1. What is meant by the term "nonqualified deferred compensation" for income tax purposes, and for whom is it most often used?
2. At what time is the employer allowed to take a deduction for its contribution to a nonqualified deferred compensation plan? How does this differ from the operation of a qualified plan?
3. Identify characteristics of each of the following primary types of deferred compensation agreements. Discuss the applicability of IRC Section 409(a) to each plan.
a. a salary continuation plan
b. a pure deferred compensation arrangement
c. rabbi trust
4. It is necessary that the deferred compensation agreement be entered into "prior to the earning of the compensation" by the employee if deferral is to be achieved. Which income tax doctrine makes this necessary? Explain your answer.
5. Identify characteristics of each of the following income tax doctrines as they relate to the principle of deferred compensation.
a. constructive receipt doctrine
b. economic benefit doctrine
c. fruit and true doctrine
6. Understanding Treasury Revenue Ruling 60-31 is essential to the proper planning of compensation arrangements that will defer income over time. Identify three principles outlined in this ruling that must be considered to avoid constructive receipt problems in a compensation arrangement.
7. An unfunded deferred compensation agreement generally is secured only by the promise of the employer to satisfy its future obligations to the employee. Identify the major requirement for a deferred compensation agreement to qualify as unfunded for income tax purposes and state why this requirement is important.
8. What is meant by the term "informal funding" of a deferred compensation agreement?
9. Differentiate between a defined benefit retirement plan and a defined contribution retirement plan.
10. Any employee of AKM, LLP Partnership can participate in the company's pension plan after they have been employed for 36 consecutive months. Can AKM's plan be a qualified retirement plan? Discuss.
11. Explain the concept of vesting as it relates to qualified retirement plans. How does it differ from the concept of participation?
12. Many small, developing companies will choose to establish a qualified profit sharing plan rather than a pension plan. Why?
13. Discuss the purpose of a spousal IRA (individual retirement account).
14. Why might an employee who receives a lump sum distribution from a qualified retirement plan choose to roll over the distribution into an IRA? What are the negative tax consequences of doing so?
15. Identify characteristics of each of the following forms of informal funding or other ways to provide security for an unfunded deferred compensation plan.
a. life insurance with an accumulation of cash value
b. a variable annuity
c. a rabbi trust
16. A funded deferred compensation plan is one in which funds are set aside for the purpose of funding a particular employee's future benefits. This type of plan is taxed under the provisions of Internal Revenue Code Section 83. Identify two major determinants of taxability of a funded plan under IRC Section 83.
17. Define when a substantial risk of forfeiture exists for income tax purposes.
18. Identify five factors that are taken into account in measuring whether a substantial risk of forfeiture is present in the case of a stockholder/employee.
19. A recipient may elect, under a so-called Section 83(b) election, to include in current income the excess fair market value of the segregated property over the amount paid for such property in exchange for long-term capital gain treatment upon sale. Identify two reasons why a recipient might make a Section 83(b) election.
20. Identify characteristics of each following types of compensation plans governed by IRC Section 83.
a. nonqualified stock option
b. stock appreciation right
c. restricted stock plan
21. Can an individual make withdrawals from a Roth IRA prior to age 59 ½
and not include the amount of the distribution in gross income?
22. In which of following situations is a nonqualified deferred compensation plan taxable under the constructive receipt doctrine?
a. The contract is funded, and there is no substantial risk of forfeiture.
b. Same as (a), except the employee must work for three years.
c. An agreement to defer payment is entered into after compensation is earned.
d. An agreement to defer payment is entered into before compensation is earned.
e. In (a), the contract is not funded.
23. Indicate whether each of the following items is considered a nonqualified compensation plan (N), a qualified compensation plan (Q), or hybrid (H) or fringe benefit (F)
a. Individual Retirement Account.
b. Incentive stock option.
c. Group term life insurance.
d. Cafeteria plan.
e. Pension plan.
f. Profit sharing plan.
g. Nonqualified stock option.
h. KEOGH plan.
i. Simplified employee pension plan.
24. Robert Jones is a corporate executive with Bee Hive, Inc., a manufacturer of processed food. Robert wants to defer a portion of his compensation payable in the current year to future years when his marginal tax bracket will be lower. He wants some assurance, however, that the compensation to be deferred will be paid eventually. Bee Hive has proposed to Robert that it will purchase a life insurance policy on his life that will accumulate sufficient cash value to pay the promised benefit.
a. Assume that this policy is owned by Robert and that he can surrender the policy for its cash value at any time as an incident of this ownership. Identify the income tax implication of this form of deferred compensation plan to Robert.
b. Now assume that Bee Hive, Inc., is the named owner of the policy on Robert's life and that all proceeds are payable to it. Would this charge the income tax implication of the compensation plan to Robert and, if so, how?
25. Jerry Holt's company transfers 100 shares of its stock to Jerry as a performance incentive measure. Jerry currently is the sales manager for the company. Under the terms of the transfer, Jerry must sell the stock back to his company at $50 per share (the same value of the stock at the time of transfer to him) if he leaves the company within five years.
a. Identify the income tax implication to Jerry during this five-year period.
b. At what time may Jerry's employer take a deduction for the value of the stock transferred to Jerry, and why?
26. Assume the same facts as in Review Question 25, with the additional fact that at the end of the five-year period, the stock of Jerry's employer is valued at $100 per share.
a. If Jerry made a Section 83(b) election at the time the stock was transferred to him by the employer, how much, if any, would be includible in his income now?
b. If a Section 83(b) election were not made, what amount would be includible in Jerry's income at the end of the five-year period?