Retirement Planning Final Ch.12

Which of the following plans is typically subject to a substantial risk of forfeiture as a result of funds being available to creditors upon liquidation of the employer? 1. Secular trust. 2. Rabbi trust. 3. Unfunded promise to pay. 1and2. 2and3. 1and3. 1,2and3.

2and3.

Which of the following is subject to IRC Section 409A? ESOPs. ESPPs. ISO plans. 457(f ) plans.

457(f ) plans.

Joe Bob receives stock options (ISOs) with an exercise price of $18 when the stock is trading at $18. Joe Bob exercises these options two years after the date of the grant when the stock price is $39 per share. Which of the following statements is correct? A) Upon exercise Joe Bob will have no regular income for tax purposes. B) Joe Bob will have W-2 income of $21 per share upon exercise. C) Joe Bob will have $18 of AMT income upon exercise. D) Joe Bob's adjusted basis for regular income tax will be $39 at exercise.

A) Upon exercise Joe Bob will have no regular income for tax purposes. Joe Bob does not have income at the date of exercise. Joe Bob's adjusted basis will be $18. The AMT income is equal to the difference between the fair market value and the exercise price ($39 - $18 = $21).

Which of the following is false regarding a deferred compensation plan that is funded utilizing a rabbi trust? 1. Participants have security against the employer's unwillingness to pay. 2. Rabbi trust provide the participant with security against employer bankruptcy. 3. Rabbi trusts provide tax deferral for participants. 4. Rabbi trusts provide the employer with a current tax deduction. A) None, they are all true. B) 2 and 4. C) 1, 2, and 4. D) 1, 2, 3, and 4.

B) 2 and 4.

Arnie, the CEO of The Producers Inc., was awarded the following stock options from The Producers Inc. OptionGrantDateTypeExercisePriceFMVNumber of Shares 1 1/1/2013NQSO$15$151,000 2 1/1/2020 NQSO$25$251,000 During 2020 Arnie had the following transactions regarding the above options. OptionDateActionNumber of Options (O) / Shares (S)Market Priceon Date 1 2/1/2020Exercised1,000 (O)$27 1 2/1/2020Sold1,000 (S)$27 2 12/12/2020Exercised 1,000 (O) $36 Which of the following is correct? A) Arnie has $11,000 of W-2 income and a $12,000 capital gain. B) Arnie has $23,000 of W-2 income. C) Arnie has capital gain of $12,000. D) Arnie has $66,000 of W-2 income.

B) Arnie has $23,000 of W-2 income. At the exercise of an NQSO, Arnie will have W-2 income equal to the excess of the fair market value over the exercise price. In this problem, Arnie has $12,000 [($27-$15)x1,000] of W-2 income related to the 1/1/2013 options and $11,000 [($36-$25)x1,000] of W-2 income related to the 1/1/2020 options.

Jennifer received 1,000 SARs at $22, the current trading price of Clippers, Inc., her employer. If Jennifer exercises the SARs three years after the grant and Clipper's stock is $34 per share, which of the following statements is true? A) Jennifer will have an adjusted basis of $22,000 in the Clippers, Inc. stock. B) Jennifer will have W-2 income equal to $12,000. C) Jennifer will have long-term capital gain of $12,000. D) Jennifer will have ordinary income equal to $22,000.

B) Jennifer will have W-2 income equal to $12,000.

Mike was awarded 1,000 shares of restricted stock of B Corp at a time when the stock price was $14. Assume Mike properly makes an 83(b) election at the date of the award. The stock vests 2 years later at a price of $12 and Mike sells it then. What are Mike's tax consequences in the year of sale? A) Mike has W-2 income of $12,000. B) Mike has a long-term capital loss of $2,000. C) Mike has W-2 income of $14,000. D) Mike has a $12,000 long-term capital gain.

B) Mike has a long-term capital loss of $2,000.

Cindy Sue has been with CS Designs, Inc. for five years. CS Designs has a deferred compensation plan to provide benefits to key executives only. CS Designs contributed $400,000 into a trust for Cindy Sue's benefit under the company's deferred compensation plan. The plan requires that executives must work for the company for 10 years before any benefits can be obtained from the plan. Cindy Sue has come to you to determine when she will be subject to income tax on the contribution by the employer. Which of the following is correct? A) Since the assets were placed into a trust, the economic benefit doctrine will require inclusion in income for the current year contributions made by the employer. B) Since Cindy Sue cannot receive the benefits until she has been with the employer for 10 years, the substantial risk of forfeiture doctrine will not require inclusion in income for the current year contributions made by the employer. C) Since the assets were placed into a trust, the constructive receipt doctrine will require inclusion in income for the current year contributions made by the employer. D) Cindy Sue is subject to income tax in the current year because the plan is discriminatory.

B) Since Cindy Sue cannot receive the benefits until she has been with the employer for 10 years, the substantial risk of forfeiture doctrine will not require inclusion in income for the current year contributions made by the employer.

Blake was awarded 1,000 shares of restricted stock of Acme Corporation at a time when the stock price was $7. Assume Blake properly makes an 83(b) election at the date of the award. The stock vests 3 years later at a price of $19 and Blake sells it then. What are Blake's tax consequences in the year he sells the stock? Blake has W-2 income of $19,000. Blake has a long-term capital gain of $12,000. Blake has W-2 income of $12,000. Blake has a $19,000 long-term capital gain.

Blake has a long-term capital gain of $12,000.

ABC has an Employee Stock Purchase Plan (ESPP). Which statement(s) regarding an ESPP is/are correct? 1. The purchase price of the stock may be as low as 85% of the stock value. 2. When an employee sells ESPP stock at a gain in a qualifying disposition, all of the gain is capital gain. 3. There is an annual limit of $25,000 per employee for ESPPs. A) 1 only. B) 1 and 2. C) 1 and 3. D) 2 and 3.

C) 1 and 3. Statement 2 is incorrect because only the gain in excess of the W-2 income (on the bargain amount) will be capital gain

Which of the following is true regarding employer contributions to secular trusts for employee-participants of a nonqualified deferred compensation agreement? 1. Participants have security against an employer's unwillingness to pay at termination. 2. Participants have security against an employer's bankruptcy. 3. Secular trusts provide tax deferral for employees until distribution. 4. Secular trusts provide employers with a current income tax deduction. A) 3 only. B) 1 and 2. C) 1, 2, and 4. D) 1, 2, 3, and 4.

C) 1, 2, and 4.

Rick has an 18% nonqualified deferred compensation plan that is funded annually by his employer. Payments are made to a separate trustee of a secular trust who was selected by Rick and his employer. The employer contributions are discontinued at Rick's death, disability, or employment termination. When Rick retires or terminates employment, he will receive the proceeds from the trust. Which of the following is/are correct regarding the deferred compensation plan? 1. The contributions are not currently taxable to Rick because they are subject to a substantial risk of forfeiture. 2. The contributions to the plan are currently subject to payroll taxes. 3. The employer can deduct the contributions to the plan at the time of the contribution. A) 3 only. B) 1 and 3. C) 2 and 3. D) 1, 2, and 3.

C) 2 and 3.

Ricky receives stock options for 12,000 shares of XYZ Corporation with an exercise price of $10 when the stock is trading on the national exchange for $10 per share. The XYZ company plan is an Incentive Stock Option Plan. Which of the following statements are true regarding the options? 1. Ricky will be required to hold any ISOs for more than a year after exercise and more than two years from the grant date to have long-term capital gains. 2. 2,000 of the options are NQSOs. A) 1 only. B) 2 only. C) Both 1 and 2. D) Neither 1 nor 2.

C) Both 1 and 2.

Which of the following are characteristics of a phantom stock plan? 1. Benefits are paid in cash. 2. There is no equity dilution from additional shares being issued. A) 1 only. B) 2 only. C) Both 1 and 2. D) Neither 1 nor 2.

C) Both 1 and 2.

Mary Jane received 1,000 NQSOs with an exercise price of $25 per share when the stock was $25 on the market. Two years from the date of grant Mary Jane exercises when the stock price is $102. At exercise, Mary Jane: A) Has W-2 income of $25,000. B) Has an AMT adjustment of $77,000. C) Has W-2 income of $77,000. D) Has an AMT adjustment of $25,000.

C) Has W-2 income of $77,000. Mary Jane will have W-2 income of the difference between the market price and the exercise price ($102 - $25 x $1,000 = $77,000). She will not have an AMT adjustment for the exercise of an NQSO.

All of the following are reasons that an employer might favor a nonqualified plan over a qualified retirement plan except: A) There is more design flexibility with a nonqualified plan. B) A nonqualified plan typically has lower administrative costs. C) Nonqualified plans typically allow the employer an immediate income tax deduction. D) Employers can generally exclude rank-and-file employees from a nonqualified plan.

C) Nonqualified plans typically allow the employer an immediate income tax deduction.

On July 31, 2014, B Corp sold 1,000 shares of its stock to Mike, an employee, for $12 per share. At the time of the sale, B stock was trading for $30 per share. The stock was to vest in 7 years on July 31, 2021. This restriction was stamped on the certificates. On July 31, 2021, the B stock was trading for $125 per share. Mike sold the stock in September 2022 for $150 per share. Assuming no special elections, how much must Mike include in income and in what year? OptionYearAmountA2014$18,000B2014-2022Ratable gain based on year-end valueC2021$113,000D2022$113,000 A) Option A. B) Option B. C) Option C. D) Option D.

C) Option C. When the substantial risk of forfeiture expires on July 31, 2021, Mike has income of $125,000 less the adjusted basis of $12,000, or $113,000. Mike will also have a gain of $25 per share from the date the stock vested until he sells the stock.

John is a consultant who issues an invoice December 18th. The company he works for always pays within ten days, including the time for the check to be mailed. If John checks his mailbox on January 1st and the check is there, which of the following tax rules would cause it to be taxable in the prior year? Substantial risk of forfeiture. Tax triads. Constructive receipt. Economic benefit doctrine.

Constructive receipt.

In 2020, Chip, an accomplished professional race car driver, is to receive a signing bonus for agreeing to drive for Hot-Lap International, a racing team. Hot-Lap agrees to establish a NQDC agreement with Chip to defer the bonus beyond Chip's peak income producing years. Hot-Lap transfers the bonuses to an escrow agent, subject to the risk of forfeiture to team creditors in bankruptcy, who invests the funds in securities acting as a hedge against inflation. The bonus is deferred until 2021 and is then paid to Chip in years 2021-2030. When is the income deductible by the employer and includible by Chip? OptionEmployerDeductionEmployee InclusionA20202020B20212021C2021-20302021D2021-20302021-2030 A) Option A. B) Option B. C) Option C. D) Option D.

D) Option D.

On January 15, Year 1, Blake, a Senior Vice President for Acme Corporation, is granted 20,000 ISOs at an exercise price of $10. On February 6, Year 2, he exercises all his options when the price of Acme stock is $27. When can Blake sell the ISO shares and avoid a disqualifying disposition? January 16, Year 3. January 16, Year 4. February 7, Year 3. February 7, Year 4.

February 7, Year 3.

Randolph Reich III is retiring early from his position as CEO of BIG Co. BIG is providing him with a lucrative severance package for early retirement. Which of the following is the name of this type of benefit? Golden Handcuff. Golden Parachute. Golden Retriever. Golden Handshake.

Golden Handshake.

Non-qualified deferred compensation plans often use life insurance for funding within the plan. Why is this?

Life insurance products have tax advantages.

ISO's are a common benefit for executives. Which of the following statements is NOT correct regarding ISO's?

To qualify as an ISO, the executive must hold the stock for either two years from the grant of the ISO or one year from the date of exercise of the ISO.

On January 15, Year 1, Blake, a Senior Vice President for Acme Corporation, is granted 20,000 ISOs at an exercise price of $10. On February 6, Year 2, he exercises all his options when the price of Acme stock is $27. He sells the ISO shares three years later, when Acme stock is trading at $47 per share. What is his long-term capital gain per share? a. $47. b. $37. c. $27. d. $20.

b. $37.

Acme Corporation has created a deferred compensation plan (Plan) for 50 key executives (participants), all of whom are highly compensated employees. Acme contributes each year on behalf of each participant to a trust, T. The trust is not and never has been a qualified trust under §401(a) and is not exempt from taxation under §501(a). T's assets are not subject to the claims of Acme's creditors. Separate accounts that reflect the participant's share of the net trust assets and income are maintained for each participant. A participant's entire interest in T becomes vested upon completion of three years of service with Acme beginning on the date the individual first becomes a participant in the plan. Participants or their beneficiaries are entitled to receive their vested interest in the net assets of T, net of applicable withholding and other taxes, on death, disability, or termination of employment. In addition, T is required to distribute to each participant each year an amount that the trustee reasonably estimates will be equal to the amount of Federal, state, and local income and employment taxes payable by the participant with respect to the increase in the participant's vested accrued benefit in T during such year. T is permitted to make the distribution in part as a distribution of cash to the participant, and in part in the form of applicable employment tax withholding under Federal, state, or local law. What type of plan is this? a. Rabbi trust.b. Unfunded plan. c. Wrap plan.d. Secular trust.

d. Secular trust.