Lesson 4: Profit Sharing plans, stock bonus, ESOP

Question 1

ESOP Diversification Request

Answer 1

10yrs of Participation
Age 55

If above, 25% of account can be diversified.

Question 2

Leveraged ESOP

Answer 2

Tax deductible contributions to a trust in the form of a loan, and interest

Question 3

ESOP Characteristics

Answer 3

1. Controlled via Trust
2. Provide Owners with a means to transfer ownership to employees
3. Can borrow money from a bank to purchase employer stock
4. Avoids some conflict of interest issues

Question 4

Non-top heavy vesting schedules for profit sharing plan

Answer 4

3yr cliff
2-6yr graduated

or

A more speedy schedule is permitted.

Question 5

Negative Election

Answer 5

Employee is deemed to have elected a specific deferral unless the employee specifically elects out of such an election in writing

Question 6

Profit Sharing Plan Employer Contribution Limit

Answer 6

25% of employers covered compensation

Question 7

Qualified Stock Bonus Plan requirements

Answer 7

1. Pass through voting rights
2. Participants have the right to demand employer securities at distributions.

Question 8

NUA Treatment

Answer 8

Only allowed when all account assets distributed within 1yr.

Question 9

Non-Recognition of Gain requirements

Answer 9

• Corporation forming ESOP must have NO class of stock outstanding that is tradable on a securities market
• Seller, and 25% shareholders are precluded from receiving allocations of stock acquired by the ESOP through Rollover
• ESOP must own at least 30% of the corp. stock immediately following sale.
• The stock sold to the ESOP must be common/convertible preferred stock and must have been owned by seller for at least 3yrs

Question 10

ESOP Cash Flow Burden Scenerios

Answer 10

1. Participant terminates employment and request distribution.
2. participant attains age 55 and requests diversification
3. Sponsor must pay for periodic appraisal of employer stock
4. Participant exercises put option

Question 11

Maximum 401k Deferral

Answer 11

• $20,500
• Over 50:
  $27,000 (20,500 plus 6500 catch up)

Question 12

ADP Test

Answer 12

Average HC Contribution

Must be below ?

Question 13

NUA Tax Treatment

Answer 13

1. Ordinary income treatment on amount equal to company’s tax deduction
2. FMV minus Company deduction amount at time of distribution = LTCG
3. Sale Price minus above 1+2 treated as STCG