Chapter 18
ESOP/STOCK BONUS PLAN
LEARNING OBJECTIVES:
A. Have a basic understanding of stock bonus plans and ESOPs
B. Identify key issues related to the use of an ESOP/Stock bonus plan for
estate planning for shareholders of closely held businesses
REVIEW:
This chapter focuses on ESOP and stock bonus plans. The chapter begins by identifying
such plans and describing when they might be used. Advantages and disadvantages are
discussed next. In the section on design features, some space is given to the use of
ESOP loans, allowing the employer to borrow money on a favorable basis. A section on
tax implications includes some of the unique tax benefits related to the use of company
stock in an ESOP. Readers are directed back to Chapters 7 and 12 for information on
ERISA and other regulatory requirements, and to Chapter 10 for plan installation
information. The chapter ends with a question and answer section, with some focus
given on estate planning for closely held business sharehoders.
CHAPTER OUTLINE:
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
What Is It?
When Is It Indicated?
Advantages
Disadvantages
Design Features
1. Diversification Provisions
2. ESOP Loans
Tax Implications
ERISA and Other Regulatory Requirements
How To Install A Plan
Where Can I Find Out More About It?
Questions And Answers
1
Chapter 18
K. Chapter Endnotes
FEATURED TOPICS:
ESOP
Stock Bonus Plan
FIGURE:
Figure 18.1 ESOP Loan Transaction
CFP® CERTIFICATION EXAMINATION TOPIC:
Topic 61: Types of retirement plans
B. Types and basic provisions of qualified plans
1. Defined contribution
c. Profit sharing
4) Stock bonus plan
5) Employee stock ownership plan (ESOP)
COMPETENCY:
Upon completion of this chapter, the student should be able to:
1. Have a basic understanding of stock bonus plans and ESOPs
2. Identify key issues related to the use of an ESOP/Stock bonus plan for
estate planning for shareholders of closely held businesses
KEY WORDS:
ESOP, stock bonus plan, ESOP loan
DISCUSSION:
1. Discuss unique tax implications of ESOPs/stock bonus plans.
Chapter 18
2. Discuss the legal and regulatory requirements that apply to ESOPs as
compared or contrasted to those more generally relating to stock
bonus plans.
QUESTIONS:
1. Which of the following are reasons why an employer might use an
ESOP/stock bonus plan?
(1) to guarantee specific retirement income amounts for employees
(2) to provide a tax-advantaged means for employees to acquire company
stock
(3) to allow the company to borrow money for business needs
(4) to broaden company ownership to help prevent a hostile takeover
a.
b.
c.
d.
(1) only
(1) and (2) only
(1) (2) and (3) only
(2) (3) and (4) only
Chapter 18, p. 161
2. Which of the following correctly identifies the ESOP/stock bonus plan
requirement that an employer must repurchase stock that is not traded on an
established market?
a.
b.
c.
d.
put option
ESOP loan
deemed IRA option
ERISA 10% requirement
Chapter 18, p. 162
3. Which of the following may be required in order for a C corporation to be able
to deduct dividends paid on stock acquired with an ESOP loan?
(1) dividends must be paid in cash
(2) dividends must be used to make payments on certain loans incurred to
acquire employer stock
(3) dividends must be paid to the plan and distributed within 90 days to plan
participants or beneficiaries
(4) dividends must be guaranteed
a. (1) and (3) only
Chapter 18
b. (1) (2) and (3) only
c. (2) (3) and (4) only
d. (1) (2) (3) and (4)
Chapter 18, pp. 163-64
4. Which of the following are estate planning-related problems that an ESOP or
stock bonus plan may help to reduce or eliminate?
(1) plan income is taxed at the lower 15% marginal tax rate
(2) funds accumulated by the corporation for the purchase of stock at death
may result in exposure to the accumulated earnings tax
(3) receipt by the corporation of life insurance proceeds may trigger the
corporate AMT
(4) insurance owned by the corporation to fund a buyout increases corporate
value, and thereby, federal estate tax
a.
b.
c.
e.
(1) and (3) only
(1) (2) and (3) only
(2) (3) and (4) only
(1) (2) (3) and (4)
Chapter 18, pp. 164-65
ANSWERS:
1. d
2. a
3. b
4. c