Module 5 - FP512
Numerous requirements must be met under the Internal Revenue Code (IRC) for a tax-favored incentive stock option (ISO). These include which of the following? The written plan must be approved by the stockholders of the corporation. The option's exercise date cannot exceed 10 years from the date of the grant. There is an annual limit of $100,000 on the value of the ISOs exercised during any one year to any employee; the stock is valued on the grant date. The exercise price cannot be less than the market price of the stock on the date of the grant. A) I, II, and III B) I, II, III, and IV C) III and IV D) I and II
All of these are IRC requirements for ISOs.
For an executive to retain the tax benefits of deferred compensation, she must not have constructive receipt of the funds. the funds must not be set aside in a specific account for the executive. she must have substantial risk of forfeiture. the employer must make an unsecured promise to pay the compensation. A) I, II, and III B) III and IV C) I, II, III, and IV D) I and II
All of these statements must be true for an executive to retain the tax benefits of deferred compensation.
Which of the following statements regarding stock appreciation rights (SARs) are CORRECT? The executive to whom they are granted does not need to have cash available to exercise the stock appreciation rights (SARs). They are similar to phantom stock, except that with SARs, the employee can choose when to exercise the right to share in the appreciation of the closely held company's stock. Like phantom stock, they require cash to create and dilute ownership. They are used heavily by closely held businesses. A) I and III B) I, II, and IV C) II and IV D) II, III, and IV
Cash does not dilute company ownership. A primary feature of SARs is that dilution of ownership is avoided.
How is deferred compensation payable to a deceased participant's beneficiary treated for tax purposes? A) It is taxable as a short-term capital gain. B) It is taxable as a long-term capital gain. C) It is tax free. D) It is taxable as ordinary income.
Deferred compensation payable to a deceased participant's beneficiary is taxable to the beneficiary as ordinary income. This is known as "income in respect of a decedent."
Which of the following statements regarding secular trusts is CORRECT? Funds held in a secular trust cannot be accessed by the employer's general creditors. The employer receives an income tax deduction equal to the amount of trust earnings each year. A secular trust is irrevocable. Because the funds in a secular trust are subject to a substantial risk of forfeiture, the employee will not be taxed on any amounts until they are distributed from the trust. A) I, II, and III B) I only C) II and IV D) I and III
Funds in a secular trust are not subject to a substantial risk of forfeiture, and therefore, the employee will be taxed when the employer makes a contribution to the trust. In addition, the employer receives a deduction for the trust contributions each year, not for the trust earnings.
Incentive stock option (ISO) requirements include which of the following? ISOs must be part of a written plan approved by the stockholders. The expiration date cannot exceed 10 years from the date of grant. The exercise price of the ISO must be at least 25% less than the market price of stock at the time of the grant. The shares received through the exercise of ISOs cannot be sold within one year from the date of grant and two years from the date of exercise in order to maintain favorable tax treatment. A) III and IV B) I, II, III, and IV C) I and II D) I, II, and IV
ISOs must be part of a written plan approved by the stockholders, and the expiration date cannot exceed 10 years from the date of grant. The exercise price of the option cannot be less than the market price of the stock at the date of the grant. The shares received as a result of exercising the ISOs cannot be sold within two years from the date of grant and one year from the date of exercise, otherwise the favorable tax treatment will be lost.
Mary, 54, is an executive with ABC Corporation, which provides a nonqualified deferred compensation (NQDC) plan. If Mary has unrestricted access to the assets in her NQDC plan, A) she has constructive receipt of the funds. B) she will incur a 25% penalty. C) the assets are subject to the claims of the employer's general creditors. D) the assets are subject to a substantial risk of forfeiture, and she is not currently taxed.
If Mary has unrestricted access to the funds, she is considered to have constructive receipt of the income and will be taxed in the current year.
In which of the following situations would it NOT be appropriate for the employer company to implement an equity-based compensation plan? A) Eagle Sporting Goods wants to provide certain key employees with tax-deferred compensation under terms or conditions different to those applicable to the rank-and-file employees. B) Scott Technology wants to provide a deferred compensation benefit to its executives, but it has many employees, and the cost to implement this benefit for all would be excessive. C) Steiner Industries wants to receive a deduction at the time of contribution to the plan. D) Domingo Foods wants to provide additional deferred compensation benefits to an executive who is already receiving maximum contributions under the company's existing retirement plan.
If Steiner Industries wants to receive a deduction at the time of contribution, the company should consider a qualified plan, not an equity-based compensation plan. Nonqualified plans do not permit the employer to take a deduction for plan contributions until the employee reports income from the plan, which is often at retirement.
In which of the following circumstances is income considered to be constructively received by an employee? The employee's receipt of the income is subject to substantial limitations or restrictions. The income is credited to the employee's account. The income is set apart for the employee. The income is made available so the employee may draw on it anytime, or could have drawn on it during the tax year if notice of intent to withdraw had been given. A) I and IV B) II and III C) II, III, and IV D) II and IV
Income is not constructively received if the employee's control of its receipt is subject to substantial limitations or restrictions.
In 2021, Judy's employer granted her nonqualified stock options to purchase 500 shares of employer stock at $20 per share. Judy exercised the options in 2022 when the fair market value of the stock was $30. What is the amount that Judy must include as W-2 compensation income in 2022? A) $0 B) $15,000 C) $7,500 D) $5,000
Judy must report the bargain element of $5,000 [($30 FMV - $20 exercise price) × 500 shares] as W-2 compensation income in 2022.
Tamu Enterprises, Inc., would like to set up an equity-based compensation plan that has the following features: Shares that are a separate class of common stock Shares that are usually convertible into common shares Shares that allow employees to purchase company stock below fair market value Shares with rights that are subordinate to regular common stock shares Which of the following would be the best choice for the company? A) Junior class shares B) Restricted stock C) Stock appreciation rights D) Incentive stock options
Junior class shares are a separate class of common stock. The voting, liquidation, and dividend rights of junior class shares are subordinate to regular common stock shares. Junior class shares are generally convertible into common shares of stock upon specified requirements, such as achieving certain years of service or performance goals. Conversion can be automatic or at the employee's discretion.
Justin's employer grants him 1,000 shares of restricted stock worth $10 per share at the time of the grant. Justin pays nothing for the grant. The terms of the restriction require him to remain employed by his company for an additional five years. When he meets the five-year requirement, the stock is trading for $25 per share. What is the amount Justin must report as compensation (W-2) income for the year in which he meets the five-year requirement? A) $25,000 B) $0 C) $12,500 D) $10,000
Justin must report the value of the stock as compensation income in the year in which the stock is no longer subject to a substantial risk of forfeiture. Therefore, he must report $25,000 ($25 × 1,000 shares) of income for the current year.
Nonqualified plans provide the same tax advantages as a qualified plan. are less flexible than qualified plans. may defer taxes on compensation to employees. are usually used to supplement qualified retirement benefits to key employees. A) II, III, and IV B) I and IV C) III and IV D) III only
Nonqualified plans do not provide the same tax advantages as qualified plans and are more flexible than qualified plans. Because compensation to employees is deferred, the income taxes on that compensation are deferred as well. Nonqualified plans are generally provided only to key employees.
Robin is granted 1,500 shares of restricted stock from her employer when the stock is trading at a fair market value of $25 per share. She is anticipating significant appreciation and wishes to minimize her future tax burden. As a result, she makes a Section 83(b) election. Assuming she is in the 35% marginal income tax bracket, how much income tax will be due on this transaction in the year of election? A) $13,125 B) $24,375 C) $37,500 D) $50,625
She will owe $13,125 [(1,500 shares × $25 per share) × 35% tax bracket] of income tax on this transaction.
Tax deferral in an unfunded plan A) may be achieved even if an executive's compensation is subject to constructive receipt. B) may be achieved if the deferral is agreed upon at any time prior to the compensation being paid. C) may be achieved if plan assets are subject to company creditors. D) depends on whether an executive's right to compensation is subject to a substantial risk of forfeiture.
Tax deferral in an unfunded plan may be achieved if plan assets are subject to company creditors. Substantial risk of forfeiture conditions do not need to be specified in an unfunded plan. If constructive receipt is deemed to have taken place, the executive is taxed. The employer's promise must be merely a naked promise and must not be secured in any fashion. The deferral must be agreed upon before the compensation is earned.
International Shipping Co. grants Frank nonqualified stock options (NQSOs) as part of his compensation package. The NQSOs give Frank the right to purchase 1,000 shares of International Shipping Co. stock at $10 per share no earlier than two years from the grant date. Frank purchases the 1,000 shares on the earliest possible date, when the market value of the stock is $25 per share. What is the amount that Frank must include in his gross income as a result of the exercise of NQSOs? A) $0 B) $10,000 C) $25,000 D) $15,000
The answer is $15,000. Frank must include the bargain element of $15,000 in his gross income. The bargain element is the difference between the exercise price ($10 per share) and the market value on the date of exercise ($25 per share) times the number of shares purchased (1,000).
Malone's employer recently offered him stock appreciation rights (SARs) with respect to 10,000 shares of the company's stock. The terms of the SARs entitle Malone to be paid the difference between the fair market value (FMV) of the stock at the time of exercise and the FMV of the stock at the time of the grant. If the FMV of the stock was $5 on the date of the grant and $9 when Malone exercised the SARs, what is the amount of the award Malone will receive? A) $40,000 B) $90,000 C) $0 D) $50,000
The answer is $40,000. Malone is entitled to receive an award of $4 per share, or $40,000 (10,000 shares × $4 difference between value at grant and value at exercise).
Two years ago, Marilyn, an executive vice president with ABC Bank, was granted a nonqualified stock option (NQSO) to purchase 100 shares of ABC stock at $10 per share. When the fair market value (FMV) of the stock reached $30 per share this year, she exercised the option. She is in the 24% marginal income tax bracket. If Marilyn chooses to use a cashless exercise, how many shares of ABC stock will she own after the transaction? A) 49 B) 51 C) 100 D) 30
The answer is 51. The cost to exercise the options is $1,000 (100 shares × $10 per share). Also, because the option is an NQSO, Marilyn will have to pay ordinary income taxes of $480 on the bargain element [($30 per share FMV - $10 per share exercise price) × 100 shares × 24% tax rate]. Marilyn's total cost to exercise the option is $1,480. Because this is a cashless exercise, enough shares of stock must be sold to cover Marilyn's cost of the option. Therefore, 49 shares of the stock must be sold ($1,480 ÷ $30 per share FMV). Marilyn will have 51 shares remaining (100 − 49).
Which of the following statements regarding unfunded plans versus informally funded plans are CORRECT? When an employee covered by a nonqualified deferred compensation plan must rely on the mere promise of the employer to actually pay the deferred benefit, the arrangement is called an unfunded plan. Informal funding is considered as unfunded because the underlying assets funding the plan are owned by the employer (rather than the executive) and are subject to the claims of the employer's general creditors. The employer owns the underlying asset used to fund the plan with an unfunded plan, so any earnings generated from these assets are taxed to the employer and, if the employer is a regular corporation, taxed at separate corporate income tax rates. A) I and III B) II and III C) I and II D) I, II, and III
The answer is I and II. The employer owns the underlying asset used to fund the plan with an informally funded plan, so any earnings generated from these assets are taxed to the employer and, if the employer is a regular corporation, taxed at separate corporate income tax rates.
Which of the following statements, with respect to making a Section 83(b) election on restricted stock, is CORRECT? An employee who receives restricted stock may elect under Section 83(b) to recognize the income immediately rather than wait until the substantial risk of forfeiture expires. The Section 83(b) election must be made within one year of receiving the restricted stock. If the election is made, the employee immediately includes as long-term capital gain the fair market value of the stock at time of receipt, less any amount paid for the stock. If the employee makes the election and then forfeits the stock, the employee is not allowed a deduction or refund of tax on previously reported income. A) I and IV B) I, III, and IV C) II, III, and IV D) I only
The answer is I and IV. The Section 83(b) election must be made within 30 days of receiving the restricted stock. The employee recognizes ordinary income and not long-term capital gain when the election is made.
Which of the following conditions would postpone the payment of income taxes on compensation in the form of restricted stock? The stock is subject to a substantial risk of forfeiture. The employee makes a Section 83(b) election. A) II only B) Neither I nor II C) I only D) Both I and II
The answer is I only. If the restricted stock is subject to a substantial risk of forfeiture, income taxes are postponed. Section 83(b) is elected when the employee wishes to immediately recognize the income.
Which of the following are the major differences between a nonqualified plan and a qualified retirement plan? Tax benefits Distributions ERISA requirements A) I and II B) I only C) II and III D) I, II, and III
The answer is I, II, and III. All of these are considered major differences.
Nonqualified deferred compensation (NQDC) plans may incorporate a salary continuation or salary reduction approach. corporate-owned life insurance. a rabbi trust. A) III only B) I and II C) II and III D) I, II, and III
The answer is I, II, and III. All of these funding vehicles or approaches may be used in NQDC plans. NQDC plans generally use either a salary continuation or salary reduction approach. Corporate-owned life insurance policies can be purchased on the employee's life, owned by and payable to the employer to fund the obligation under NQDC plans. A rabbi trust is a trust set up to hold property used for funding a deferred compensation plan where the funds set aside are subject to the claims of the employer's general creditors, thereby adhering to the substantial risk of forfeiture rules.
Corporate-owned life insurance is a very popular funding vehicle for nonqualified plans because the cash value buildup is not currently taxed. the insurance policy may be purchased on the executive's life and still be owned by the employer to fund the promised benefit. these policies provide the funds to pay the benefit in the event of the executive's death before retirement. A) I and III B) II and III C) I, II, and III D) I and II
The answer is I, II, and III. All of these statements are correct.
The tax treatment of junior class shares of stock include which of these? The employee is not taxed when the junior class shares are purchased and issued. The employee is not taxed when the junior class shares are converted to common shares. The employee is taxed when the junior class shares are converted to common shares and then sold. When the common shares are sold, the employee incurs ordinary income taxes and FICA based on the sales price. A) III and IV B) I, II, and III C) I and II D) I, II, III, and IV
The answer is I, II, and III. The employee is neither taxed on the date the junior class shares are issued, nor when the junior class shares are converted to common shares. Upon sale of the common shares, the employee is taxed on the capital gain (the difference between the sales price of the stock and the employee's basis in the stock). The employee's basis is the amount paid for the junior class shares.
Which of the following nonqualified deferred compensation (NQDC) plan funding instruments provide income tax deferral of the trust assets to the executive? A secular trust A rabbi trust A) Both I and II B) I only C) Neither I nor II D) II only
The answer is II only. A secular trust does not provide income tax deferral of the trust assets to the executive.
A supplemental employee retirement plan (SERP) is a qualified deferred compensation plan. often referred to as a salary continuation plan. a method of providing additional retirement income to executives. a plan that complements existing retirement plans to bring executive benefits up to desired levels. A) II, III, and IV B) III and IV C) I and II D) I, II, and III
The answer is II, III, and IV. A SERP is a nonqualified deferred compensation plan and is often referred to as a salary continuation plan because the executive is not required to decrease his current salary. In addition, a SERP is a method of providing additional retirement income to executives over and above that which is provided by qualified plans, and it complements existing retirement plans to bring executive benefits up to desired levels.
A cashless exercise of stock options provides the employee with cash only. provides the employee with stock only. involves no cash outlay by the employee. works best for employees with insufficient cash to exercise the option. A) I and II B) III and IV C) I, II, and III D) I, II, III, and IV
The answer is III and IV. The employee receives the net amount of the stock (the stock remaining after the sale of shares) or all cash. When an option is exercised, the employee has to pay to buy the shares. If the employee does not have enough cash to exercise the options, then a cashless option becomes a viable choice. The option is exercised, after which sufficient stock is immediately sold for the fair market value to realize the cash needed to pay for the exercise and any costs and taxes associated with the sale. The employee receives the net amount of the stock in either stock or cash.
Sandra, a highly paid executive with ABC Company, is interested in entering into a nonqualified deferred compensation plan with her employer. She wants the plan benefit to be payable at her retirement date. However, Sandra does not want to use any of her current compensation to fund the plan. After analyzing this scenario, what plan should be recommended? A) A supplemental executive retirement plan (SERP) B) A salary continuation plan using a secular trust C) A salary reduction plan using a rabbi trust D) A Section 401(k) plan
The answer is a supplemental executive retirement plan (SERP). Sandra would want to implement a SERP. This type of plan is funded by salary continuation (employer money) and will pay the benefit at her retirement. A salary reduction plan would use some of Sandra's money, and she makes too much money for only a Section 401(k) plan to provide her with sufficient retirement income on the basis of preretirement percentage of salary.
Which of the following statements regarding excess benefit plans is CORRECT? Excess benefit plans provide executives with a retirement benefit over and above the Section 415 limit on defined benefit plans. From the executive's standpoint, a major disadvantage of an excess benefit plan is the lack of security associated with the employer's mere promise to pay the benefit. A) I only B) Neither I nor II C) Both I and II D) II only
The answer is both I and II. Both of these statements are correct.
Which of the following statements regarding the income tax doctrines that apply to nonqualified deferred compensation plans is CORRECT? If constructive receipt occurs, the executive must report the funds that are constructively received as taxable income. The economic benefit doctrine does not apply if the funds placed in a nonqualified plan remain subject to potential attachment by the employer's general creditors. A) Neither I nor II B) II only C) Both I and II D) I only
The answer is both I and II. Both of these statements are correct.
Which of the following statement(s) regarding phantom stock plans is CORRECT? These plans provide for adjustments to the fictional entries to track the real appreciation of the corporation's common stock. At some event (usually retirement), the theoretical investment, valued to reflect cumulative gains and losses, is paid to the employee or the employee's designated beneficiaries. A) Both I and II B) Neither I nor II C) II only D) I only
The answer is both I and II. Both statements I and II are correct.
Which of the following statements regarding tax considerations of nonqualified retirement plans is CORRECT? Under IRS regulations, a nonqualified plan benefit becomes currently taxable to an executive even before the benefit is actually received, if it has been constructively received by the executive. Constructive receipt occurs if the deferred compensation is credited to an executive's account, set aside for the executive, or made immediately available to the executive. A) Neither I nor II B) II only C) Both I and II D) I only
The answer is both I and II. Both statements I and II are correct.
A secular trust A) is irrevocable. B) holds funds that are subject to a substantial risk of forfeiture. C) provides for deferral of income taxation for employees. D) is subject to the claims of the employer's general creditors.
The answer is is irrevocable. A secular trust is irrevocable. Funds in a secular trust are not subject to either the claims of the employer's general creditors or a substantial risk of forfeiture; therefore, the employee, if vested, is taxed when the employer makes a contribution to the trust. The employer also receives an immediate income tax deduction for the amounts contributed to the trust.
Which of the following statements regarding a rabbi trust is CORRECT? A) It is a trust in which the assets remain available to the claims of the employer's general creditors, thereby constituting informal funding of the arrangement. B) It is a trust used solely and exclusively for religious institutions. C) It is a trust that involves formal funding of the nonqualified deferred compensation (NQDC), thereby making the value of the trust assets immediately taxable to the trust beneficiary. D) Trust earnings are not currently taxable to the employer.
The answer is it is a trust in which the assets remain available to the claims of the employer's general creditors, thereby constituting informal funding on the arrangement. A rabbi trust is an irrevocable trust in which the assets remain available to the claims of the employer's general creditors and is a common method of informally funding an NQDC plan.
Which of the following statements pertaining to nonqualified deferred compensation plans is CORRECT? The salary continuation approach uses some portion of the executive's current compensation to fund the promised compensation benefit. With a pure deferred compensation arrangement, the plan is funded with money the employer has set aside from current earnings to benefit the executive in the future. A) II only B) Both I and II C) I only D) Neither I nor II
The answer is neither I nor II. The pure deferred compensation arrangement uses some portion of the executive's current compensation to fund the promised compensation benefit. With a salary continuation approach, the plan is funded with money the employer has set aside from current earnings to benefit the executive in the future.
The granting of a stock option is generally a _____ event because the option's exercise price is usually equal to the stock's trading price on the day of the grant. A) qualified B) taxable C) nontaxable D) discriminatory
The answer is nontaxable. The granting of a stock option is generally a nontaxable event because the option's exercise price is usually equal to the stock's price on the day of the grant. The option, therefore, has no readily ascertainable value, and there is no economic benefit to the employee to tax.
Closely held corporations that would like to reward valuable employees but do not want additional shareholders may consider using A) restricted stock. B) phantom stock. C) junior class shares. D) NQSOs.
The answer is phantom stock. Closely held corporations wishing to reward their highly valued employees without adding more shareholders may use phantom (or shadow) stock arrangements. Such arrangements are structured as fictional deferred compensation accounting entries, where the base value is equal to the current value of the corporation's common stock.
The economic benefit doctrine (Section 83) requires A) restricted stock to be included as employee income if there is no longer a substantial risk of forfeiture. B) future consulting fees to be paid after retirement to be currently included as employee income. C) the present value of a not-to-compete restriction be currently included as employee income. D) that stock options are deductible by the employer in the year granted.
The answer is restricted stock to be included as employee income if there is no longer a substantial risk of forfeiture. Section 83 requires the employee to include as income any property that the employee has the right to enjoy, or the employee's right to the property is no longer subject to a substantial risk of forfeiture. Consulting services after retirement are subject to risk of forfeiture.
Which of the following nonqualified deferred compensation arrangements use a portion of the executive's current compensation to fund the promised benefit? A) Salary reduction B) Corporate-owned continuation program C) Salary continuation D) Informal secular trust arrangement
The answer is salary reduction. In a salary reduction, or pure deferred compensation arrangement, the plan uses a portion of the executive's current compensation to fund the promised benefit, usually payable at the executive's retirement date.
ADM Inc., a closely held business, wishes to provide Jackie, a key employee, with a plan that gives her a choice of when to exercise the right to share in the appreciation of the company's stock. Therefore, the company should consider using A) junior class shares. B) restricted stock. C) stock appreciation rights. D) phantom stock.
The answer is stock appreciation rights. Stock appreciation rights (SARs) are similar to phantom stock plans, except SARs give the employee/executive a choice of when to exercise the right to share in the appreciation of the closely held company's stock.
The doctrine of constructive receipt is A) triggered if there is an irrevocable transfer of funds made on the executive's behalf that provides a benefit to the executive. B) also called the economic benefit rule. C) triggered if an executive has the right to access the funds or if the funds are securely set aside for the executive. D) triggered if an executive has control to receive income within stated limits.
The doctrine of constructive receipt is triggered if an executive has the right to access the funds or if the funds are securely set aside for the executive. Constructive receipt is different than the economic benefit rule. The economic benefit rule is triggered if there is an irrevocable transfer of funds made on the executive's behalf that provides a benefit to the executive. There is no constructive receipt if income is available only upon surrender of a valuable right or if there are limits on the right to receive the income.
Which of the following statements regarding the tax treatment of phantom stock are CORRECT? The employee is taxed upon receiving the grant. The employee is taxed when payment is received at retirement. The employer receives a tax deduction when payment is made to the employee. The employer receives a tax deduction when the employee receives the grant. A) I and II B) I, II, III, and IV C) III only D) II and III
The employee is taxed when payment is received at retirement or termination. The employer receives a tax deduction only when the employee receives payment at retirement or termination.
The major advantage of a nonqualified plan is that it A) is subject to ERISA nondiscrimination rules. B) provides employers with an immediate tax deduction. C) can be discriminatory. D) provides coverage for rank-and-file employees.
The major advantage of a nonqualified plan is that it does not have to comply with the general nondiscrimination rules that apply to qualified plans. In addition, nonqualified deferred compensation (NQDC) is not subject to all the reporting and disclosure rule requirements that pertain to qualified plans. Generally, nonqualified plans are used to benefit key executives and exclude rank-and-file employees. Employers typically do not get an immediate tax deduction; rather, they get a deduction when the employee is in constructive receipt of the funds. Immediate constructive receipt is rare in nonqualified plans.
Which of the following are requirements of an employee stock purchase plan (ESPP)? The plan must be in writing and approved by the corporate shareholders. The option price must be at least 75% of the fair market value (FMV) of the stock at the time of grant. Acquired shares must be held by the employee for at least one year from the option grant date and two years after the exercise date. A) II and III B) I and III C) I only D) I, II, and III
The option price must be at least 85% of the FMV of the stock at the time of grant. Employees owning more than 5% of the corporation cannot participate in the plan. The acquired shares must be held by the employee for at least two years from the option grant date and one year after the date of exercise.
All of the following statements regarding the taxation of nonqualified stock options are correct except A) if the nonqualified stock option does not have a readily ascertainable fair market value at the date of the grant, the employee is not taxed until the date of the exercise of the option. B) the employer receives a deduction for the amount of the bargain element when the employee brings the amount into income. C) on the exercise date, the bargain element represents income to the employee. D) the stock's holding period, for purposes of determining long- or short-term capital gains treatment to the employee, begins with the grant date.
The stock's holding period, for purposes of determining long- or short-term capital gains treatment to the employee, begins with the exercise date. All of the other statments are correct.
Which of the following are nonqualified deferred compensation plans? Salary reduction arrangement Pure deferred compensation arrangement Salary continuation arrangement A) I, II, and III B) II and III C) I and III D) I and II
There are two broad ways to structure a nonqualified plan. The first is as a salary reduction or pure deferred compensation arrangement. With this approach, the plan uses some portion of the executive's current compensation to fund the promised compensation benefit, usually payable at the executive's retirement date. Alternatively, the plan may be structured with a salary continuation approach. To implement this arrangement, the plan is funded with money that the employer has set aside from current earnings to benefit the executive. The salary continuation approach is preferred by most executives because they are not sacrificing any of their own compensation to fund the benefit.
Which of these are characteristics of phantom stock plans? Company stock is issued to the employee as a reward for meeting performance goals. The employee becomes vested in theoretical shares according to a written agreement. The plan is a way to reward employees without giving them actual ownership in the company. Upon retirement or some other event, the employee receives the vested value of his account in cash. A) III and IV B) I, II, and III C) I and II D) II, III, and IV
Under a phantom stock plan, no stock is actually issued to the participant. The plan is a means for companies to give employees a bonus tied to performance and reward employees without giving them actual ownership in the company. The employee becomes vested in theoretical shares according to a written agreement. Upon retirement or termination, the employee receives the vested value of his account in cash either as a lump sum or in installments.
Under which tax doctrine would the value of the benefit be includible as taxable income if an individual receives any economic or financial benefit or property as compensation for services? A) Economic benefit doctrine B) Assignment of income doctrine C) Constructive receipt doctrine D) Substantial risk of forfeiture
Under the economic income doctrine, if an individual receives any economic or financial benefit, or property as compensation for services, the value of the benefit is includible as taxable income. Income is assumed to be received even if the employee does not have actual or constructive receipt.
A rabbi trust provides A) income tax payments for employees. B) security against employer bankruptcy. C) an immediate income tax deduction for employers. D) security for the employee against the employer's unwillingness to pay deferred compensation benefits.
While the assets held in a rabbi trust are still subject to the company's general creditors, the trust does provide the executive with security against the employer's unwillingness to pay.
