CHAPTER 19--DEFERRED COMPEN

Someone else other than a covered participant must be

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· Someone else other than a covered participant must be the trustee. 102. Under what circumstances is it advantageous for an employee to elect to be taxed immediately as ordinary income on the FMV in excess of the amount paid for restricted property? The special election may be advantageous if: · The bargain element is relatively small. · Substantial appreciation is expected in the future. · A high probability exists that the restrictions will be met. 103. From an employee’s point of view, discuss the difference between the tax treatment accorded to a nonqualified stock option (NQSO) that has an ascertainable fair market value and one that does not. If a nonqualified stock option (NQSO) has a readily ascertainable fair market value (i.e., a warrant traded on an established market), the value of the option must be included in the gross income of the employee at the date of grant. No income is reported when the employee exercises the warrant. Capital gain or loss treatment occurs when the employee disposes of the optioned stock. The employee’s basis at the date of disposition is the amount paid for the stock plus any amount reported as ordinary income. Where a NQSO does not have a readily ascertainable fair market value, the employee does not recognize income on the grant date. Instead, in the year of exercise, the employee reports as ordinary income the difference between the fair market value of the stock on the exercise date and the option price. The amount paid for the stock, plus the amount reported as ordinary income, becomes the employee’s tax basis in the stock. Any appreciation above such basis is treated as a capital gain upon disposition. 17
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104. Compare a § 401(k) plan with an IRA. An instructor can use Concept Summary 19-4 to cover this comparison. Most employees will find a § 401(k) plan more attractive than an IRA. Probably the biggest limitation of an IRA is the $5,000 maximum shelter in 2010 (ignoring the catch-up provision). Under § 401(k), employees are permitted to shelter compensation up to $16,500 (in 2010). The restrictions on deducting contributions to IRAs for many middle-income and upper-income taxpayers may cause many employees to utilize § 401(k) plans more frequently. Another difference between § 401(k) plans and IRAs is the manner in which the money is treated. Money placed in an IRA may be tax deductible, whereas dollars placed in a § 401(k) plan are considered to be deferred compensation. Thus, a § 401(k) reduction may reduce profit sharing payments, group term life insurance, and Social Security benefits. 105. If a person has funds from sources other than retirement assets when he or she retires, which retirement asset should be spent first? The most tax-efficient result is to postpone the income tax obligation for as long as possible.
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  • Spring '12
  • honig
  • a. b. c., b. c. d., C. D. E.

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