Retirement Chapter 10: Employee Stock Options, Stock plans and Nonqualified Deferred Compensation

Question 1

How are ER tax deductions treated for contributions to a nonqualified plan?

Answer 1

No deductions until EE is taxed

Question 2

How are ER tax deductions treated for contributions to a qualified plan?

Answer 2

Immediate ER tax deduction for contribution (even though EE may not be vested)

Question 3

Can fund earnings be taxable to the ER in a nonqualified plan?

Answer 3

Yes, depends on the investment

Question 4

How do earnings accrue in a qualified plan?

Answer 4

Tax-deferred until distribution

Question 5

Why would an ER offer a nonqualified plan?

Answer 5

Wants to provide additional benefits to an executive who is already receiving the max benefits or contributions under the ER’s qualified retirement plans

Question 6

Section 162 insurance

Answer 6

Represents a direct cash bonus by the ER made to an insurance company to pay the premium on a policy that is owned by the EE

Question 7

When will taxation occur for a secular trust?

Answer 7

The later of…
1) when the funds are deposited into the plan or
2) when there is no longer a substantial risk of forfeiture (normally there is not a substantial risk of forfeiture with a secular trust)

Question 8

Why are contributions to nonqualified plans nondeductible at the time of contribution for pass-through firms?

Answer 8

The owners will have to report the amount contributed to the deferred compensation plan on their personal tax returns. Regular corporations do not have this requirement because they are separate tax entities.

Question 9

Compensation vs. ordinary income

Answer 9

Compensation - subject to FICA/FUTA
Ordinary income - not subject to FICA/FUTA

Question 10

Does a gift of an ISO before exercise disqualify a disposition?

Answer 10

Yes; The OG owner is charged with the resulting income; only exception: owner dies before exercising (maintains ISO status)