Employee stock options, stock plans, and non-qualified deferred compensation Flashcards
What are the differences between a non-qualified deferred compensation plan and a qualified plan?
Non-qualified, deferred compensation plan:
May discriminate
Exempt from most ERISA requirements
No employer, tax deductions for contributions and until employee is taxed
Funds earnings may be taxable to employer
Distributions are taxable at ordinary tax rates (exception, incentive stock options)
Qualified plans:
May not discriminate
Many ERISA requirements
Immediate employer, tax deduction for contribution (even though employee may not be vested)
Earnings accrue tax deferred until distributions
Distributions are taxable at ordinary tax rates (exception, 10 year averaging NUA under a stock bonus or ESOPs)
What is an unfunded plan?
Unfunded can be misunderstood. Plan may consist of a mere promise, also called naked promise to pay or be informally funded with life insurance, annuities, mutual funds, or other investments both methods are considered unfunded
Considered unfunded because assets are owned by the company and our subject to the company creditors. Employee has no access to the compensation that has been deferred no tax deductions for contributions until the employee is ultimately taxed tax when they have constructive receipt or an economic benefit.
Is a funded plan beyond the reach of an employers creditors?
Yes
Life insurance often used as an informal funding vehicle because their cash value buildup is not currently taxed. The premiums and benefits of a life insurance contract are usually taxed as follows….
Employer will own the policy and be its beneficiary
Premiums are not currently deductible
Death proceeds paid to the employer, are not taxable as income to the employer. This is because the premiums paid or not deductible. Therefore, the proceeds remain tax-free death benefits.
Benefits pay to the covered employee or to surviving dependence or deductible expense to the employer as paid employee has constructive receipt or the surviving dependent receive an economic benefit. This payment is deferred compensation, not a death benefit taxable income.
Present value of payments to the surviving beneficiaries are included in the employees gross estate because employee had a right to name the beneficiaries. It creates an incident of ownership.
What happens if more than $100,000 of an ISO that vest in the same year are granted?
Only the first $100,000 worth are treated as ISOs with the access treated as NSOs
What is a salary continuation plan?
Uses employer contributions to fund the ultimate compensation benefit
Under non-qualified, deferred compensation, the firm can design a plan exclusively for one specific executive. You can’t discriminate without regard to other employees of the firm.
Funded entirely by employer contributions
When does a SEP fall under Keogh rules for contributions?
When the company is either a sole proprietorship or a partnership, this would include a 1099 employee and they must use the 18.59% calculation to figure out the maximum that they can contribute to their SEP plan
