During class this week, we discussed stock bonus plans, employee stock ownership plans (ESOPs), and distributions from qualified plans.
Stock bonus plans are defined contribution profit sharing plans, so employers establish and contribute stock to the plan. Contributions are discretionary and must be substantial and recurring to e considered a qualified plan. Also, allocations to these plans must be nondiscriminatory. In order to meet the requirements of a stock bonus plan, participants must have pass through voting rights of stock, the right to demand employer securities when taking distributions, a put option to the employer, distributions that begin within one year of normal retirement, death/disability, or within five years for other termination modes, and lastly, distributions must be paid within five years of the commencement of distributions. Advantages to stock bonus plans include: the value of employer stock contributed is tax-deductible for the employer and they give participants vested interest in the performance of the company. Disadvantages include: the employee has the risk of a non-diversified portfolio, put options could create cash flow problems for the employer, and employers incur valuation costs at the contribution of stock.
ESOPs are also defined contribution profit sharing plans which are established as trusts. Participants receive allocations of the employer stock from the ESOP, and the employer receives a tax deduction for the value of the stock contributed to the plan. Contributions to ESOPs can be made by cash or by stock. Employers receive a tax deduction for the value of the stock/cash at the date of the contribution, subject to 25% of employer covered compensation. Also, dividends paid are deductible. Allocations to ESOPs can be percentage or age-based, however, they cannot use social security integration.
Stock bonus plans and ESOPs differ by the following: their deductible contribution limits, valuation requirements, Social Security integration, and portfolio diversification.
Distributions from qualified plans differ between types. Pension plans do not allow in-service withdrawals for participants under age 62. Most employers may permit in-service withdrawals after two years of participation in the plan. 401k plans may permit loans. At the termination of service, beneficiaries may receive either a lump sum distribution, may rollover plan assets into an IRA or other qualified plan, or may purchase an annuity. The general taxation rule states that distributions are ordinary income except direct rollovers of plan assets to IRAs or other qualified plans, adjusted basis in the plan, lump sum distribution options, and qualified domestic relations order (QDRO). Taxable distributions from qualified plans are subject to a 20% income tax withholding.
Stock bonus plans are defined contribution profit sharing plans, so employers establish and contribute stock to the plan. Contributions are discretionary and must be substantial and recurring to e considered a qualified plan. Also, allocations to these plans must be nondiscriminatory. In order to meet the requirements of a stock bonus plan, participants must have pass through voting rights of stock, the right to demand employer securities when taking distributions, a put option to the employer, distributions that begin within one year of normal retirement, death/disability, or within five years for other termination modes, and lastly, distributions must be paid within five years of the commencement of distributions. Advantages to stock bonus plans include: the value of employer stock contributed is tax-deductible for the employer and they give participants vested interest in the performance of the company. Disadvantages include: the employee has the risk of a non-diversified portfolio, put options could create cash flow problems for the employer, and employers incur valuation costs at the contribution of stock.
ESOPs are also defined contribution profit sharing plans which are established as trusts. Participants receive allocations of the employer stock from the ESOP, and the employer receives a tax deduction for the value of the stock contributed to the plan. Contributions to ESOPs can be made by cash or by stock. Employers receive a tax deduction for the value of the stock/cash at the date of the contribution, subject to 25% of employer covered compensation. Also, dividends paid are deductible. Allocations to ESOPs can be percentage or age-based, however, they cannot use social security integration.
Stock bonus plans and ESOPs differ by the following: their deductible contribution limits, valuation requirements, Social Security integration, and portfolio diversification.
Distributions from qualified plans differ between types. Pension plans do not allow in-service withdrawals for participants under age 62. Most employers may permit in-service withdrawals after two years of participation in the plan. 401k plans may permit loans. At the termination of service, beneficiaries may receive either a lump sum distribution, may rollover plan assets into an IRA or other qualified plan, or may purchase an annuity. The general taxation rule states that distributions are ordinary income except direct rollovers of plan assets to IRAs or other qualified plans, adjusted basis in the plan, lump sum distribution options, and qualified domestic relations order (QDRO). Taxable distributions from qualified plans are subject to a 20% income tax withholding.