Chapter 12 83 b Cashless Exercise Using proceeds from sale before even getting the shares to exercise buy options Bargain Element per share Stock price MV at exercise date Exercise price NQOs Employee At exercise employees report ordinary income equal to total bargain element TAXED at ordinary rate Basis Fair Market Value on the day of exercise Future appreciation depreciation will be treated for Tax purposes as short term or long term Capital Gain Loss ISOs Employee No income at Exercise as long as they don t IMMEDIATELY sell the stocks Basis Exercise price At exercise Bargain Element is added to Alternative Minimum taxable income If 2yr 1yr requirement met No tax until sale of shares At sale Tax on Capital Gain Loss If 2 year after grant 1 year after exercise requirement NOT met Then taxed like NQOs Disqualify Disposition Capital Gain Sale price Basis NQOs Employer Deduct the Bargain Element that employees recognize as Income at exercise Performance based compensation thus used to circumvent the 1million deduction limit imposed by 162 m ISOs Employer NO deductions cumbersome IRS regulatory requirements Restricted Stocks Employees Taxed on Fair Market Value of shares on Vesting date Appreciation Depreciation taxed as Long Short term Capital Gain Loss when shares are Sold Basis Fair Market Value on Vesting date 30 days after grant date to make 83 b Irreversible after making If made Restricted stocks Taxed on Grant date rather than vesting date Appreciation Depreciation taxed as Capital Gain Loss when shares are sold at preferential rate 15 Restricted Stocks Employer Deduct the ordinary income recognized by Employees Either at grant year if 83 b elected or vesting year Taxable Fringe Benefits Employees recognize Ordinary compensation income when they receive TAXABLE benefits and pay FICA taxes on them How to compute the Annual taxable benefit for Group Term Life Insurance Book Page 12 22 Non taxable Fringe Benefits Group term Life Insurance Employers Deduct the COST of the benefits NOT value of benefits Employees may EXCLUDE group term life insurance benefits for the First 50 000 Employer MAY NOT discriminate between employees in providing Non taxable group term life insurance Health and Accident Insurance Employees EXCLUDE the benefit from gross income including Cash reimbursements Generally Employers may NOT discriminate Meals and Lodging for Convenience of Employer Employees MAY exclude benefit if it meets 2 criteria Book Page 12 26 Employers MAY generally discriminate Employee Educational Assistance Employees can exclude up to 5 250 of benefits Amounts in excess of this limit are taxed as compensation Amount Excluded CAN NOT qualify for educational deductions or credits Dependent Care Benefits Employees Can Exclude up to 5000 paid or reimbursed Only for children under age 13 or dependent or spouse who are physically or mentally unable Amount excluded DOES NOT qualify for child and dependent care credit No Additional Cost Service Employers generate NO cost Ex Airplane Company giving un sold seats to employees for free Employees can exclude Qualified Employee Discount Working Condition Fringe Benefits Book Page 12 28 top Book Page 12 28 bottom 12 29 top Book Page 12 29 mid De Minimis Fringe Benefits Qualified Transportation Fringe Employees may exclude In 2012 Maximum for carpool and mass transit 125 Month Maximum for Qualified Parking 240 Month Book Page 12 29 bottom 12 30 top Cafeteria Plans and Flexible Spending Accounts FSAs Qualified Moving Expense Reimbursement IMPORTANT EXAMPLE Book Page 12 31 mid bottom AND Book Page 12 32 Book Page 12 30 mid Defined Benefit Plan Chapter 13 Book Page 13 4 Qualified tax favored Cannot discriminate Specify amount that employee will receive at retirement For employees retiring in 2012 Maximum benefit employee can receive is the Lesser of 1 100 of average of the employee s three highest years of compensation 2 200 000 Vesting 1 5 Year Cliff 0 on years 1 4 and the 100 on year 5 2 7 Year Graded Vesting Schedule 0 on year 1 and 2 and then 20 ADDS every year till 100 in year 7 Employers DEDUCT Actual contributions to the plan Employers bear investment risk Bad for Employers Distribution to retired employees is TAXABLE as Ordinary Income in the year received Defined Contribution Plan Specify Maximum annual contribution Greater concern of early distribution and minimum distribution requirement Penalties than Def Ben Plan Separate account for EACH employee participating Employees bear investment risk Contribution Limits 1 For 2012 Sum of employer and Employee contributions is limited to the LESSER of Book Page 13 7 I 50 000 55 500 for age 50 and up by end of year II 100 of the employee s compensation for the year 2 Employee contribution to employee 401 k is limited to 17 000 22 500 for age 50 and up by end of year Vesting 1 When employees contribute they are Fully vested in the accrued benefit their contribution earnings on it 2 Employees vest on Employer contributions based on employer s Vesting Schedule Book Page 13 8 I 3 Year Cliff II 6 Year Graded 0 in year 1 and then 20 adds every year till 100 in year 6 0 in year 1 and 2 and 100 in year 3 When separate employee accounts not maintained o Accrued benefit from employee Total accrued benefit x employee contribution employee contr employer contr o Accrued benefit from employer Total accrued benefit Accrued benefit from employee contribution Employees DEDUCT their contributions to Defined Contribution Plans EXCEPT for Roth 401 k Employees After Tax Contribution Before Tax Contribution Tax savings from contribution At DISTRIBUTION Distributions are taxed as Ordinary Income Distribution PENALTY Book Page 13 9 mid and bottom Minimum Distribution Formula Book Page 13 10 top Minimum Distribution PENALTY Book Page 13 10 bottom Roth 401 k Employees may NOT contribute to Roth 401 k Employee contributions to Roth accounts are NOT deductible Qualified DISTRIBUTIONS from Roth account are EXCLUDED from Gross Income o Qualifying 1 Roth account has been open for 5 taxable years 2 Employee is AT LEAST 59 5years of AGE Minimum Distribution requirements applicable to Traditional 401 k ALSO apply to Roth Non Qualified Deferred Compensation Plans NQDC Employees exclude contributions from Taxable Income Employees are NOT taxed on the balance in the account Distributions are taxed as Ordinary Income Employers MAY discriminate Employers are not required to FUND the plans As a result if Employer goes bankrupt Employee