Chapter 57
LOANS TO EXECUTIVES
LEARNING OBJECTIVES:
A. Understand tax and other implications of loans to executives
REVIEW:
This chapter talks about an employer providing loans to executive employees.
Such a benefit may be provided for a number of reasons, but rarely on a carte
blanche basis. The biggest advantage is the convenience of the executive. The
biggest disadvantages relate to administrative costs and tax treatment. Tax
implications are discussed. Interest paid by the executive is taxable to the
company, and any difference between market rates and the actual rate charged
for the loan is normally considered to be income to the executive. ERISA and
other regulatory implications are identified in the next section. ERISA probably
does not apply, but Truth in Lending probably does. Alternatives are presented,
and the chapter closes with a brief question and answer section.
CHAPTER OUTLINE:
A.
B.
C.
D.
E.
F.
G.
H.
When Is It Indicated
Advantages
Disadvantages
Tax Implications
ERISA and Other Regulatory Implications
Alternatives
Questions and Answers
Chapter Endnotes
FEATURED TOPICS:
Loans to executives
1
Chapter 57
CFP® CERTIFICATION EXAMINATION TOPIC: NONE
COMPETENCY:
Upon completion of this chapter, the student should be able to:
1. Understand tax and other implications of loans to executives
DISCUSSION:
1. Discuss why an employer might provide a loan to an employee.
2. Discuss tax implications for below-market and compensation-related
loans.
KEY WORDS:
Legal services plan
Prepaid legal services plan
Scheduled benefits
Comprehensive benefits
Indemnity basis
Prepayment basis
Open-panel prepayment plan
Closed-panel prepayment plan
QUESTIONS:
1. Which of the following are true regarding loan interest actually paid by an
employee to the lender-employer?
(1) interest is considered taxable income to the company
(2) interest may be deductible for the employee
(3) any difference between loan interest rate and current market rate is
considered income paid by the employer to the employee
(4) the employer cannot deduct any interest amount considered to be
additional compensation to the employee
a.
b.
c.
d.
(1) only
(1) and (2) only
(1) (2) and (3) only
(2) (3) and (4) only
Chapter 57, p. 412
Chapter 57
2. Which of the following are requirements that must be met in order for a loan
to qualify for the bridge loan exception?
(1) the loan proceeds can only be used to purchase a principal or secondary
(i.e., vacation) home
(2) the loan must be payable in full 15 days after the old principal residence is
sold
(3) the aggregate principal of all bridge loans must not exceed a reasonable
estimate of the equity in the old residence
(4) the old residence must not be converted to business or investment use
a.
b.
c.
d.
(1) only
(1) and (2) only
(1) (2) and (3) only
(2) (3) and (4) only
Chapter 57, pp. 412-13
3. What is the maximum possible dollar amount for a loan to be a de minimis
loan?
a.
b.
c.
d.
$5,000
$10,000
$20,000
$25,000
Chapter 57, p. 413
4. What impact does Sarbanes-Oxley have on personal loans from a publicly
traded corporation to an employee?
(1) employees who are not directors or officers can still receive loans
(2) no employee can receive a loan
(3) employees who are directors or officers cannot receive a loan
(4) loans can be made, but only at current market rates
a.
b.
c.
d.
(1) and (3) only
(1) (2) and (3) only
(2) (3) and (4) only
(1) (2) (3) and (4)
Chapter 57, p. 413
Chapter 57
ANSWERS:
1. c
2. d
3. b
4. a