Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

Retirement > Employee Stock Options, Stock Plans and Nonqualified Deferred Compensation > Flashcards

Employee Stock Options, Stock Plans and Nonqualified Deferred Compensation Flashcards

1
Q

Basic provisions and differences from qualified plans

A

Nonqualified
- may discriminate
- exempt from ERISA
- no ER tax deduction until EE is taxed
- earnings may be taxable to ER
- distributions taxable ordinary (except ISO)

Qualified
- may not discriminate
- many ERISA requirements
- immediate ER tax deduction for contributions
- earnings grow tax deferred
- distributions taxable ordinary (except 10 yr av. and NUS under stock bonus or ESOP)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Choosing to offer nonqualified plans

A
  • when ER wants to provide additional benefits to executive who is already receiving max benefits under ER qualified retirement plan
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Salary reduction plans

A

aka. pure deferred compensation arrangements
- use some portion of EE current compensation to fund the ultimate compensation benefit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Salary continuation plans

A
  • uses ER contributions to fund the ultimate compensation
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Unfunded plans

A

requirements for unfunded deferred comp and nonqualified stock based comp
1. Must be unfunded
- naked promise: (promise to pay)
- informally funded: LI, annuity, MF, other investments (owned by company and subject to their creditors)
2. EE has no access to the comp that has been deferred
3. no ER tax deductions until EE is taxed
4. EE taxed when they have constructive receipt or economic benefit

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Life insurance and section 162

A
  • used an informal funding vehicle because CV is not taxed
  • premiums for nonqualified deferred comp taxed as follows
  • ER owns policy and will be beneficiary
  • premiums not deductible
  • DB paid to ER not taxable (bc premiums were not deductible)
  • benefits paid to EE or surviving dependents is deductible to ER
  • benefits paid to EE or surviving dependents is deferred comp and taxable
  • PV included in EE gross estate
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Rabbi trust

A

requirements
- assets must be available to all general creditors of ER
- participant cant have greater rights than other unsecured creditors
- have clear rules for when benefits will be paid
- company must notify trustee of any bankruptcy or hardship - trustee must suspend payment to trust beneficiary for creditors

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

When Rabbi trusts are used

A
  • ownership/ management may change before deferred comp benefits are paid (takeover/acquisition)
  • new management may be hostile to key employees in future and fail to honor agreement
  • litigation to enforce payment in future would be too costly
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Secular trusts

A
  • addresses 2 problems with nonqualified deferred comp plans
    1. lack of security in relying on informally funded plans
    2. fear that tax savings will disappear if tax rates in retirement are higher
  • irrevocable trust for exclusive benefit of EE
  • beyond reach of ER creditors
  • taxed in year funds placed in trust and ER gets deduction that year (or when substantial risk of forfeiture no longer exists)
  • funded nonqualified comp
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Tax implications - informal funding

A
  • ER taxation
    1. funds set aside to fund plan taxed at corporate level
    2. earnings on funds may create additional tax
  • if annuity is held by entity (not natural person) rules change and income is taxed ordinary in year
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Constructive receipt

A
  • income is taxable in year it is paid or made available to taxpayer
  • not constructively received if taxpayers control is subject to substantial risk of forfeiture
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Substantial risk of forfeiture

A
  • when EE rights to enjoyment of property are conditioned upon performance of services for a period of time
  • 2 tests
    1. EE relationship to other stockholders and the degree of their potential control
    2. EE relationship to corporate officers
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Economic benefit doctrine

A
  • if any economic benefit is conferred on an individual by ER as compensation in a taxable year then it is taxable to individual
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Employee stock options - basic provisions

A
  • employee stock options enable employees to buy shares of ER stock at a specified price
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Funded vs informally funded (unfunded) plans

A
  • if deferred comp plan is not a naked promise to pay for income tax purposes then its funded
  • two determinants of taxation
    1. free transferability of EE interest
    2. presence of substantial risk of forfeiture at time of contribution made by ER
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Company restrictions

A
  • stock plans can be designed to benefit anyone
  • usually not offered by small closely held corporations
  • usually dont want to share ownership of the business
  • often used where ownership of broad or company is publicly traded
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Transferability

A
  • options not freely transferable
18
Q

Exercise price

A
  • stated price to purchase shares of company stock
19
Q

Vesting

A
  • many options not exercisable for a period of time after options are granted
  • can also be subject yo specific performance goals
20
Q

Expiration

A
  • out of the money: at end of exercise price usually let it expire without exercising it
  • term is usually 10 years, can be shorter
21
Q

Cashless exercise

A
  • selling some of the acquired shares to cover the cost of the options and the taxes due
  • often all shares sold
  • not all companies allow this
  • can work for NSO and ISO
  • ISO sold like this then nonqualifying disposition would occur and it would be taxed ordinary
22
Q

Incentive stock options (ISO)

A
  • tax favored plan for compensating executives by granting options to buy a company stock
  • only first 100k granted that vest in one year is entitled to favorable treatment
  • options granted over that amount are non-qualified and treated as regular nonqualified stock options
  • company does not receive deduction unless with disqualifying disposition
23
Q

Nonqualified stock option (NSO)

A
  • right to purchase a specified number of shares of the ER stock at a given time and given price
24
Q

NSO and ISO events

A
  • Grant: date EE is given shares and date shares typically valued
  • Exercise: date EE chooses to exercise the right to buy the shares awarded
  • Bargain element: spread between exercise price and market price
  • Sale: the date the EE sells the exercised shares. amount of time between exercise and sale determines whether gain is LT or ST
25
Q

Holding period requirements

A

ISO
- from grant to sale and from exercise to sale
- two holding periods that need to be satisfied to prevent disqualifying disposition (ISO becoming NSO)
1. grantee must hold exercised ISO for at least 1 year before selling
2. taxpayer must hold shares from ISO exercise at least 2 years from grant date before selling
- if sale occurs less than 2 yrs of grant date or less than 1 yr of exercise date = disqualifying disposition

26
Q

Disqualifying dispositions

A
  • ISO must satisfy many IRC conditions, but no tax when options are granted or exercised
  • ISO taxed at sale (LT/ST)
  • NSO have no holding period, upon exercise, tax (ordinary) is due on gain (strike price - current market price)
  • NSO cant be taxed a second time if holding on to acquired shares and selling in future (price at acquisition - sale price)
27
Q

Disqualifying dispositions subject to FICA and FUTA

A
  • is ISO sold in same year of exercise, bargain element is taxed (FICA and FUTA)
  • if ISO sold within 12 months of exercise (in different yr) or violated 2 yr rule - taxed ordinary (no FICA/FUTA)
  • if both 1 yr and 2 yr rule is violated, bargain element is taxable comp to FICA/FUTA
28
Q

Choosing to offer ISOs

A
  • granted to reward key employees to motivate productivity
  • no ER tax deduction when exercised
29
Q

Planning strategies for employees with both ISOs and NSOs

A
  • NSO: regular tax (maybe FICA) must be paid at exercise
  • if EE holds shares for future, still pays tax at exercise and needs cash to purchase` shares
  • ISO: no regular tax
  • excess of stocks FMV at time of exercise over option to exercise is AMT add back item
30
Q

Election to include in gross income in the year of transfer

A
  • NSO: taxed ordinary at exercise - section 83 election
  • 83b election: EE elects to recognize the tax at the time of the award instead of exercise
  • FMV stock granted - EE cost is ordinary tax
  • appreciation after grant not taxed until sale - CG
  • choose 83b when stock expected to appreciate over time
31
Q

Restricted stock

A
  • involves sale of stock (not options) to an employee at a bargain price
  • no tax if substantial risk of forfeiture
32
Q

Restricted stock units (RSUs)

A
  • stock based compensation
  • vest after certain period
  • once vested, EE receives stock
  • no financial value when issued, great value when vested
  • value taxed as comp (FICA) then taxed as CG based on sale price - vale of shares at vest
33
Q

Stock appreciation rights (SARs)

A
  • rights to be paid an amount of money equal to the difference between the value of a specified number of shares of stock on the date the SARs are granted and the value of the stock on the date the SARs are exercised
34
Q

Phantom stock

A
  • right to a cash bonus based on performance of phantom shares of corps common stock over specified period of time
35
Q

Similarities between SARs and phantom stock

A
  • amount is paid in cash, stock, a combo of both, or other consideration
36
Q

Differences between SARs and phantom stock

A
  • holder of phantom stock doesnt have chouse to specified date of exercise
  • phantom stock not granted in tandem with options
  • phantom stock typically carries dividend equivalent rights
37
Q

Choosing to offer SARs and phantom stock

A
  • owners want to share economic value of equity but not equity itself
  • company is division on another company
  • company is not a company its nonprofit or government
  • company cannot offer conventional ownership because of restrictions
38
Q

Junior class shares (JCS)

A
  • stock plan
  • after expiration of substantial risk of forfeiture, junior class (B) are converted to regular shares (A)
39
Q

Employee stock purchase plan (ESPP)

A
  • section 423 stock purchase plan
  • ER is allowed to discount the price of stock up to 15% of market value (charge 85%)
40
Q

ESPP income tax implications

A
  • no tax at time of purchase
  • taxes paid at time of sale of stock
41
Q

Implementation of ESPP plan

A
  • option to purchase shares through ESPP must be made available to all EE

Retirement (10 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions