BUSI 421 Exam 3 Liberty University Prof. Cornfield

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In order for a publicly held company to receive an income tax deduction for executive compensation, what is the maximum allowable amount of cash compensation paid to a CEO?

$1,000,000

Valquez Alura, an executive with Harbor Millwork, is covered under her company's incentive stock option (ISO) plan. Under the plan, Valquez is granted an option in 2012 to purchase company stock for $50 per share. In April of 2014, Valquez excercises this option and purchases 100 shares for $5,000. The fair market value of the shares when she exercised the option was $7,500. In November of 2015, she sold the 100 shares for $10,000. What is Valquez's compensation income from this transaction?

$2,500

Which of the following are regulations governing ESPPs?

(1) (2) and (3) only

Assuming appropriate regulations and requirements are followed, which of the following correctly identify tax issues related to ESPPs?

(1) and (2) only

How long must stock acquired by an employee under the ISO be held to satisfy section 422 regulations?

(1) and (2) only

Which of the following items normally would be included in an employee census?

(1), (2), and (3) only

Which of the following options are reasons why employees may need employer-sponsored benefit plans?

(1), (2), and (3) only

What benefit is gained by offering an ISO?

(2) (3) and (4) only

Which of the following are tax sanctions on amounts characterized as excess parachute payments?

(3) and (4) only

Only the first $_____ worth of an ISO stock granted any one employee is entitled to favorable tax treatment.

100,000

An employee can purchase no more than $____ of stock under an ESPP in any one calendar year

25,000

High-deductible health insurance is required with which of the following?

A Health Savings Account

A flexible spending plan is beneficial when

A and B

Advantages of a restricted stock plan include which of the following?

All of the above

An employer can use a restricted stock plan to

All of the above

Common exclusions is a long-term disability policy include which of the following?

All of the above

Disadvantage of a stock option include which of the following?

All of the above

Disadvantages of an employee stock purchase plan include

All of the above

In health insurance plan design, which of the following are vitally important aspects of that design?

All of the above

In lieu of a bonus, an employer can provide a tax-deferred benefit to employees by using

All of the above

Which of the following can an employer choose when designing a short-term disability or sick pay policy?

All of the above

Which of the following is true regarding health care costs?

All of the above

Which of the following is true regarding restricted stock plans?

All of the above

Which of the following types of health insurance was originally designed by an organization of hospitals & physicians to facilitate payment of hospital and doctor bills?

Blue Cross/ Blue Shield

Advantages of a cafeteria plan include

Cafeteria plans can be structured to meet a variety of employee benefit needs

Disadvantages of cafeteria plans include all of the following except

Cafeteria plans provide numerous different benefits to employees in addition to basic benefits shared by all employees

How are severance payments usually considered by the IRS when they are made pursuant to a written agreement that is entered into while the employee is still actively at work?

Compensation for employee services

Disadvantages of a flexible spending account include all of the following except

Employer must contribute to employee flexible spending accounts

What amount is included in the executive's AMT calculation when an ISO is exercised?

Excess of the stock's fair market value over the option price at time of exercise

What is the minimum allowable exercise price of the option?

Fair market value of the stock on the date the option is granted

Which one of the following weakens the value of an ESPP as a performance incentive?

Fluctuation in the market value of the stock is likely to have little or no relation to employee performance

Executive Michael Waldron was company stock obtained through an incentive stock option plan. Waldron has held the stock 3 years after the option was granted and 2 years after exercise of the option. Michael sold the stock last month. Tax consequences for Michael include

Gain on sale is taxed at long-term capital gain rates

Which of the following is true regarding HSA funding?

HSA funding is not subject to income tax

Some health economists argue that offering an HSA as an alternative to traditional health insurance will eventually increase premiums for traditional health insurance because

Healthy, high-income employees will select the HSA, leaving relatively sicker and older employees in the traditional health plan

Under the Affordable Care Act, all of the following are considered essential benefits, except

Hearing care services and devices

Advantages of an incentive stock option (ISO) include which of the following?

ISOs generate greater deferral of taxes to an executive than nonstatutory stock options

Which of the following is seen as a primary advantage to bonus compensation?

It allows flexibility to reflect company performance

Incentive stock options are used mostly by

Large C corporations with public stock

An employee stock purchase plan is a tax-advantaged form of employee compensation that is most effectively used in a

Large corporation with publicly traded stock

Employee benefits under a Health Reimbursement Arrangement are tax free if

Only A and B

Advantages of cash compensation include

Only a and b

Objectives that employers have for benefit plans include

Only a and b

A Health Reimbursement Arrangement cannot

Provide extra benefits exclusively for a business owner and key employees

An ESPP is popular with employees as a type of

Savings

Disadvantages of restricted stock plans from the view of the employer include all of the following, except

Substantial risk or forfeiture must be established for the employee to obtain favorable tax treatment

In 2016, Susan is granted stock options for 500 shares of her publicly-traded employer. The option price is $40 per share, and at the time the options are granted the stock is trading for $67 per share. Susan does not exercise her options until 2018, at which time the stock is trading for $80 per share. As a result of exercising the options:

Susan will have $11,500 in income in 2018

What is the usual tax treatment of unfunded severance plan payments?

Taxable to the recipient as compensation income in the year it was received

What is considered to be the basis in shares acquired under a stock option plan when an option has no readily ascertainable fair market value?

The amount paid for the stock plus the amount of taxable income reported at the time the option was exercised

The bargain element is

The difference between the fair market value of the shares at the date of purchase and the option price

The disadvantages of an incentive stock option (ISO) include all of the following except

The recipient must pay tax when the ISO is issued

At what point does an employer normally receive a tax deduction for a restricted stock plan?

The year in which the property becomes substantially vested

In the absence of any additional agreement, when is the employee usually taxed on stock options?

When the option is exercised


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