Equity based compensation and nonqualified deferred compensation plans

Question 1

What is the bargain element and how is it treated for AMT purposes?

Answer 1

It is the difference between exercise price and market price

It is a positive adjustment to AMT if it is an ISO (incentive stock options) and a negative adjustment to AMT when sold

No Adjustment for NQSOs

Question 2

How is the bargain element taxed on incentive stock options (ISOs) and nonqualified stock options (NQSOs)?

Answer 2

Not taxed on an ISO, but the gain on an ISO is the sale minus exercise price. NOTE the ISO holding periods must be met for this tax treatment (1 year from exercise date / 2 years from grant date)

Taxed as W-2 Compensation with NQSOs, and the gain or loss is the FMV of the Stock at the time of sale less the market price at exercise date.

Question 3

If an incentive stock options (ISO) fails the holding restrictions. How is it taxed?

Answer 3

W-2 tax but they do not pay payroll tax

Question 4

The option term for ISOs and NQSOs cannot exceed how many years from the grant date?

Answer 4

10 years

Question 5

The maximum value of stock with respect to which ISOs May first become exercisable in one year is what amount and when is it valued?

Answer 5

$100,000

When the option is granted

Question 6

Is there a company deduction for ISO’s?

Answer 6

Not unless there is a disqualifying disposition

Meaning the one year from exercise date / two years from date

Question 7

A disqualifying disposition occurs when an employee disposes of incentive stock options (ISOs) Before the statutory holding period expires. If a disqualifying disposition occurs, the employees will then recognize W-2 compensation income, not subject to payroll taxes on the difference between what?

Answer 7

The ISOs exercise price; and

The ISOs stocks, fair market value at the time of option exercise

Recognized ordinary income will be added to the ISO’s stock basis to determine the capital gain that must be recognized because of a disqualifying disposition

Question 8

Nonqualified deferred compensation plans

Are they subject to ERISA?

Answer 8

No

Question 9

Nonqualified deferred compensation plans

Can they provide benefits in excess of qualified plan limits?

Answer 9

Yes

Question 10

Nonqualified deferred compensation plants

What is an unfunded plan?

Answer 10

Informal funding using life insurance, annuities, mutual funds, or general investments

Assets owned by the company and subject to creditors

No company tax deduction until employee receives payment or has constructive receipt (taxable to the employee)

Question 11

Nonqualified deferred compensation plans

What is a funded plan?

Answer 11

Assets are set aside from the claims of the employers creditors. Not currently tax to the employee if there is

Has substantial risk of forfeiture

Unrestricted transfer ability of employees interest

Question 12

Nonqualified deferred compensation plans

Do they benefit from tax and advantages of qualified plans?

Who are they provided for?

Answer 12

No, they do not

Provided for key employees, and executives may be discriminatory

Question 13

Nonqualified deferred compensation plans

Can they use either a salary, continuation or salary reduction approach?

Answer 13

Either

Question 14

Nonqualified deferred compensation plans

What is a corporate owned life insurance?

Answer 14

Provides funds to pay the benefit in the event of the executives death before retirement, while also accumulating cash value to pay the benefit at retirement if the executive is still living

Question 15

Nonqualified deferred compensation plans

What is a rabbi trust?

Answer 15

Set up to hold property use for funding a deferred compensation plan where the funds are set aside and are subject to claims of the employers general creditors

Risk of forfeiture is considered substantial therefore no current taxation to the executive taxation occurs when payments are received from the trust

Question 16

Nonqualified deferred compensation plans

What is a secular trust?

Answer 16

Trust for the exclusive benefit of the employee

Irrevocable

Funded by the employer

Not subjected to the claims of the employers creditors

Does not have a substantial risk of forfeiture therefore, employee is taxed immediately on a amount contributed to the trust and employer receives an immediate income tax deduction for amount contributed to the trust

Question 17

Nonqualified deferred compensation plans

What is a supplemental executive retirement plan? (SERPs)

Answer 17

Deferred compensation plan that focuses on providing adequate retirement income to executives

Allowed to complement existing retirement plans to bring executive benefits up to desired levels

Question 18

Nonqualified deferred compensation plans

What is an employee stock purchase plan (ESPPs)

Answer 18

Option to purchase employer stock

Question 19

Nonqualified deferred compensation plans

With an employee stock purchase plan (ESPP), the option grant price must not be less than the lesser of what?

Answer 19

85% of the fair market value on the Grant date; or

85% of the fair market value of the stock on the exercise date

Question 20

Nonqualified deferred compensation plans

What are the restrictions and limits to employees stock purchase plans (ESPP)?

Answer 20

Shares must be held by the employee for at least two years from the date of grant and one year from the date of exercise

Greater than 5% owners not permitted

Annual limit of $25,000