefore no employer deduction.

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19
Q

What are the tax consequences if an ISO is sold too soon?

A

FMV (at exercise) - exercise price = OI (but no payroll tax or withholding)

FMV (at sale) - FMV (at exercise) = LT or ST gain.

In other words, the bargain becomes OI.

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20
Q

Does the employer receive a tax deduction if an ISO is sold too soon?

A

Yes: Sale price - exercise price, the same as the OI to the EE.

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21
Q

What is a cashless exercise? How is it taxed?

A

EE borrows money to exercise and immediately sells stock to pay lender back.

This violates ISO rules so sale price - exercise price is OI.

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22
Q

How are NQSO’s taxed?

A 
At date of grant: 
   - No tax if exercise price = FMV.
   - OI if exercise price < FMV
At exercise: 
   - W2 income for the bargain, payroll and withholding apply, employer gets tax deduction
   - Basis = Amt paid at exercise + bargain.
At sale: 
   - ST or LT gain or loss.
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23
Q

Can NQSO’s be gifted?

If so, how are they taxed?

A

Yes! If gifted before exercise:

  • when exercised, donor will have W2 income for the bargain.
  • The donee’s basis will be FMV on the date of exercise.
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24
Q

What are stock appreciation rights (SAR’s)?

How are they taxed?

A

ER grants to EE the right to the appreciation of stock from a specific basis.

EE has W2 income for the difference between exercise price and FMV at exercise.

Essentially they are a cashless exchange without the 3rd party.

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25
Q

What are restricted stock plans? How are they taxed?

A

They are conditional grants of stock from employer to employee. No tax at time of transaction, but when the condition passes EE has W2 income of the value of the stock at that date. Employer has tax deduction.

EE’s basis = his amount of W2 income for this transaction.

26
Q

What is an 83b election?

A

EE receives a stock grant and opts to recognize it as income immediately.
Basis = amt. recognized (plus any $ paid).

If stock is forfeited it is treated as a realized loss.

27
Q

What are employee stock purchase plans? How are they taxed?

A

Essentially ESPP’s are a modified stock option for the EE.

  • EE’s buy stock at up to 15% discount for a determined date or average.
  • EE must hold for 2 years from date of grant, and 1 year from date of exercise.
  • Any gain due to price discount is OI (not W2), any other gain is LTCG.
  • Maximum $25k per year.
28
Q

What happens if you sell ESPP stock too soon?

A

The discount is W2 income rather than OI.

29
Q

How is ESPP stock taxed if it’s sold at a loss?

A

LT or ST loss.
Holding period begins at date of exercise.
Loss = Sale price - exercise price.

30
Q

Are all fringe benefits non-discriminatory?

What happens if they aren’t?

A

Most fringes are required to be non-discriminatory but some aren’t.

If one is supposed to be discriminatory but isn’t applied that way may become includable in employee income.

31
Q

2017 TCJA Fringes Eliminated (2)

A
  • Entertianment

- Membership dues to any club.

32
Q

Is transportation a deductible fringe?

Meals?

A
  • No deduction for helping an employee go from home to work. Safety related expenses deductible.
  • Deduction for meals is 50%, but 100% for restaurant meals as of the last of 2020.
33
Q

What is the deduction employers get for meals furnished for their own convenience?

What is their own convenience?

A

50%

Their own convenience is tight—employee is on-call, employee doesn’t have enough time to go get food.

More flexible for restaurants.

34
Q

What 3 things must happen for lodging to be excludable from EE income?

A
  • For the convenience of the employer.
  • On the employer’s premises.
  • A requirement of taking the job.
35
Q

What 3 things are necessary for athletic facilities to be excluded from income?

A
  • On the employer’s premises, or leased by them.
  • Operated by ER
  • Substantially all use is be EE’s and their fams.
36
Q

What is NOT excludable in education assistance programs?

A
  • Meals, lodging, transpo
  • Things other than books that EE keeps.
  • Education involving sports, games, or hobbies.
37
Q

What are the requirements to exclude dependent care assistance from EE income?

A
  • Care must be for a child under 13, or a spouse or child who can’t care for themselves.
  • The service must enable the EE to work.
  • $5000 is excludable, or earned income if less.
  • Benefit must be non-discriminatory.
38
Q

When are “no additional cost” services excludable?

A
  • In the normal course of business.
  • Must not displace a paying customer; flying standby qualifies, tickets don’t.
  • Non-discriminatory.
39
Q

What is excludable for employee discounts?

A

20% for services.

Profit margin for physical items.

Must be non-discriminatory!

40
Q

When are working condition fringe benefits excludable?

A
  • when the EE could deduct them as expenses if he had to buy them himself.
  • When they’re for business use only, not used personally (car example).
  • They can be discrim.
41
Q

Is life insurance on the life of the spouse or child an excludable fringe?

A

No.

42
Q

Are moving expense reimbursements excludable?

A

No, unless you’re in the military.

43
Q

What’s the funny thing about transportation and parking benefits?

A

Not deductible to the ER, but excludable to the EE.

44
Q

What is excludable for Employee awards? Discrim.? What change did the TCJA add?

A

$400 for non-QP awards, $1,600 for QP awards. Must be non-discrim.

TCJA excluded cash, vacations, tickets, lodging, meals, stocks, and bonds from the exclusion.

45
Q

Is tuition reduction excludable by Caitlin Gable?

A

Yes, as long as it’s below graduate level and for employee, spouse or dependent children, and non-discrim.

Widows of former EE’s and former EE’s with disabilities also qualify.

46
Q

What is the special tax benefit of employee group benefits?

A

They’re not taxable to the EE’s but deductible to the ER’s.

47
Q

Are group medical benefits taxed?

A

Yes, if disability.

No if for medical care or permanent loss of a part or function of the body, or permanent disfigurement.

48
Q

Who is required to provide COBRA?

A

An employer who provides a health plan and employs 20 or more for more than 1/2 the year.

49
Q

Who qualifies for 18 months of COBRA?

A

Staff who are terminated, laid off, quit, or have hours reduced.

Except for gross misconduct.

50
Q

Who gets COBRA for 29 months?

A

Disabled employees or their dependents.

51
Q

Who gets COBRA for 36 months?

A

Dependents of employee in case of:

  • Death
  • Becomes eligible for Medicare
  • Divorce
  • Plan terminates AND another plan is offered.
  • Qualified child who ages out of health plan.
52
Q

What are the non-discriminatory conditions for employer provided group term life insurance?

A

70% of all eligible employees.

85% of non-key employees.

53
Q

How is employer provided disability insurance taxed?

A

It depends:

  • If ER pays, EE is not taxed on the premiums, but is taxed on the benefits.
  • If EE pays the premiums with after-tax $, or includes the premiums in income, the benefit is tax free.
54
Q

What is the premise of a cafeteria plan?

A

EE’s can choose between a certain amt. of compensation, or the cafeteria benefits.

If they choose Cafe, benefits are not included in gross income.

55
Q

What can be included in Cafeteria benefits?

A
  • Accident and health benefits, but not medical savings accounts.
  • Adoption benefits
  • Dependent care coverage
  • Group term life.
56
Q

What is the discrimination test and consequence for Cafe plans?

A

If more than 25% of the benefit goes to keys, it is included in their gross income.

57
Q

What is the premise of a Flex Spending Account?

A

EE can use pre-tax $ to pay for qualified medical expenses.

EE will lose the money if not spent 3 months after year end.

ER doesn’t contribute, only administers plan.

58
Q

What is the discrimination test for FSA’s?

A

Same as Cafeteria plans; if 25% goes to Keys, they must include it in their income.

59
Q

What is the 2021 max salary reduction for FSA’s?

A

$2,750

60
Q

Compare the benefits for dependent care expenses with the dependent care expense tax credit or flex spending rules.

A

The tax credit is usually better for those with lower incomes.

Flex spending is usually better for those with higher incomes. The tax credit is $500 (.2 x $2,500) for those with over $43,000 in income. Given their higher tax rates the flex discount is often more.

61
Q

What were the tax changes to FSA’s in 2020 and 2021?

A

2020 - Unused balances carry over without limit to 2021 and 2022. The normal carryover is 550.

  • Employees who ceased participation in 2020 or 2021 can cash out unused amount in that year.
  • Year-end grace period is now 12 months.

2019 - FSA money can be spent on over the counter drugs.

62
Q

What is the age and catch-up provision for an HSA?

A

55 and $1,000

Retirment Planning (5 decks)

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