Retirement Final Exam

In 2017 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 2019, at which time the stock is trading for $80 per share. As a result of exercising the options: a. Susan will have $20,000 in additional income in 2017 and she must file an amended return. b. Susan will have $11,500 in income in 2019. c. Susan will have $20,000 in income in 2019. d. Susan will not have any additional income until she sells the stock.

**either b or c but i'm pretty sure it's C (80-40 = 40, 40* 500 = 20000)

Assuming appropriate regulations and requirements are followed, which of the following correctly identify tax issues related to ESPPs? (1) gain on the sale of stock is taxed as a capital gain (2) there is no taxation to the employee until the stock is sold (3) the employee is taxed when the ESPP option is granted (4) the employee will be taxed when the ESPP option is exercised a. (1) and (2) only b. (2) and (3) only c. (3) and (4) only d. (1) (3) and (4) only

A

Executive Michael Waldron has 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 a. gain on sale is taxed at long-term capital gain rates b. gain on sale is taxed at short-term capital gain rates c. gain on sale is taxed as ordinary income d. difference between option price and fair market value is taxed as ordinary income e. difference between option price and fair market value is taxed as short-term capital gains

A

Incentive stock options are used mostly by a. large C corporations with public stock. b. S corporations. c. closely held businesses. d. only a and b e. only b and c

A

On what basis are stock options usually taxed when the option has no readily ascertainable fair market value? a. the difference between the fair market value of the shares when purchased and the option price b. the fair market value of the shares c. the option price plus ½ the fair market value of the stock when sold d.the price when the shares are sold minus the original option value

A

The disadvantages of an incentive stock option (ISO) include all of the following except a. the recipient must pay tax when the ISO is issued. b. the recipient must have sufficient cash to exercise the ISO. c. the granting corporation does not receive a tax deduction at any time. d. the plan must meet complex Internal Revenue Code rulings. e. the exercise price of an ISO must at least equal the fair market value of the stock when the option is granted.

A

What amount is included in the executive's AMT calculation when an ISO is exercised? a. excess of the stock's fair market value over the option price at time of exercise b. excess of the option price over the stock's fair market value at time of exercise c. option price of stock at time of grant d. fair market value of stock at time of grant

A

Hudson Bellington owns 51% of the stock of Bellington Corporation. Two key employees each own 15% of the company. Bellington Corporation has 60 other employees, including five that joined the company last year. In addition to these workers, two part-timers share a job as office assistants, each working a 15-hour week. Bellington has just installed an employee stock purchase plan as an incentive plan. The plan must cover _____ employees. a. 55 b. 60 c. 62 d. 63 e. 65

A The plan can exclude those with less than 2 years of service, part-time employees that work less than 20 hours per week, and highly compensated; so must cover 60 - 5 = 55

Hugh Green's employer, Jolly Foods, granted Hugh a stock option under its employee stock purchase plan to buy 200 shares of Jolly Foods stock for $10 per share when the market price was $13 per share. A year and a half later, when the stock had a value of $15 per share, Hugh exercised his option. Fourteen months later, when the stock was $17 per share, Hugh sold his stock. In the year of sale, Hugh had to report _____ as wages and _____ as capital gains. a. $600, $800 b. $600, $1400 c. $1000, $400 d. $300, $1,100 e. $1100, $400

A selling price ($17 × 200 = 3,400) less purchase price ($10 × 200 = $2,000) equals gain ($1,400); amount reported as wages is (value at option less option price) × # shares {($13 - $10) × 200 = $600; gain ($1,400) less wages ($600) = capital gain ($800)

An ESPP is popular with employees as a type of a. protection from company reductions in the workforce. b. savings. c. welfare benefit. d. portfolio diversity. e. pension.

B

An employee stock purchase plan is a tax-advantaged form of employee compensation that is most effectively used in a a. family corporation. b. large corporation with publicly traded stock. c. closely held corporation. d. all of the above e. only a and c

B

How long must stock acquired by an employee under the ISO be held to satisfy section 422 regulations? (1) at least two years after the option grant (2) one year from the date stock is transferred to the employee (3) until the fifth year of employment (4) one year after the option grant a. (1) only b. (1) and (2) only c. (1) (2) and (3) only d. (2) (3) and (4) only

B

In the absence of any additional agreement, when is the employee usually taxed on stock options? a. when the option is issued b. when the option is exercised c. when the underlying stock reaches a target price d. when the underlying stock splits

B

Set-up of an employee stock purchase plan requires a. a written plan. b. approval by stockholders of granting corporation within a year before or after plan adoption. c. notification of employees that plan has been initiated. d. all of the above e. only b and c

B

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 exercises 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? a. $0 b. $2,500 c. $5,000 d. $7,500 e. $10,000

B

Which one of the following weakens the value of an ESPP as a performance incentive? a. the employee is taxed when the stock is sold b. fluctuation in the market value of the stock is likely to have little or no relation to employee performance c. the ESPP is a form of equity compensation d. all covered employees must have the same rights and benefits

B

Megan Farley received $150,000 worth of incentive stock option (ISO) stock in November of last year that is exercisable for the first time during the next calendar year. Which of the following best describes the tax consequences that Megan faces as a result of the ISO? a. Megan is subject to federal income tax on the ISO when it is granted b. Megan is subject to federal income tax on the ISO when she exercises her option c. $50,000 of Megan's ISO stock is treated as a nonstatutory stock option d. a and c e. a and d

C

Steve Stockton's employer gave him a stock option under its employee stock purchase plan to buy 500 shares of company stock. Steve held the stock for 1 year before he exercised the option and then sold it six months later. Which of the following is true? a. Steve must treat the total amount received from the sale as taxable wage income. b. Steve's employer receives no tax deduction. c. Steve's employer receives a tax deduction equal to the amount that Steve must include as income. d. Steve has no taxable income from receiving or selling the stock. e. Steve must treat the total amount received from the sale as a capital gain.

C

What is the minimum allowable exercise price of the option? a. fair market value of the stock on date of exercise, less 25% b. option price plus 25% of the current market price c. fair market value of the stock on the date the option is granted d. one-half the current fair market value of the stock

C

Which of the following are regulations governing ESPPs? (1) benefits are limited to $25,000 per year (2) benefits are forbidden to more than 5% owners (3) the plan must cover all employees, with few exceptions (4) the plan may not cover employees of the employer's parent corporation a. (1) only b. (1) and (2) only c. (1) (2) and (3) only d. (2) (3) and (4) only

C

Hal Overton is a middle manager of Global Corporation. One year ago, Hal received a stock option for 100 shares of stock from Global. The option price was $5.00 a share. When he exercised his option three months ago, the stock had risen to $10.00 per share. Hal resigned from Global last month to take an executive position at rival Universal Corporation. Tax consequences for Hal include a. taxable income at the time the stock option was granted. b. no taxable income at the time the stock option was exercised. c. $500 in taxable compensation income. d. $1,000 in taxable compensation income payable this year. e. $1,000 in taxable compensation income payable next tax year.

C Hal did not hold Global stock long enough to get tax benefits. Because he did not meet holding period requirements, Hal has additional compensation income = $1,000 fair market value at purchase - $500 option price = $500

Advantages of an incentive stock option (ISO) include which of the following? a. ISOs do not require much, if any, outlay of cash b. income from the sale of stock obtained through exercise of an ISO may be eligible for capital gain treatment c. ISOs generate greater deferral of taxes to an executive than nonstatutory stock options d. all of the above e. only a and b

D

An employee can purchase no more than $_____ of stock under an ESPP in any one calendar year. a. 10,000 b. 15,000 c. 20,000 d. 25,000 e. 50,000

D

Disadvantages of a stock option include which of the following? a. employee bears market risk b. market fluctuation may have little relationship with employee performance c. employee must have a source of funds to purchase stock d. all of the above e. only a and b

D

Disadvantages of an employee stock purchase plan include a. the employee bears the market risk. b. the employee must have a source of funds to purchase the stock. c. the employer usually does not receive a tax deduction under an employee stock purchase plan. d. all of the above e. only a and b

D

The bargain element is a. the lowest price of a stock option in the year it was granted. b. the negotiated value of a stock option when it is sold. c. the difference between the lowest value and the highest value of a stock option between the time it is granted and sold. d. the difference between the fair market value of the shares at the date of purchase and the option price e. the amount a company would pay for its own stock rather than the amount any other buyer would pay for the company's stock.

D

What benefit is gained by offering an ISO? (1) there may be AMT when an ISO is exercised (2) the ISO provides greater tax deferral than a nonstatutory option (3) income from sale of stock received at exercise may be eligible for preferential capital gain treatment (4) the company has little or no out-of-pocket cost with an ISO a. (1) only b. (1) and (2) only c. (1) (2) and (3) only d. (2) (3) and (4) only

D

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? a. the option price plus the difference between the price of the stock and the exercise price b. the strike price plus any commissions c. the amount paid for the stock minus any additional taxable income d. the amount paid for the stock plus the amount of taxable income reported at the time the option was exercised

D

What tax rules apply when an option does have a readily ascertainable fair market value at the time of the grant? (1) the option is taxed based on the difference between the stock price and the option's value at the time of the grant (2) the option is taxed at the time of the grant (3) the employer receives a tax deduction at the time of the grant (4) the employee has no further taxable compensation income when the option is exercised a. (1) and (3) only b. (1) (2) and (3) only c. (2) (3) and (4) only d.(1) (2) (3) and (4)

D

Which of the following ERISA requirements must be met by ESPPs? (1) Form 5500 reporting (2) participation (3) funding (4) vesting a. (1) and (2) only b. (3) and (4) only c. all of the above d. none of the above

D

Which of the following options is (are) true regarding the tax implications of a stock option that has a readily ascertainable fair market value at the time of the grant? a. option is taxed at the time of the grant b. employer receives a tax deduction at the time of the grant c. employer receives a tax deduction when the employee exercises the option d. a and b e. a and c

D

Executive Topdollar was given an option in 2011 to purchase 1,000 shares of Good Company stock at $200 per share, the 2011 market price. In 2013, Topdollar purchases 300 shares for a total of $60,000. The fair market value of the shares in 2013 is $100,000. Topdollar sold the 300 shares of stock in 2015 for $500 per share. Topdollar's basis in the shares acquired under his stock option plan is a. $0. b. $40,000. c. $60,000. d. $100,000. e. $200,000

D Topdollar's basis is $60,000 paid for the shares + $40,000 of ordinary income (calculated as $100,000 fair market value on date of purchase less $60,000 option price), or $100,000.

Executive Topdollar was given an option in 2011 to purchase 1,000 shares of Good Company stock at $200 per share, the 2014 market price. Topdollar can exercise the option anytime over the next 3 years. In 2015, Topdollar purchases 300 shares for a total of $60,000. The fair market value of the shares in 2015 is $100,000. Which of the following options best describes the tax consequences of Topdollar's stock option? a. Good Company had a tax deduction of $40,000 in 2014 b. Topdollar must pay ordinary income tax on $40,000 c. Topdollar must pay ordinary income tax on $60,000 d. a and b e. a and c

D The amount of taxable income for Topdollar is the difference between the fair market value of the shares at the date of purchase and the option price ($100,000 - $60,000 = $40,000. Good Company can take a tax deduction when the option is exercised and shares are purchased.

Corporate stockholders must approve the ISO plan _____ it is adopted by the company's board of directors. a. when b. within one week of the time c. within 10 days of the time d. within one month of the time e. within one year of the time

E

Only the first $_____ worth of ISO stock granted any one employee is entitled to favorable tax treatment. a. 10,000 b. 25,000 c. 50,000 d. 75,000 e. 100,000

E

The owners of Best Manufacturing are third-generation members of the Best family and do not want to share ownership of their closely held business. For day-to-day operations of the business, the owners have a CEO and employees who are not related to the business. Best is considering using a stock ownership plan to provide some additional reward for its CEO after she led the company to record high earnings for two straight years. You advise the owners that use of a stock option plan will a. result in little out-of-pocket costs to Best Manufacturing. b. allow Best Manufacturing to take a tax deduction in the year the stock option is granted to the CEO. c. give the CEO an ownership interest in the company. d. all of the above e. only a and c

E

Which of the following options is (are) true regarding the tax implications of a stock option that does not have a readily ascertainable fair market value at the time of the grant? a. no taxable income to the employee at the date of the grant b. employer receives a tax deduction at the time of the grant c. employer receives a tax deduction when the employee exercises the option d. a and b e. a and c

E

T/F: A "one size fits all" type of health plan is generally cheaper and is accepted by employees just as well as a health plan that tries to consider individual characteristics.

False

T/F: A defined contribution health plan places all burden of payment on the employer

False

T/F: A restricted stock plan cannot be used as a way of keeping retirees tied to the company for a specified time.

False

T/F: An advantage of an employee stock purchase plan is that its value is directly related to employee performance.

False

T/F: An employer receives a tax deduction for a restricted stock plan in the year that the stock plan is adopted.

False

T/F: An executive who receives a stock option must always include in his or her taxable income the fair market value of the stock in the year the stock option was granted.

False

T/F: Essential benefits under the Affordable Care Act exclude wellness services.

False

T/F: Hedgepeth Insdustries granted an incentive stock option (ISO) to executive Jason Meric. Hedgepeth can take a tax deduction when the ISO is granted.

False

T/F: Stock option plans are most often used by closely held corporations.

False

T/F: Stock option plans must comply with nondiscrimination coverage rules.

False

T/F: Stock options are a high out-of-pocket expense for companies with high stock prices.

False

T/F: The corporation granting an incentive stock option (ISO) receives a tax deduction when the employee exercises the option.

False

T/F: Hammond Publishing is a closely held company. The owner wants to keep the company in the Hammond family. Hammond wants to attract an effective CEO to join the company and cannot hire within the family to fill this position. Use of a stock option would help Hammond accomplish all of the company's important objectives.

False (Hammond wants to keep the business in the family; transfer of stock to an outside hire will dilute ownership.)

T/F: A nonstatutory stock option provides greater tax deferral than an ISO.

False (ISO have the most tax deferral if you meet holding periods)

T/F: Stock options often are used by closely held corporations as a way to reward executives.

False (big publicly held companies, not closely held)

T/F: The company bears investment risk when granting a stock option to an executive.

False (no risk once they grant it)

T/F: The employer bears the market risk.

False (the employee bears market risk)

T/F: An employee stock purchase plan is a plan for compensating a select group of employees by giving them the option to purchase company stock at a specified price.

False (the plan is for a broad group of employees)

T/F: Tax laws are the same whether or not company stock has a readily ascertainable fair market value at the time that it is granted.

False (there are differences between them)

T/F: The special tax treatment of ISOs is automatic, no further rules must be met.

False (there's always some rules)

T/F: ESPPs are used by closely held corporations.

False (used by larger comps)

T/F: A basic health insurance plan primarily covers hospitalization.

True

T/F: A basic principle of Blue Cross/Blue Shield plans is to offer coverage to any individual who requests it.

True

T/F: An employee stock purchase plan generates little to no out-of-pocket cost to the company.

True

T/F: An employee stock purchase plan gives employees an interest in the financial success of the business.

True

T/F: An employee stock purchase plan is a tax-deferred form of compensation.

True

T/F: An executive may incur an alternative minimum tax (AMT) liability when an ISO option is exercised.

True

T/F: An executive must have cash to exercise an incentive stock option.

True

T/F: Corporate-owned life insurance is an option for providing continuing health coverage for retirees.

True

T/F: Employer health insurance plans generally cover all employees.

True

T/F: Employers can use a restricted stock plan to reduce the chance that a savvy executive would learn trade secrets and then go to work for a competitor.

True

T/F: If a stock option has no readily ascertainable fair market value at the time it is transferred to an executive, there is no taxable income to the executive at the date of the grant.

True

T/F: Premiums for commercial health insurance include such costs as commissions and state premium taxes.

True

T/F: Private long term care policies are more common than employer long-term care policies

True

T/F: Prospective pricing means the employer negotiates price of health care services before the services are needed.

True

T/F: Restricted stock arrangements often qualify for exemption from registration with the Securities and Exchange Commission.

True

T/F: Stock options are a form of compensation with little or no out-of-pocket costs to the company.

True

T/F: Stock options are a form of deferred compensation, with the amount of compensation based on increases in the value of the company's stock.

True

T/F: The corporation gets a deduction for the compensation income element that an executive must recognize if stock is sold before the two year/one year holding period.

True

T/F: The incentive stock option (ISO) provides greater deferral of taxes to the executive than a nonstatutory stock option.

True

T/F: The purpose of cost sharing is to encourage employees to limit health care spending.

True

T/F: To enjoy favorable tax treatment with an incentive stock option (ISO), the exercise price of the option must be at least equal to the fair market value of the stock on the date the option is granted.

True

T/F: Traditional health care plans are postpaid plans.

True

T/F: Vesting can be tied to a performance goal to encourage employees to achieve business goals.

True

T/F: The ability to treat subsequent gains in stock value at favorable capital gain rates makes a section 83(b) attractive to executives.

True (83B makes it so that they can treat gains in a stock at a long-term capital gain rate if they choose to do that. Must be substantially vested to file 83B)

T/F: ESPP benefits are forbidden to people who own more than 5%.

True (ISO is 10%)

T/F: ESPP options must be exercised within 5 years.

True (ISO is 10)

T/F: ESPPs have little to no out-of-pocket costs to the company.

True (costs nothing)

T/F: Equity-based compensation is very useful as an executive incentive in high-growth companies.

True (high-growth, tech, big comps)

T/F: A stock plan can be more valuable than cash compensation.

True (it can be, and often is true for executives, paid less salary, get more from stock options plans)

T/F: An executive is not subject to federal income tax on an ISO when the option is granted or exercised.

True (taxed when stock is sold)

T/F: A granting corporation does not get a tax deduction for granting an ISO.

True (they only get deduction if employee does not meet holding period)

T/F: An employee may have to pay tax when restricted stock is received even though, under state law, the employee does not completely own the stock.

True (yes, IF they are substantially vested in the option and it cannot be forfeited back!)

T/F: A restricted stock plan can be used to keep a recent retiree available for consulting services for a specified length of time.

True (yes, it can be a restriction that they must be available to the company)

What are the implications of the IRS position that an employer must be "at risk" with respect to health benefits in an FSA?

Who tf is not at risk?? IRS is dumb and a half

Can a self-employed person or S corporation shareholder-employee be covered under his or her own business's health insurance plan and obtain any tax advantage?

somethin to think about

Does a restricted stock plan affect an employer's accounting statements?

somethin to think about

Executive I. M. Best is covered under his company's ISO plan. The plan grants Best an option in 2019 to purchase company stock for $150 per share. In February 2021, Best exercises this option and purchases 100 shares. Fair market value of the 100 shares in February 2021 is $20,000. Suppose Best sells the 100 shares in December 2021 for $25,000. a.What is Best's taxable gain? b.How much is treated as compensation income in 2021? c.How much is treated as capital gain?

somethin to think about

Explain the difference between an HSA and an Archer Medical Savings Account

somethin to think about

Is there any type of disability plan that provides both employer payment of deductible premiums and non-taxation of benefits to the employee?

somethin to think about

What are the alternatives to the classic employer-paid long-term disability plan?

somethin to think about

What is the effect of federal securities laws on stock option plans?

somethin to think about

Zeta Corp. granted Norman an option under its employee stock purchase plan to buy 100 shares of Zeta for $20 a share when the stock was valued at $22 a share. A year and a half later, when the stock was $23 a share, Norman exercised his option; 14 months later he sold his stock for $30 a share. a.What must Norman report as wages? b.What must Norman report as capital gains?

somethin to think about