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Published byAnthony Young Modified over 9 years ago
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Employee Benefits Deferred compensation: pay me later Hopefully, lower tax rate when funds are received Only $1 million of compensation per person can be deducted on income tax return for publicly traded companies Must agree to deferral prior to earning compensation Must avoid constructive receipt Funds can’t be set aside for you Must have risk of forfeiture Unsecured creditor of employer
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Employee Benefits Deferred compensation: pay me later Secular trusts: hold funds for paying deferred comp Not subject to creditors’ claims Consequently, employees are taxed as soon as funds are transferred to trust Employer also gets deduction at that time Rabbi trust Subject to creditor’s claims Consequently, not taxed until employee receives funds
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Employee Benefits Phantom stock Units representing company’s common stock shares Receive payment in 5, 10, 15 years or at retirement based on increase in stock price Payment is ordinary income subject to FICA and company gets deduction Reduces downside risk to executive if stock price falls
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Employee Benefits Nonqualified stock options (NQSOs) Generally granted with exercise price = stock price at date of grant Typically can exercise over next 10 years by paying cash or tendering shares owned If can determine FMV of options at date of grant and no restrictions on options Ordinary income at date of grant = value of options
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Employee Benefits Nonqualified stock options (NSOs) Generally restrict transfer of options so no income at time of grant Then, ordinary income at date of exercise FMV of stock date of exercise – option price No AMT preference item
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Employee Benefits Stock Appreciation Rights (SARs) Receive payment for increase in value of stock Ordinary income and subject to FICA tax Company gets deduction for same amount Don’t actually buy stock May be paid in cash or stock
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Employee Benefits Restricted Stock Exec loses stock if doesn’t work for company until a certain date Shares not vested until that date Ordinary income when vested Unless make IRC Sec 83 election to include FMV stock – Purchase price Then subsequent increase is capital gains Company gets deduction for that amount
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Employee Benefits Employee Stock Purchase Plans (ESPPs) Must meet nondiscrimination coverage tests for qualified plans Gives employees chance to buy stock at a discount (no more than 15%) Limited to $25,000 stock per year Similar to ISOs Long-term capital gains (15% maximum rate) if: Stock sold more than two years after option was granted and Stock sold more than one year after option was exercised Always ordinary income for “discount” amount
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Employee Benefits Junior Stock Restricted stock exec can convert into common stock if goals are met Buys junior stock at a discount since value is less doe to risk won’t be able to convert Capital gains = sales price – purchase price
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