RP & EB - Chapter 5 - Deferred Compensation & Employee Benefits

Question 1

Constructive Receipt

Answer 1

Income that is not constructively received in the taxable year yet is credited to the taxpayers account and is includable in income. Exercising “dominion and control”
- Deferral compensation plans specifically designed to AVOID Constructive Receipt

Question 2

NQDC - Nonqualified Deferred Compensation Plan

Answer 2

• Contract between executive and employer that promises to pay executive a predetermined amount sometime in the future.

Advantages:
- cash outflows deferrable - employer can discrimintae

Question 3

Substantial Risk of Forfeiture

Answer 3

When rights in property are transferred and are conditioned upon the future performance of substantial services by someone or something; And that the possibility of forfeiture is substantial if the condition is not satisfied
- As long as there is Substantial Forfeiture, taxpayer is NOT required to include as taxable income

Question 4

Secular Trust

Answer 4

Hold funds for paying NQDCs
- eliminates Substantial Risk of Forfeiture BUT subject to immediate tax.
(tax is the cost of elimination of Substantial Risk of Forfeiture)

Question 5

Rabbi Trust

Answer 5

Assets are for the sole purpose of providing benefits to employees and may not be accessed by the employer. Assets may be seized and use to pay creditors if company liquidates
- Maintains Substantial Risk of Forfeiture
- Trust treated as unfunded, although can be informally funded
- Strikes balance between an unfunded promise to pay and Secular Trusts where the risk of Substantial Forfeiture is eliminated.

Question 6

Non-Qualified Deferred Compensation

Answer 6

Question 7

Stock Options

Answer 7

• Stock Option: gives employee right to buy stock at specified price.
• Option/Exercise Price: FMV at date of grant/issurance
• Form of deferred compensation if the price of the stock increases

2 Types of Stock Options:
1) ISOs - Incentive Stock Option
2) NQSO - Non-qualified Stock Option

Question 8

2 Stock Options

Answer 8

1) Incentive Stock Options - ISOs:
right given to an employee to purchase employer’s common stock at exercise price.
- Bargain element: employee is not subject to income tax on the difference between the FMV and exercise price when the option is exercised
- Holding Period for a Qualified sale:
a) 2yrs from date of grant
b) 1yr from date of exercise

2) Non-qualified Stock Option - NQSOs:
- option that does not meet the requirements of an ISO.
- A bonus program of additional compensation

Question 9

Employee Fringe Benefits

Answer 9

General Rule:
- Employee: all fringe benefits are taxable wages UNLESS specifically excluded OR employee pays fair value for it
- Employer: deductible as compensation exp UNLESS benefit is specifically excluded

Question 10

Summary of Available Fringe Benefits

Answer 10

A) Meals:
- Employee: fully exclude if furnished for the convenience of the employer AND on employer’s business premises.
- After 2017, meals for convenience only 50% deductible. Meals for convenience do not include: promoting morale/goodwill OR when employee has choice to accept the meal or bring his own.
B) Lodging:
- Employee exclude if lodging is furnished on the employer’s business premises, is for the convenience of the employer, AND accepts the lodging as a condition of employment.
If one of 3 not met, then employee must include lodging in gross income
B) Adoption Assistance (see Dalton FCs)
C) Cents-per-mile: $0.655 per mile; commute: $1.50

Question 11

Cafeteria Plans

Answer 11

Employee chooses to either receive cash as compensation or tax-free fringe benefits.

• Flexible Spending Accounts (FSAs):
  a type of cafeteria plan that is funded by employee deferrals rather than employer contributions. $3,050 limit. “Use it or lost it” account that must be used by 15th Calendar day after year-end.

Question 12

Split-dollar Life Insurance

Answer 12

• Split-dollar Life Insurance: employee and employer share the premium costs and cash value. Purpose is to reimburse the employer’s share of the premium cost.
• 2 Forms of Policy Ownership:
  1) Endorsement Method: EMPLOYER owns policy and is primarily responsible for making premium payments. Easy to establish & maintain. Employer has greater control.
  2) Collateral Assignment: EMPLOYEE owns policy and is primarily responsible for making premium payments. Provides more protection for employees.

*Exam Tip: employeR owns the policy if it is an endoRsement method