Planning for Executives - 4 Different types of executive deferred compensation plans COPY

Question 1

What is a Stock Option?

Answer 1

Right to buy a certain number of shares at a specified price

Question 2

What are the two reasons why companies issue Stock Options?

Answer 2

1) Start-ups are frequently cash strapped and don’t need immediate
compensation deductions

2) To attract/retain employees and align interests

Question 3

What are the two types of Stock Options?

Answer 3

1) Non-Qualified Stock Options (NSO)
2) Incentive Stock Options (ISO)

Question 4

What do NSOs and ISOs do?

Answer 4

Both ISOs and NSOs give the option holder a right to purchase shares of stock at the stated exercise price that is of value only if the shares of underlying stock subject to the option increase in value

Question 5

What are the similarities between NSOs and ISOs?

Answer 5

1) No tax impact at grant or vest
2) Sec. 83b election available with early exercise

Question 6

What do NSOs do that ISOs do not?

Answer 6

1) Spread at exercise is compensation subject to payroll taxes
2) At exercise, employee needs to raise exercise price and withholding.
*“Cashless Exercise”
3) On disposition, post-exercise appreciation is capital gain

Question 7

What do ISOs do that NSOs do not?

Answer 7

1) No ordinary income at exercise
2) Spread at exercise is AMT preference
* Leads to basis differential
3) Depending on AMT, may be able to exercise tax-free
4) On disposition of stock, long-term capital gain if:
* Held for 2 years from grant, AND
* Held for 1 year from exercise
5) Disqualifying Disposition triggers compensation income (not subject to payroll tax or withholding) equal to the lesserof spread at exercise or gain realized with balance treated as capital gain

Question 8

What is California Stock Option Taxation?

Answer 8

• Heads they win, tails you lose!!!
• Departing Resident: CA applies accrual method.
• Incoming Resident: CA applies cash method.

Question 9

What is Sec. 83(i)?

Answer 9

• New for 2018
  Employees can elect to defer income from ISO exercise
• Income still measured by value at exercise
• ISO spread treated as compensation income
  Applies only for income tax, NSO rules apply for payroll tax purposes
  Election cannot be combined with 83(b) election
  Eligible Corporation requirements
  Multiple issues limit likely popularity