An employer securities and/or stock ownership plan can be quite enticing for prospective employees, particularly those who are of management caliber and highly-qualified technicians. By itself, the investment in securities of the employer as part of a plan can create some threats as it presents opportunities for some employers to enrich themselves at the detriment of employees. Also, it reduces the participants' economic diversification as if the employer fails, then not only will employees lose their jobs, they will lose part of their retirement security as well. Therefore, ERISA prohibits such transactions and closely regulates stock ownership plans.
On the plus side, plan investment in stock of the employer provides a chance for an employee to have an ownership stake in the business. Also, there can be no argument that stock ownership provides an incentive for productivity and commitment. These are powerful arguments in favor or stock ownership plans, and as a result, ERISA strongly encourages employee stock ownership plans (ESOPs) which are designed to invest primarily in employer stock.
ESOPs have an unusual feature—they integrate the employer and the plan, plus ERISA encourages them. But, ERISA also demands strong protection of participants and beneficiaries as it does in all plans. Obviously, this can create a controversial and complex body of law and regulations.
F An employee stock ownership plan (ESOP) may be either a qualified stock bonus plan, or a combination bonus and money purchase plan, either of which must be designed to invest primarily in qualifying employer securities.
"Employer security" is a security issued by the employer of the participants or by an affiliate, and the word "security" takes its meaning from securities regulation. A "qualifying employer security" is an employer security that is either stock, a marketable obligation or certain publicly traded partnership interests.275 These are the only kinds of securities that these plans are allowed to hold.
To be a "qualified" security, the Code's rules state that a qualifying employer security (or employer security) is common stock issued by the employer, or by a corporation that is a member of the same controlled group, and which is readily tradable on an established securities market.276 Where there is no such readily tradable common stock, then employer securities are shares of common stock that has voting power and dividend rights equal to or greater than the voting power of dividends of any other class of stock. Also, noncallable preferred stock that is convertible at any time into common stock of the employer—and at a reasonable price—is also an employer security.
A "marketable obligation" is a bond, debenture, note, or other evidence of indebtedness that is either acquired in the market or from an underwriter/issuer at a fair price, and such investment in this employer obligation is not excessive.
For plans other than eligible individual accounts plans (described below), stock is a considered as a qualifying employer security only if (1) immediately after the acquisition of the stock, no more than 25% of the outstanding stock of the same class is owned by the plan, and (2) at least 50% of the outstanding stock of the same class is owned by persons independent of the issuer. This is a very important distinction as an employer cannot use treasury stock, etc., as the ownership of at least half of the stock is owned by other than the issuer.277
Real estate can be used also, and "employer real property" is defined for these purposes as real property leased by the plan to the employer or an affiliate. "Qualifying employer real property" is defined as parcels of employer's real property of which a substantial number are geographically dispersed; each parcel and its improvements can be adapted (without excessive cost) to more than one use; and the purchase and retention of the property does not violate any fiduciary standards.278
Still another concept of the stock ownership plans is the "eligible individual account plan." This is a profit-sharing plan, stock bonus plan or employee stock ownership plan or similar plan, which specifically provides for purchasing and holding of qualifying employer securities or qualifying employer real property, and, further, the benefits do not reduce benefits payable under any defined benefit plan.279
ESOPs can prove to be quite valuable for corporate planning as they can do such things for the corporation as provide equity capital by purchasing newly issued shares. They can also be used as an inside purchaser of the interest of a shareholder withdrawing from a close corporation, thereby keeping the corporation "in the family."
An ESOP can be used, and has been used, along with other investors in some cases, to take a company private through a leveraged buyout. In the discussion of employee benefits, it is important to know that an ESOP can help the corporation with cash flow by allowing contributions toward retirement benefits to be made in stock rather than in cash.
In the past when the stock market was very volatile, many companies in certain industries watched aghast as their stocks tumbled, even among the better financed and well-run firms. However, one company stood out as the price of their stock held steady and actually showed some increase in value during this time, contributing greatly to the fact that the company is today one of the most financially secure companies in the industry. The "secret" was simply a form of an ESOP where commissioned salespersons received stock options in the company as part of their compensation, thereby creating a market for the stock even though other companies in that industry were having a difficult time.
All is not roses, however, as there are some disadvantages, primarily the fact that the issuance of new stock dilutes existing stockholder rights. And it must be noted that ESOPs are tightly regulated and using an ESOP in corporate financing requires compliance with ERISA's fiduciary rules and other regulations.
A "regular" ESOP is formed by the employer either contributing stock, or contributing money used by the ESOP to purchase stock, on a yearly basis in amounts that meets current contribution requirements. A "leveraged" ESOP, on the other hand, borrows the money to pay for a large block of employer securities and these shares are allocated to the participants' accounts as the loan is repaid—sort of like borrowing money using securities as collateral. The loan to buy the stock is obtained from the employer or from another lender and guaranteed by the employer. The shares can be purchased from the employer or on the open market.
The tax advantage to the employer can be quite important. If the plan buys securities from the employer with a loan from a bank, then the employer gets the proceeds of the loan from the plan, with the effect that the transaction is treated as a loan to the employer. But the annual contribution of the employer to the plan in order to repay the principal and interest of the loan, are deductible by the employer in an amount up to 25% of the annual compensation of the participants. The excess can be carried over in subsequent years.280 Compare that tax treatment to an ordinary loan where only interest payments would be deductible.
The purpose of this tax treatment is to encourage ESOPs but the favorable tax treatment has been controversial. The tax advantage is justified in the eyes of most if the ESOP benefits participants in ways that regular ordinary plans do not, and at the same time contribute significantly to society and the economy.
Basically, employer loans to plans and guarantees of loans to plans are prohibited (see below for discussion of other prohibited transactions). Therefore, some sort of exemption is needed if leveraged ESOPs are to be allowed. ERISA provides for it by stating that a loan to an ESOP by a party in interest, or guaranteed by a party in interest, is allowed as long as it is an exempt loan, defined as primarily for the benefit of the participants and beneficiaries, that bears a reasonable rate of interest, and is secured only by qualifying employer securities (if it is secured at all).
Since the loan must be primarily for the benefit of participants and beneficiaries, the proceeds must be used within a reasonable time and be used solely for the purchase of qualifying employer securities, or to repay the loan or prior exempt loan. The purpose of the loan must not be to negatively affect plan assets and the terms must be at least as favorable as terms of a comparable loan that would result from an arm's-length transaction.281
Further, the loan must be for a specific term and it must be without recourse against the ESOP as the only collateral may be qualifying employer securities that either were purchased with the loan or were collateral for a prior exempt loan that was repaid with proceeds of the new loan. The form of repayment of the loan must be only collateral, contributions—other than employer securities—that were made for the purpose of meeting loan obligations, and earnings that can be directly attributed to collateral and investment of the contributions.
In respect to the amount, the value of the plan assets that are transferred to the creditor in case of default, can not be more than the amount of the default. And, if the lender is a "party in interest," the amount transferred may only be the amount necessary to meet the repayment schedule.282
Another, rather rigid, requirement is that if the securities that are purchased with the loan are used as collateral, then the loan must provide for a number of securities in proportion to the amount of the loan repaid in the year, to be released on an annual basis. Formulas are used in the regulations to determine the number of shares released.283
There are too many requirements to list in this text, but the most important ones are as follows:
Designation: The plan must be specifically designated as an ESOP.284
Integration with Social Security: An ESOP cannot be integrated with Social Security.285
Assets Allocated to Accounts: All assets that are acquired with the proceeds of an exempt loan, must be first placed into a suspense account and withdrawn from this account as the lender's security is released. At the end of each year, the ESOP must allocate to participants' accounts units that represent interest in the assets that are withdrawn from the suspense account. (There are further limitations if the employer is an S-Corporation.)286
Right to Vote Stock: An ESOP must satisfy conditions on the voting of employer stock.287 If the employer has a registration-type class of securities (i.e., registered under Section 12 of the Securities Exchange Act , etc.), each ESOP participant or beneficiary must be allowed to direct the plan in respect to the voting of the shares allocated to his account (known as "pass-through" voting).288
If the employer does not have the registration-type of securities, participants and beneficiaries may still be able to direct the voting of the shares allocated to their accounts in regards to mergers, dissolutions, recapitalizations and sales of substantial assets of the business. The voting requirement is a qualification for defined contribution plans (other than profit-sharing plans) of employers whose stock is not readily tradable on an established stock market, which have more than 10% of their assets invested in employer securities. This requirement is allowed if each participant has one vote and providing that the trustee should vote the unallocated shares in proportion to the votes of the participants.289
Distribution Options: An ESOP participant must be able to demand a distribution in the form of employer securities. This keeps ESOPs from being used to keep employer stock in limited hands. This right does not apply to any part of the participant's stock that he has diversified. However, if the employer's charter or bylaws restrict the ownership of all or nearly all of outstanding employer securities to employees or to a plan, or if the employer is an S Corporation, the ESOP may provide for distribution only in cash.290
If the securities cannot be easily traded, the distributee must have a put option (a right to demand that the employer repurchase the shares under a fair evaluation system). This makes sure that the securities will have value to the distributee. The put option cannot "bind" the plan but the plan may assume the employer's obligation if such action is considered as prudent.291
Timing of the Distribution: When the participant (or spouse in some situations) elects a distribution of the account, such distribution of the account balance will start no later than one year after the close of the plan in the year in which he separates from service because of retirement, disability or death. Or, if he is separated from service for more than five years and is not reemployed before distribution is required to start. Unless the participant elects otherwise, the distribution must be in (substantially) equal periodic payments over a period of time not to exceed one year, and over a period not longer than five years (unless the account balance is very large). The account balance of a participant does not include securities that were purchased with an exempt loan until the close of the plan year in which the loan is repaid.292
Diversification of Investment of Account Assets: An ESOP must offer a special investment option to any participant who is at least 55 years old, and has completed a minimum of 10 years of participation, which must allow the participant to direct the plan as to the investment of at least 25% of his account in the first five years, and 50% in the sixth. The plan must provide three or more investment options, or it must distribute the part of the account that is subject to the election.293
Appraisal of Securities: All employer securities that are not readily tradable on an established market, must be valued by an independent appraiser.294
Note: Since tax advantages depend upon the type of corporation, it may be helpful to define the types of corporations at this point for reference:
C-Corporation is a corporation whose income is taxed through it rather than through its shareholders. Any corporation not electing S-corporation status is automatically a C-corporation under the Internal Revenue Code.
S-Corporation is a corporation whose income is taxed through its shareholders rather than through the corporation itself. Only corporations with a limited number of shareholders can elect S-corporation tax status under Subchapter S of the Internal Revenue Code.295
In addition to the tax advantages regarding ESOP loans, there are a couple more tax-related benefits for ESOPs:
Dividends are not usually deductible by an issuing corporation, but if the corporation is a "C" corporation and if the dividends are paid on shares of employer stock held by an ESOP, the employer may deduct the amount of such dividends that are (1) paid in cash directly to participants and beneficiaries; (2) paid to the plan and then distributed in cash to participants and beneficiaries within 90 days of the end of the plan year; or (3) are used to repay the loan by which the securities were purchased.296
Dividends are also deductible when the participants and beneficiaries are allowed to elect either payment in cash or reinvestment in additional employer stock held by the plan.
The sale of stock in a domestic C-Corporation to an ESOP is eligible for deferral of capital gains tax on the proceeds of the sale provided several requirements are met (Note: all are specified in IRC § 1042 unless otherwise noted):
If the criteria for deferral are satisfied, then the shareholder can recognize long-term capital gain on the sale only to the extent that the amount that is realized exceeds the cost of the qualified replacement property. There are rules, naturally, that provide for the adjustment of the basis of the qualified replacement property by the gain not recognized, and for recapture of gain upon disposition of such property.
ESOPS are often established for the purpose to defend against proxy fights or tender offers as an ESOP puts a large block of stock into friendly (management) hands. This has been done so often that the SEC treats certain ESOPs as "anti-takeover" vehicles and requires that information about their defensive characteristics be stated in proxy statements.297
This use of ESOPs creates problems and questions regarding the duties of those in management who are responsible for ESOPs, including officers, directors, plan fiduciaries—and those persons who have an interest in the ESOP, such as the corporation, shareholders, employees, participants and beneficiaries.
The regulations, and in particular court decisions, that have evolved that concern ESOPs in such corporate control situations, are numerous and details and are beyond the scope of this discussion. If questions arise regarding legal actions or requirements for these situations, it should be referred to knowledgeable legal counsel.
Regulations regarding prohibited transactions in employer securities are broken into two functions: (1) acquiring and holding the securities, and (2) borrowing the funds to acquire them.
ERISA has two basic rules in respect to employer securities, the first rule being that a plan cannot acquire or hold any employer securities that are not qualifying employer securities. Secondly, a plan cannot acquire qualifying employer securities or qualifying employer real property, if, immediately after the purchase or acquisition, the fair market value of the employer security and real property held by the plan is more than 10% of the fair market value of the total assets.298
The exception to the 10% limitation does not apply to the acquisition or holding of qualifying employer securities by eligible individual account plans, as such an account can hold as much of its assets in qualifying employer securities as the fiduciaries elect, as long as it is consistent with the terms of the plan and ERISA provisions.
The acquisition or sale of qualifying employer securities is a violation of the prohibited transaction rule regarding the sale or exchanges of plan property if the transaction is with a party in interest. On the other hand, ERISA provides for an exemption for eligible individual account plans where the acquisition or sale of qualifying employer securities is exempt from ERISA if no commission is charged and the acquisition or sale is for "adequate consideration."
"Adequate consideration" means a price no less favorable than the price required under ERISA regulations: If there is a recognized market for the securities, adequate consideration is then defined as either the prevailing price on a national securities exchange or the offering price quoted by persons independent of the issuer or any party in interest—sort of a "willing-seller, knowledgeable buyer" concept (which, incidentally, is part of a new proposed regulation which defines fair market value and good faith). Where there is no generally recognized market, then adequate consideration is fair market value determined in good faith by the trustee or named fiduciary pursuant to the plan terms.
It should be noted that ERISA does exempt eligible individual account plans from the diversification requirements or ERISA regarding the acquisition or holding and qualifying employer securities and real property. As an example, it may not be prudent for an ESOP fiduciary to continue to invest in employer stock because of changing circumstances, even though the plan document permits it to do so.
An employee stock option plan gives an employee the right to buy a certain number of shares in the employer's corporation at a fixed price within a specified period of time. The price for which the employee pays for the option is called the "grant" price, which is usually at or below the stock's current market value. The idea is that the stock will increase in value, which allows the employee to profit by the difference. Conversely, if the stock should decrease in value below the grant price, the option is called "underwater" and the employee does not exercise the option to purchase the stock—the employee is not at risk for out-of-pocket losses.
There are two kinds of stock options, each with different rules and tax consequences, the "qualified" stock options—also known as "incentive stock options" (ISOs) or "statutory stock options." Non-qualified stock options (NQSOs) are sometimes known as "nonstatutory" stock options. There are another kinds, used basically for executive plans, which are performance-based options that provide that the holder of the option will not realize any value from the option until certain specified conditions are met—for example, the share price exceeding a certain value above the grant price, or the company outperforming the industry.
For a stock option to qualify as an ISO and receive the attending special tax treatment of IRC Section 421(a), it must have an exercise price not less than the fair market value of the stock at the time of the grant, expire within no more than 10 years, and generally be nontransferable and exercisable only by the grantee.299
When an employee receives an ISO, he realizes no income upon its receipt or exercise, instead, the employee is taxed when he disposes of the stock acquired with the ISO.299A "Disposition" means any sale, exchange, gift or transfer of legal title of stock, but does not include a transfer from a decedent to his estate, a transfer by a bequest or inheritance, or any transfer of ISO stock between spouses or incident to a divorce.300
The tax treatment depends upon whether the stock was disposed of within the statutory holding period for ISO stock, which is defined as the later of two years from the date or one year from the date when the shares were transferred to the employee upon exercise.301
If the employee disposes of the stock during the holding period, he is taxed as ordinary income on the difference between the option price and the fair market value of the stock the time he exercised the sale of the stock, and then, capital gain measured by the difference between the fair market value of the stock at exercise and the proceeds of the sale. When an employee disposes of ISO stock after the holding period, all of the gain is capital gain and is measured by the difference between the option price and the sale proceeds.302
An employer that grants an ISO is not entitled to a deduction in respect to the option when it is granted or exercised. The amount received by the employer as the exercise price will be considered as the amount received by the employer for the transfer of the stock. If the employee disposes of the stock prior to the end of the requisite holding period, the employer may generally take a deduction for the amount that the employee recognized as ordinary income in the same year in which the income is so recognized.303
The employer does not have to pay FICA or FUTA taxes or withhold federal income taxes, when an option is granted. At this time, the IRS has no taken a position whether the employer is obligated to pay FICA or FUTA taxes, but there is indication that it is "in the wind."
Basically, an NQSO is an option to purchase employer stock that does not satisfy the legal requirements of an ISO.
As a general rule, an employee is not taxed on an NQSO at time of grant until it has a readily ascertainable fair market value and is not subject to a substantial risk of forfeiture. Options do not have a "readily ascertainable fair market value" unless they are publicly traded. If an NQSO does not have a readily ascertainable fair market value at time of grant, then it is taxed at time of exercise, and if there is a substantial risk of forfeiture, then it is taxed when the risk of forfeiture lapses. When taxed, the employee will recognize the excess of the market value of shares receivable over the grant price as ordinary income subject to FICA, FUTA and federal income tax.304
Within 30 days of the grant of an NQSO that is subject to a substantial risk of forfeiture, an employee may elect to be taxed currently on the fair market value of the option. Any appreciation after the election is taxable as a capital gain. If the NQSO is eventually forfeited, no deduction is allowed for the forfeiture.305
The employer has a corresponding deduction in the same amount and at the same time, as the ordinary income recognized by the employee. Usually, compensation that is paid in the form of stock options trigger the receipt of wages for the purpose of employment tax and withholding provisions in the amount of the income generated.
If the NQSO is exercised for less than the fair market value at the date of grant, it will be subject to the rules governing deferred compensation plans (as discussed earlier). If the exercise price can never be less than the fair market value of the underlying stock at the date of the grant, and where there is no other feature for the deferral of compensation, a stock option will not constitute deferred compensation.
Under an IRS ruling previously expressed, stock options could be "converted" to a deferred compensation plan free of tax under certain and limited situations. Where the employees could choose to retain or surrender both ISOs and NQSOs in exchange for an initial deferral amount under a nonqualified deferred compensation plan, the IRS indicated that neither the opportunity to surrender the options, nor their actual surrender, would create taxable income for participants under either the constructive receipt or economic benefit rules.
An employer has no obligation to pay employment taxes or to withhold federal income taxes when NQSOs are granted. When they are exercised, the employer must treat the excess of the market value of shares received over the grant price as wages which will be subject to FICA, FUTA and federal income tax withholding in the pay period in which the income arises. The employer has no obligation to withhold or pay federal income or employment taxes upon the sale of shares purchased by option.
Employers must use code "V" in box 12 on Form W-2 to identify the amount of compensation to be included in an employee's wage in connection with the exercise of an employer-provided NQSO. Employers are required to report the excess of the fair market value of the stock received upon exercise of the option, over the amount paid for the stock on Form W-2 in boxes 1, 3, 5 and 12, when an employee exercises his option.
As a general rule, an ISO is not subject to the reporting requirements of ERISA and a summary plan description does not need to be distributed to participants. But the employer must furnish a statement to the employee on or before Jan 31 of the year following the year in which he exercises the ISO, stating details about the options granted.306
Restricted stock should be discussed as it is regarded as an employee benefit, and it is popular among the higher-paid employees. Actually, it is simply an outright grant of shares of stock by a company to an individual (usually an employee) without any payment by the recipient—or in some case, only a nominal payment. As a general rule, the shares of stock are subject to a provision in a contract under which the granting company has the right (but not the obligation) to repurchase or reacquire the shares from the recipient when a specified event occurs, usually termination of employment. The right to repurchase expires after a specified period of time; sometime all at once and sometimes periodically over a period of time. Such expiration of this right to repurchase/reacquire is called "vesting." During the period that the stock can be repurchased/reacquired the recipient is prohibited (restricted) from selling or otherwise transferring the stock—hence the name, "restricted" stock. In some cases, vesting may depend upon on restrictions other than time, such as satisfying corporate goals or reaching certain profitability goals.
The taxation is simply that restricted stock does not constitute taxable income to the employee at the time it is granted unless it is substantially vested upon grant. An employee who receives restricted stock must include the fair market value of that stock in his income in the year the stock becomes substantially vested; the amount the employee paid for the stock, if any, must be subtracted from this amount. Restricted stock becomes "substantially vested" in the year in which the stock becomes transferable, or the stock is no longer subject to a substantial risk of forfeiture.307
Within 30 days of receiving restricted stock, an employee may elect to be taxed on the fair market value of the stock currently rather than the year the stock becomes substantially vested. Any appreciation of the value of the stock after the election is taxable as capital gain. But, if the restricted stock is ultimately forfeited, then there is no deduction for that forfeiture.308
The employer has a corresponding deduction in the same amount and at the same time as the ordinary income is recognized by the employee. Compensation paid in the form of restricted stock normally triggers a receipt of wages for the purposes of employment tax and withholding provisions in the amount generated.309
If there are dividends on restricted stock, they are considered as extra compensation to the employee and the employer includes those payments on the employee's Form W-2. The employee should receive a Form 1099-DIV showing those dividends.
An educational benefit trust is a employee benefit by the establishment of a trust to defray the educational expenses of employee's children. Employer's contributions to such trust when related to an employee's service, are taxed as compensation to the employee when they are paid to or for the benefit of children. Some plans may call these benefits "loans," but for tax purposes they are treated as compensation.
Amounts that are paid under such a trust to the children of stockholder-employees, are treated as compensation, not dividends, where the plan is adopted for business reasons—usually stated to attract and retain employees.
As in most cases, an educational benefit trust is considered as a welfare fund, and therefore, the employer's deduction is effectively deferred until benefits are includable in the employee's income. This is a recent development, as in the recent past when the benefits under such trust related to the service of the employee, it was considered a deferral of compensation and therefore, the employer's deductions should be taken when benefits are paid out.310
A dependent care assistance program is as the name suggests, a separate written plan of an employer for the exclusive purpose of providing employees with payment for or the providing of services, which, if paid for by the employee, would be considered employment-related expenses—defined as amounts incurred to allow the taxpayer to be gainfully employed while he has one or more dependants under the age of 13 (for which he declares as a dependent under his personal income tax), or a dependent or spouse who cannot care for themselves. The expenses may be for household expenses or for the care of such dependents. The plan is not required to be funded.311
Non-highly compensated employees may exclude from income a limited amount for services paid or incurred by the employer under such program that were provided during a taxable year. In order for highly compensated employees to also have the same income tax exclusion, the program must meet certain requirements, basically to avoid discrimination.312
If benefits are provided through a salary reduction agreement, the plan may disregard any employee with compensation less than $25,000 for purposes of the 55% test.313Employees who have not attained age 21 and completed one year of service, and employees covered under a collective bargaining agreement may be excluded.
The employee may exclude up to $5,000 paid or incurred by the employer for dependent care assistance provided during the taxable year, or $2,500 in the case of a married individual filing separately.
As a general rule, the amount of employment-related expenses by the employer in providing benefits under such program, are deductible to the employer as ordinary and necessary business expenses. The employer that maintains a dependent case assistance plan must file an information return with the IRS as detailed in IRC Section 6039D.
STUDY QUESTIONS
1. An employee stock ownership plan (ESOP) must invest in
A. mutual funds.
B. qualified employer securities.
C. only in the preferred stock of the employer.
D. government securities.
2. An ESOP is valuable for corporate planning purposes as it can
A. be used to hide profits from the IRS.
B. be set up to invest only in off-shore banks, thereby elimination a lot of taxes.
C. provide equity capital by purchasing newly issued shares
D. can hide equity that can be used to stall a takeover.
3. When an ESOP borrows money to pay for a large block of employer securities, and these shares are allocated to participant accounts as the loan is repaid, this
A. transaction is known as a "leveraged" ESOP.
B. is subject to prior approval of the SEC.
C. transaction must be audited annually by the IRS.
D. plan is primarily to negatively affect plan assets.
4. An ESOP participant must be able to demand a distribution in the form of employer securities, which
A. is never enforced as the participant actually has no power to demand anything.
B. can mean securities of Fortune 500 companies only.
C. would then mean that the employer would have to pay taxes on the entire ESOP with no
business expense deduction.
D. keeps the ESOPs from being used to keep employer stock in limited hands.
5. Dividends are deductible by an issuing corporation when the participants and beneficiaries
A. are not otherwise stockholders of the corporation common or preferred stock.
B. are sole owners of the corporation.
C. are trying to avoid taxation by converting dividends and depositing them in off-shore
banks.
D. are allowed to elect either payments in cash or reinvestment in additional employer stock
held by the plan.
6. With an ESOP, the acquisition or sale of qualifying employer securities is a violation of the prohibited transaction rule regarding the sale or exchanges of plan property
A. if the transaction is with a party in interest.
B. if the transaction is with a disinterested third party.
C. unless prior approval has been granted by the Department of Insurance.
D. unless a "party in interest" purchases plan property.
7. An employee stock option plan gives the employee the right to buy a certain number of shares in the employer's corporation at a fixed price which is called
A. the grant price.
B. the negotiable price.
C. the stone (from "set in stone") price
D. the immotable consideration price.
8. There are two kinds of stock options:
A. qualified and less-than-legal.
B. taxable and non-taxable.
C. incentive stock options and performance-based stock options.
D. specific and generic.
9. When an employee receives an ISO,
A. he realizes no income upon its receipt or exercise, but is taxed when he disposes of the
stock obtained through the ISO.
B. he receives taxable income when the ISO stock is received.
C. there is no tax on the value of the stock until he dies, at which time there is no tax on the
amount included in his estate.
D. he must pay capital gains on the value of the stock as determined by the average of the
last five years of stock activity.
10. Basically, an option to purchase employer stock that does not satisfy the legal requirements of an ISO
A. is a CSO (certified stock option).
B. is a taxable event for both the employee and the employer (actually double taxation).
C. has no legal standing unless it is an integral part a qualified pension plan.
D. is a non-qualified stock option (NQSO)
ANSWERS TO STUDY QUESTIONS
1B 2C 3A 4D 5D 6A 7A 8C 9A 10D