1
Q
ESOPs our defined contribution, plans, true or false?
A
True
2
Q
ESOPs our designed to invest primarily in what?
A
Securities of the Plan sponsor
3
Q
ESOPs can be advantage for three reasons:
A
Gives employees an ownership outlook
Employees share in the fruits of their labors
Offers a favorable means of corporate financing for the company
4
Q
The Internal Revenue Code provides employers with three additional tax incentives to put stock into an ESOP, which are:
A
Dividends paid to the ESOP may be deductible
Favorable tax treatment of distribution from ESOP if in the form of employer stock
Selling shareholders may delay the recognition of any gain on the sale of their shares if transactions are properly structured
5
Q
An ESOP must be a stock bonus plan or a combined stock bonus plan and what other type of plan?
A
Money purchase pension plan
6
Q
An ESOP must be designed to invest primarily in employer securities. In addition, it must satisfy the internal revenue code requirements and restrictions for these four criteria:
A
Requirements:
Put options
Voting rights
Restrictions:
Distributions
Allocations
7
Q
Stock bonus plans are non-pension plans that are distributable in?
SBPs have the same contribution in allocation formula options as:
A
Employer stock
Profit sharing plans
8
Q
The contribution and allocation formula is under an ESOP normally operate under the same rules as profit training plans.
However, what type of allocation formula may not be used within ESOP?
A
Permitted disparity allocation formula
9
Q
The definitions of a control group under an ESOP are expanded solely for the purpose of the ESOP. Rather than 80% ownership what is the ownership requirement for controlled status with regards to an ESOP?
A
Subsidiaries that are owned by at least 50% of the common parent in the control group
10
Q
If the stock is not readily tradeable, it must have what two characteristics when it comes to voting and dividends, of all classes of common stock issued by the corporation?
A
The highest voting rights
And
The highest dividend rights
11
Q
If an ESOP holds employer securities that are not readily tradable, who must make all valuations of the securities?
How frequently is the evaluation required?
In what case besides the annual valuation might an ESOP need an additional evaluation?
A
Independent appraiser
Annually
If the company is buying stock for the ESOP from a source, that is not the ESOP itself
12
Q
Customarily, what is the amount that can be deducted by a business on a commercial loan?
In a leveraged ESOP, What can be deducted by a business?
A
Just the Interest
The entire payment to the ESOP - portion of the loan repayment and Employer Contribution.
13
Q
An ESOP, not the Plan Sponsor, can borrow money from either the Employer or a Third Party with a guarantee to purchase stock, as a form of capital for expansion - true or false?
What is this called?
A
True
This is called a Leveraged ESOP.
The ESOP can take the loan and the company repays it and makes contribution.
14
Q
The permissible contributions under a leveraged ESOP are greater or lesser than those in other DC plans?
A
Greater
15
Q
In a closely held company, an ESOP can help create a market to sell shares. It can also help minority partners to:
A
Divest
16
Q
1042 Transactions are really neat. They allow C Corp shareholders to sell their shares to an ESOP and do what with the taxes from the gains?
How much stock is required to qualify for the 1042 transaction?
Where does the money have to be reinvested?
A
Defer taxes applied to gains from the sale
+30% owners
Securities from unrelated companies
17
Q
In executing a 1042 transaction, where a +30% shareholder sells their shares to the ESOP- they can defer taxes on the capital gains if they buy securities in an unrelated business. When are taxes paid? What is the name of the deferred tax securities that are purchased?
A
Qualified Replacement Property
When the QRP is sold
18
Q
A sponsor of an ESOP may contribute either _____ or _____ to an ESOP?
A
Stock
Cash
19
Q
A non-leveraged ESOP participant balance statement will consist of what 2 asset accounts?
A
A stock account.
A cash account
20
Q
Can an employer provide cash to a non-leverage ESOP account for employees? If so, why?
A
Yes,
To purchase stock from an available seller
21
Q
In a non-leverage ESOP, if the stock is not publicly traded, and the employer provides cash for the purchase of stocks, where are the stocks purchased? (CAPS)
A
Corporate parent
Affiliate of the Plan Sponsor
Plan sponsor
Shareholders
22
Q
The statutory exemptions exist to protect ESOP plans from prohibited transactions when purchasing stock?
A
Yes
23
Q
In an ESOP, the exemption from PT rules as it pertains to Employer Securities requires these 3 things to occur:
A
No commissions
Stock owned by Plan cannot exceed legal limits (for ER Securities)
adequate consideration price or less required
24
Q
What is adequate consideration? How does it factor into the purchase of employer securities? Who does it and how often?
A
It is the share value applied to employer securities
It is required for companies that do not have publicly traded stock
It is determined by an independent appraiser on an annual basis
25
what happens if the fiduciary fails to investigate the value of securities offered in their ESOP?
The investment is deemed improper
26
Can a commission be charged on the purchase of employer securities for the ESOP?
No, that would be a prohibited transaction that would not be exempt.
27
Is the fee for determining the valuation of employer securities a prohibited transaction?
No, it is not. That is permitted.
28
Eligible individual account plans are allowed to exceed the 10% rule limiting employer securities and a plan. ESOPs are a type of EIAP. What are other types?
Profit-sharing plan (with or without 401k option)
Stock bonus plan
29
What are the six requirements necessary for a shareholder in a C corporation to defer taxes on their 1042 transaction?
Own stock sold to ESOP 3yrs +
ESOP must own 30%+ post sale
Must reinvest in qualified replacement
QRP must be purchased within 3mos prior to sale of ESOP shares and 12 mos post sale
Purchase statement, notarized and filed w/ Tax Return
No transferring of shares to self, family +25%SHs during non allocation period
30
Qualified replacement property is defined as a security issue, issued by a domestic operating company which: (two criteria)
Didn’t have passive income in excess of 25% of gross receipts for preceding taxable year
Is not the corporation which issued the securities that were sold to the ESOP
31
With regards to 1042, what is defined as the seller’s family?
Spouse
Siblings
Ancestors
Descendants
32
Is there a de minimus exception for the sellers family and a 1042 transaction?
Yes,
Total to all descendants cannot exceed 5%
33
Which definition of ownership is used for the 25% shareholder definition in a 1042 exchange?
IRC 318
34
What is the non-allocation period definition in a 1042 transaction?
**From the date of the sale of the securities**
and **ends on the later of:**
**10 years** after date of sale.
**Date of plan distribution tied to the final payment of any acquisition**, debt incurred in connection with the sale
35
A 10% excise tax can be assessed against a ESOP related to a 1042 transaction in one of two cases:
**# shares** held by plan after sale **is less than the # after the 1042 transaction**
**value of the securities** held by the plan after **sale is less than 30% of the value of all employer securities**as of such disposition
36
ESOPs must be valued Annually for these 4 reasons:
1) ERISA and IRC require annual fair market valuation
2) The value of ER contributions and allocations to Participant accounts must be determined to insure limitations are met.
3) Term EEs need the value to decide whether to hold or sell
4) EEs who receive a distribution & want to sell their shares back to the company need to know the value
37
Publicly traded stock sets the fair market value for some companies ESOP plans, true or false?
True
38
What criteria does an independent auditor take into account when determining a fair market value? (4 criteria)
1) sales income (for year)
2) COGs (for year)
3) Debt load
4) ESOP equals Majority/Minority Interest in company
39
When a participant becomes eligible for distribution from the ESOP, the distribution generally is provided through which 3 contingent pieces from the vested account?
Whole shares of employer securities
Cash equal to the non-stock investments
Any partial shares
40
Do participants have the right to demand their entire account balance, be distributed in the form of employer securities?
Yes
41
What happens if the stock distributed the participant consists of qualified employer securities, and the vested account is paid in one calendar year?
The Participant is taxed only on the value of the shares when they were purchased
42
If for Participant is paid out their entire ESOP balance in one calendar year aside from the tax benefit of only being taxed on the purchase price what else happens?
This permits, the Participant to defer taxation on the net unrealized appreciation
43
So for an employee demands payment from the ESOP in employer securities this can allow them to defer what?
Payment of taxes on the net unrealized appreciation, until the shares are sold
44
What would be the NUA for an employee whose shares at time of distribution are less than their Cost Basis?
The NUA would equal zero dollars
45
A plan that holds employer securities must compute its cost basis under one of four methods outlined in treasury regulations.
What are the four methods?
What is the method typically used?
Ear marking, 12 month allocation, single security type, average cost
Average cost method
46
If the employer securities are rolled over to another qualified plan, how does the IRS view the transaction? What is the impact?
Does it receive the distribution tax exception?
What exception would exist for a transfer?
They are viewed as a distribution and the cost basis equals the current value.
No
In a plan transfer the original cost basis continues .
47
If a participant were to take a partial lump sum distribution of employer securities from their ESOP account, how is the NUA treated? Does it matter how the employer securities are purchased?
It does matter how the employer securities are purchased. If they were purchased with after tax employee contributions, then only the portion of the NUA attributable to such contributions is excluded from gross income.
48
On what day is the NUA computed at distribution?
As of the date of delivery of the stock certificates to the transfer agent
49
The plans cost basis is different from the participants cost basis. The plans cost basis is the cost of acquiring employer securities for calculating NUA, whereas the participants basis represents what?
Amounts previously taxed to the Participant, (for example, after tax employee contributions)
50
If after tax employee contributions are invested exclusively in employer securities, any distributed securities that are purchased with after tax employee dollars will be entirely excludable from income, true, or false?
True
The employee already paid the basis cost when they paid their taxes on income
51
Does the after Tax employee contribution exception inside of the ESOP extend to non-employer securities?
No. They will be treated as any other after tax investment and the NUA would be taxable.
52
The 10% early distribution penalty applies to all early ESOP distribution, true or false?
False.
It is not applied to any NUA that is excluded from income.
The penalty only applies to the taxable portion of the distribution
53
What is a put option and how does it apply to ESOP distributions?
In companies that do not have publicly traded stock it allows the ESOP Participant to demand the company buyback the participants share(s) add a given price.
54
The ESOP put option permits the participant to require the company to buy the stock at any time during the following two option periods:
The first put option period
The second option period
55
The first put option period occurs after what event?
When does the first put option period begin and end?
What happens if the Participant decides not to put the stock to the company during that period?
The date the Stock is distributed to them.
at least 60 days- after they receive the stock
The company must provide a second 60 day window 1 year after the first option was granted
56
When does the second put option period begin? When does it end? What is the employer required to do?
During the following plan year after the New fair market value has been determined in the participant notified.
It must be at least 60 days in length
Notify the Participant
57
If the participant exercises a distribution based on an installment plan rather than a lump sum payment, the company must actually pay the Participant for the put stock within within how many days after the participant exercise exercises the option?
Within 30 days
58
If an employee exercises a put option for a total distribution (full balance in 12 months) payment must commence when?
In doing so how may the employer defray the purchase price in the distribution? What would be require required of the employer?
Within 30 days.
The employer may pay the purchase price in substantially equal annual installments over a period of five years or less.
Adequate security for any unpaid balance during the period .
59
An ESOP is always required to distribute stock upon distribution to Participant, true or false?
False
60
In what situation would a company be relieved of the requirement to distribute stock to participants?
If the articles of incorporation or bylaws of the company limit stock ownership to employees
If the company is an S corporation
61
If an ESOP is not going to distribute stock, what options does the Plan have for converting to cash within the plan?
1) exchanging stock with cash accounts of other Participants
2) Through a sale of stock to the employer or other shareholder
62
If stock issuance is in an S Corp. exceeded 100 shares what would happen?
The S corporation would automatically convert to a C corporation
63
S corporations are exempt from the requirement of distributing benefits in the form of stock, true or false?
True
64
If an employee separates from service either due to normal retirement age, disability, or death, then the participant must have a right to elect distribution within what timeframe?
For separations due to other reasons, what is the requirement?
One year after the close of the Plan year in which they separate
Within one year after the fifth Plan year, following his or her separation
65
ESOP’s they do not lump sum distribute distribute over what timeframe?
The maximum distribution payment is what?
What happens if the balance exceeds this limit?
Is there anything different in terms of the repayment period if the ESOP is leveraged?
Not more than five years
$800,000
The five-year period is increased by one year for each $160,000 or fraction there of
The plan may delay distributions of securities to the participants until the loan is completely repaid
66
A leveraged ESOP may be permitted to delay distributions until the loan is completely repaid, but cannot be delayed for either of the following two situations:
A required minimum distribution is due
Earlier of age 65/ retirement age
10th anniversary on date of participation
Termination of the Participant service
67
In a leveraged ESOP distribution attributable to Retirement age, 10th year anniversary from participation, start date and termination of the participant service-payment must commence no later than how many days after the end of the plan year in which the preceding event occur?
Distribution must commence no later than the 60th day after the end of the Plan year
68
Can a plan allow participants to elect a longer or shorter payment period?
It’s up to the plan document
69
Is an ESOP or stock bonus plan permitted to eliminate or give the employer the discretion to eliminate either a single sum or installment option of distribution-for benefits that are subject to put option requirements related to employer securities that are not readily tradeable?
Yes
70
In order to allow employees close to Retirement to properly diversify their investments held in an ESOP what are three options that the internal revenue code provides:
a cash distribution to the Participant equal to the elected diversification amount
The plan may offer three investment alternatives within the ESOP
The plan may permit the transfer of amounts to the companies, 401(k) or profit sharing plan that has at least three alternative funds for the participant to choose from
71
Diversification is available for a Plan year to what type of Participant?
At what age?
And what service requirement?
Qualified participant
Age 55
10 years of participation as of the end of the plan year
72
Hours of service and last day conditions don’t have any effect on whether an employee is able to diversify, true or false?
False, they certainly could play a role into a employee‘s eligibility as it pertains to 10 years of plan participation
73
A qualified participant must be permitted to diversify up to how much of their account balance in employer stock? Over what period? What happens when that period ends?
Up to 25%
5 years
Upto 50% in the 6th year and beyond
74
The diversification period continues for a total of how many years, at the 25% level?
In the sixth year, the participant must be allowed to diversify up to how much?
Five years.
50%
75
A qualified participant diversifies 25% of their available balance in year one based on 1000 shares of stock, they diversify 250 shares. In year two the employee receives 100 additional shares. And year two how much can be diversified?
25
76
The diversification amount is based on the value of shares, true or false?
False.
It’s based on the number of shares
77
The Participant may elect diversification when during the diversification election period?
What is the diversification election period?
Anytime
The 90 day window Starting on the last day of the Plan year in which the participant is eligible for diversification.
78
Once an election to diversify by a qualified participant is made how long does the plant administrator have to affect the diversification?
Are there any exceptions?
90 days
Yes,
In closely held companies the participant is not notified of the 90 day period. In the summary plan description and allowed to make the diversification once the share value is known.
79
For a closely held company a Participant may typically make a diversification request after the share value is known for what else can the plan sponsor offer Participant in such a situation?
An opportunity to make a preliminary diversification within the 90 day period and then the offer of a final diversification once the share value was known.
80
Diversification is requirement under IRC 40 one a in failure to permit a participant to diversify is grounds for what?
Disqualification of the plan
81
For defined contribution plans that contain publicly traded employer securities there are different diversification rules. When is diversification allowed by contribution type?
Deferrals and after tax contributions
Rollover accounts
Non-elective contributions
Participants must be allowed to diversify employee referrals (pre-tax or after tax) and rollover account **Anytime**
Diversification of NEC account must be only to participants who have at least three years of service
82
DC plans that include employer securities have diversification rules that are different than ESOPs that are not publicly traded.
ESOPs that contain publicly traded employer securities are not subject to this diversification requirement if they do not provide for:
Elective contributions
Matching
After a tax employee contribution.
**AND**
The ESOP is a separate plan from any other DB or DC plan.
83
ESOPs provide for forfeitures in one of two ways:
How does it work if the plan allows for an account restoration if rehired within a five year period?
How does it work absent that?
The plan is able to allocate forfeitures once the employee takes their full plan distribution-provided that the employee does not return to work within the 5 1-year break and service window.
The plan allocates for fixture after the five year break in service window closes
84
When a participant forfeits part of their account, the forfeiture is made up of what?
For features that occurred during the year are held in a _______ account until what date?
Stock and cash
Suspense
The Plans end of your allocation date
85
Unallocated forfeitures may provide a pool cash with which the plan may re-purchase stock from who? Thereby avoiding what?
Terminated employees during the year
Avoiding a sale of stock to the company or shareholders during the year
86
When reallocation of forfeitures occurs classification of the forfeiture does what?
Stays consistent with its forfeited form either stock or cash
87
Two employee account activities can create a Repurchase liability in a closely held company with an ESOP, what are the two situations?
The exercise of put options
Diversification
88
What does the repurchase liability do?
Who are possible parties to the purchase?
What is a possible outcome?
What is done to guard against this?
Forces a purchase of the stock
The plan, the corporation, or other shareholders
It may place a cash flow burden on the company
A repurchase liability study is done annually
89
The maximum deductible contribution in a given year is 25% of eligible compensation for companies to offer an ESOP, true or false?
True
Just like stock, bonus plans, ESOP’s are governed by the profit plan deduction rules
90
An unleveraged ESOP Plans the limits are vastly greater than those allowed for in other types of plans, true or false?
False
Allocations to non-leveraged ESOP accounts are subject to the same limits under 415 as other DC plans
91
The 415 limit for ESOP contributions on an un leverage plan then is what for each participant?
The lesser of the 415 limit or 100% of compensation
92
Compensation for the determination of non-leveraged ESOP funding, which looks at the 415 limit is the same as what showing on form W-2, true or false?
False
Compensation for this purpose includes amounts, not showing on form W-2, such as pretax, elective referrals to a 401(k) and amount paid into a cafeteria plan
93
Are voting rights different between ESOPs that consist of publicly traded employer securities and ESOP’s that exist and closely held companies
Publicly traded securities allow full voting power
Closely held companies limit voting power to significant changes in the corporation
94
ESOP’s may be structured so that participants are permitted to vote the shares of stock allocated to their account as well as unallocated shares, true or false?
False
Participants are permitted to vote. Their shares.
And plans can be designed to allow the trusteed to vote the unallocated shares
95
What other options are available for allowing employees to vote and handling an allocated shares?
All participants each get one vote, regardless of the number of shares held
Participants will vote both the shares allocated to their account and a pro rata portion of the unallocated shares
96
In a direct loan to an ESOP, who borrows the money for the program? And whom is a borrowed from?
The ESOP borrows the money.
The Plan borrows the money from either a bank or from the company
97
In a back to back ESOP loan describe loan number one describe loan number two.
Loan number one originates with the company borrowing money from the bank.
Loan number two originates with the ESOP borrowing money from the company with which to purchase the shares
98
What are some of the key advantages of a back to back ESOP loan?
It allows for:
Refinancing of loan one
Accelerated repayment of loan one
The use of assets other than company stock for security for loan one
99
At the time a loan is taken for stock purchase for an ESOP plan all of the shares purchased with the loan proceeds are in encumbered. What happens to these shares?
They are not allocated to Participant account, but are held in suspense, until encumbrance is released
100
Encumbered shares are released how?
As payment is made to the bank, a release of unencumbered shares occurs from the suspense account and the shares are allocated to Participant
101
Because of the obvious self-dealing issues with an ESOP loan what does treasury and Department of Labor recommend when executing a loan?
And independent fiduciary approved the loan to ensure the interest of the Plan participant and beneficiaries are protected
102
If an ESOP terminate before the loan is fully repaid, how is the loan satisfied and closed out?
The remaining on allocated chairs in the suspense account are sold to repay the loan balance
103
Permissible uses of loan proceeds include these three uses
To purchase qualifying employer securities
To repay the exempt loan
To repay a prior exempt loan
104
If a lender foreclose against an ESOP, what is the maximum extent the lender can recoup?
Only to the extent of the delinquent payment
A lender cannot call the loan or require additional security if the underlined stock value drops
105
ESOP loan proceeds can be used for the following three reasons
Acquire employers securities
Repay the exempt loan
Repay a prior exempt loan
106
The definition of an exempt loan means that the bank may not sue the EOP for collection on default on the loan, true or false?
True
Except in relation to the collateral pledged
107
A person entitled to repayment under the loan may not have a right to any assets of the ESOP other than these three things
Collateral given on the loan
Employer contributions (other than securities made to satisfy obligations under the loan)
Earning attributable to the collateral and the investments
108
Non-recourse loans take a real risk because if the value of the collateral stock drops and the company continues making payments. What happens?
The bank cannot take action to exercise at security rights as long as payments are being made.
If the ESOP were to terminate or default, the bank could take possession of employer stock and nothing else.
109
We’re only principal payments are taken into account to determine the rate at which encumbered securities are released from the suspense account. The repayment term on the loan may not exceed what and must have what other characteristic?
10 years
The payments must be equal
110
The IRS permits securities held in the suspense account to be sold and the proceeds of the sale to be used to repaid an exempt loan in the event of a spinoff or sell transaction, true or false?
True
111
Earnings on the collateral for an ESOP exempt loan cannot be used to make repayment on that loan, true or false?
False
112
C corporations that have leverage ESOP enjoy a additional deduction benefit. What is it?
1) permits a deduction of up to 25% of eligible comp for principal payments
2) May deduct any amount contributed to pay loan interest
3) If company maintains a separate DC plan, there is a separate, unrelated 25% deduction limit as well.
113
Leveraged ESOPs are able to written to allow for larger contributions to employees than would be available through other DC plans, true or false?
True
114
Explain how dividends are taxed at both the corporate and shareholder level.
Corporations do not receive tax deductions for issuing a dividend.
Shareholders are taxed on dividend income
115
Dividends to an S corporation paid to an ESOP our tax deductible, true or false?
False
they’re only tax deductible to C corporations
And with additional requirements met
116
In order for dividends paid to a ESOP held by a C corporation to be tax deductible, what 4 requirements must be met?
repay the ESOP loan or disperse to Participant
applicable on loan payments to securities related to the loan
Dividends must be reasonable and characterized as dividends
If company is subject to alternative minimum tax, they must be added back in to determine Tax
117
If the ESOP owns all of the stock of a C-Corp, AND the 4 requirements are met regarding dividends- what happens to Tax Deductibility?
It makes it completely tax deductible.
118
If a qualified plan, even an ESOP happens to hold stock in the corporation that does not satisfy the definition of employer securities, what happens to the dividends paid on that stock? Are they or are they not deductible?
They are not deductible, even if the requirements of 404K are met
119
Dividends in an ESOP are not annual additions under 415, pretax elective, or after tax employee contributions.
Is this true even if the dividends are reinvested in employer securities instead of being distributed to the Participant?
Yes
120
If dividends are distributed to participants, are they subject to the 10% tax on early distribution under IRC 72T? Are they eligible for rollover under 402C?
They are not subject to the 10% early distribution tax.
They are not eligible for rollover
121
What happens to dividends that are reinvested in employer securities? What happens to their identity and how are they treated?
They lose their identity is 404K dividends
They are treated as earnings in the same manner as dividends, for which no election is provided
122
On the part of the business, to be deductible, dividends retained in the plan at the employees election must be reinvested in what?
What is the ongoing requirement in terms of asset allocation?
Employer securities
There’s no requirement that the dividends must remain in the form of employer securities
123
The treasury regulations require a participant to take all ____ - ________ distributions available from the employers plans before taking a hardship distribution under a ______ plan.
Non-hardship
401(k)
124
The right to receive ESOP dividends is a distribution option that must be exhausted before or after requesting a 401(k) hardship?
401(k) hardships are the last option and so ESOP dividend distributions must be access first.
125
Any dividends reinvested must be 100% vested even even if the participant is not otherwise 100% vested, true or false?
True
126
Because participants have to be 100% vested, what are the two options available, even for employees that aren’t 100% vested, when it comes to dividend distributions?
Provide that the reinvested dividends are fully vested, even if the participant is not
Offer an election to reinvest dividends only to participant who are 100% vested
127
Deductible dividends under 404K, which are distributed to the participants or beneficiaries directly from the plant sponsor are reported on the 1099R or 1099DIV?
1099DIV
However if the dividend is paid from the ESOP trust account, it’s reported on the 1099R
128
To the extent that the ESOP is a S corporation shareholder, the ESOP’s portion of any income will be paid to a tax exempt entity therefore, that portion will or will not be subject to taxation?
Will not be subject to taxation
129
An S corporation ESOP may or may not provide deductible dividends?
May not
130
Because of the limitations on the number of shareholders in an S corporation, ESOP’s sponsored by S corporations generally do not do what
Permit distributions in stock
131
Because stock distributions are not permitted in an S corporations ESOP, there is no need to provide what type of distribution request?
Put options
132
Can S corporation stockholders take advantage of the tax deferral on sales of stock to an ESOP under the 1042 exchange?
No, that’s only for C corporations
133
NS corporation with an ESOP must provide that no portion of the plan attributable to employer securities may accrue during a non-allocation year to whom? If that were to occur, what is that called?
Disqualified persons
Prohibited allocation
134
A disqualified person is anyone that owns what percentage of stock in the ESOP? Or their family is deemed to own at least how much?
10%
20%
135
A process that artificially allocate shares held in suspense and takes into account stock options and approximate stock values of nonqualified deferred comp plans is called what?
Synthetic equity
136
The result of the synthetic equity calculations is that if a sufficiently small group of individuals has a sizable enough ownership in the S corporation, those individuals may not get any allocation in the ESOP.
Section 409P must be passed how often?
Every day in the plan year
137
If a prohibited allocation occurs, what happens?
What is the Penalty to the S Corp?
What happens to the ESOP loan?
Prohibited allocation is treated as distributed to the disqualified person.
The plan is disqualified
The S corporation is subject to a 50% excise tax.
The ESOP loan may be subject to a 15% excise tax.
138
Deemed ownership shares are calculated how?
The number of shares of the S corporation that are allocated to a Participant account
Plus
The Participant share of the unallocated stock held by the ESOP such as in a suspense account
139
A non-allocation year is any year in which DQP’s in the aggregate own what percentage or more in the S corporation?
50%
140
Synthetic equity is the term given by 409P to benefits provided by the corporation to individuals in the form of certain types of what? (Two items)
Non qualified deferred comp
Restricted property
141
Special rules apply regarding income tax withholding requirements on distributions which include employer securities. What are these rules do?
Prevent the securities from having to be sold to satisfy any withholding obligation
142
If a distribution consists solely of employer securities, what withholding applies? Is it different if the distribution is an eligible rollover or would otherwise be subject to 20% withholding?
No withholding applies
143
What if the cash in the distribution exceeds $200?
In that case withholdings would occur
144
A lump sum distribution consist partly of employer securities and cash. The securities portion is $15,000 and the cash portion is $40,000 for a total of $55,000. The rollover withholding rate is 20%. What will the tax withholding be?
The withholding is $11,000 (20% X $55,000)
The withholding is taken from the cash portion of the distribution
145
A lump sum distribution consists partly of employer securities and cash. The employer securities portion is $120,000 and the cash portion is $15,000. What is the withholding liability? And how is it satisfied?
$27,000 (20% X $135,000)
Because the succeeds the cash portion the liability is reduced to $15,000
$15,000 which represents all of the cash is transmitted to the IRS for withholding
146
An employee has a distribution which consists of $40,000 in cash and $60,000 in employer securities. The NUA insecurities is $25,000. If the employee chooses to exclude the NUA from gross income then what is the cost basis? Assume that two years later the securities are worth $78,000 what is the taxable gain then?
$35,000 ($60,000 – $25,000)
$43,000 ($78,000 – $35,000)
147
Including the NUA portion at the time of distribution may provide an opportunity to declare a loss that wouldn’t be available. If the NUA was excluded. True or false?
True
148
What are two reasons an individual might elect to include in income the full value of the distributed employer securities? (Two reasons)
Because the individuals effective tax rate is low,
Because the distribution qualifies for income averaging treatment under 402D
149
The four methods for calculating the basis of employer securities in the plan. Name the four methods.
Ear marking
12 month allocation
Single security type.
Average cost
150
Of the four different types of methods available for determining the cost basis of employers securities in a plan, some of these methods may result in employer securities held by the plan having **different** or the **same** cost basis as other employer securities?
Different
151
When an employer sells the shares, all of the shares will have the same cost basis true or false?
True
152
At time of payout the cost basis that an employee realizes is computed off of the NUA less the companies cost basis. What then happens?
The companies cost basis is subtracted from the NUA value of the total shares.
The remaining amount is then divided by the total number of shares distributed which then provides the cost basis for the employee.
153
Gain that does not exceed the NUA that was previously excluded from income is treated as capital gains or long-term capital gains?
Long-term capital gains
This is regardless of the actual holding period.
154
To the extent the gain exceeds the previously excluded NUA the characterization of the gain as long-term or short-term depends on what?
The individuals actual holding period
155
For determining gains tax treatment, the individuals holding period begins on what date?
The date the trustee of the Plan delivers the stock certificates to the transfer agent with written instructions to reissue the certificates in the name of the individual
QKC
flashcards
Decks in class (15)
# Cards
-
Chapter 1: Plans Covering More Than One ER And Leased EEs203
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Chapter 2: Other ER Situations131
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Chapter 162
-
Chapter 3 Controlled Groups & ASGs92
-
IRC codes24
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Chapter 4: Compensation107
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Chapter 5: Average Benefits Test and Special Rules129
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Chapter 6: Non-Discrimination141
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Chapter 7: ESOPs155
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Test Questions6
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Chapter 8: Fiduciary Standards118
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Chapter 9: Prohibited Transactions134
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Chapter 10: Distributions & Insurances111
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Chapter 11: Code of Conduct0
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Chapter Tests: True/False Questions112
