TOOLS & TECHNIQUES OF EMPLOYEE BENEFIT AND RETIREMENT PLANNING
11th Edition
College Course Materials
Deanna L. Sharpe, Ph.D., CFP®, CRPC®, CRPS®
Associate Professor
CFP® Program Director
Personal Financial Planning Department
University of Missouri-Columbia
Please Note: Correct answers for each question are indicated in bold type. After each question,
the number of the page containing information relevant to answering the question is given. When
a calculation is necessary or the reasoning behind a given answer may be unclear, a brief
rationale for the correct answer is also given.
Part B: Employee Benefit Planning
Equity Options
Chapter 37: Employee Stock Purchase Plan (Section 423 Plan)
True/False
37.1
An employee stock purchase plan is a plan for compensating a select group of employees
by giving them the option to purchase company stock at a specified price.
37.2
An employee stock purchase plan is a tax deferred form of compensation.
37.3
An employee stock purchase plan generates little to no out-of-pocket cost to the company.
Answers:
37.1 False [p. 295 – the plan is for a broad group of employees]
37.2 True [p. 295]
37.3 True [p. 295]
Multiple Choice
37.4
An employee stock purchase plan is a tax-advantaged form of employee compensation
that is most effectively used in a
a.
b.
c.
d.
e.
family corporation
large corporation with publicly traded stock
closely held corporation
all of the above
only a and c
Answer: B [p. 295]
37.5
Disadvantages of an employee stock purchase plan include:
a. employee bears market risk
b. employee must have a source of funds to purchase the stock
c. employer usually does not receive a tax deduction under an employee stock purchase
plan
d. all of the above
e. only a and b
Answer: D [p. 296]
37.6
Set up of an employee stock purchase plan requires
a. a written plan
b. approval by stockholders of granting corporation within a year before or after plan
adoption
c. notification of employees that plan has been initiated
d. all of the above
e. only b and c
Answer: B [p. 297]
Application
37.7
Hal Overton is a middle manager of Global Corporation. One year ago, Hal received a
stock option for 100 shares of stock from Global. The option price was $5.00 a share.
When he exercised his option three months ago, the stock had risen to $10.00 per share.
Hal resigned from Global last month to take an executive position at rival Universal
Corporation. Tax consequences for Hal include
a.
b.
c.
d.
e.
taxable income at the time the stock option was granted
no taxable income at the time the stock option was exercised
$500 in taxable compensation income
$1000 in taxable compensation income payable this year
$1000 in taxable compensation income payable next tax year
Answer: C [p. 296 – Hall did not hold Global stock long enough to get tax benefits. Because he
did not meet holding period requirements, Hal has additional compensation income = $1000 fair
market value at purchase – $500 option price = $500]
37.8
Hudson Bellington owns 51% of the stock of Bellington Corporation. Two key employees
each own 15% of the company. Bellington Corporation has 60 other employees; including
five that joined the company last year. In addition to these workers, two part timers share a
job as office assistants, each working a 15 hour week. Bellington has just installed an
employee stock purchase plan as an incentive plan. The plan must cover ______
employees.
a.
b.
c.
d.
55
60
62
63
e. 65
Answer: A [p. 296 – The plan can exclude those with less than 2 years of service, part time
employees that work less than 20 hours per week, and highly compensated; so must cover 60 – 5
= 55]
37.9
Hugh ‘Jolly’ Green’s employer, Giant Foods, granted Hugh a stock option under its
employee stock purchase plan to buy 200 shares of Giant Foods stock for $10 per share
when the market price was $13 per share. A year and a half later, when the stock had a
value of $15 per share, Hugh exercised his option. Fourteen months later, when the stock
was $17 per share, Hugh sold his stock. In the year of sale, Hugh had to report _____ as
wages and ____ as capital gains
a.
b.
c.
d.
e.
$600, $800
$600, $1400
$1,000, $400
$300, $1100
$1,100, $400
Answer: A [p. 297 – selling price ($17 x 200 = 3400) less purchase price ($10 x 200 = $2000)
equals gain ($1400); amount reported as wages is (value at option less option price) x # shares
{($13 - $10) x 200 = $600; gain ($1400) less wages ($600) = capital gain ($800)]
37.10 Steve Stockton’s employer gave him a stock option under its employee stock purchase
plan to buy 500 shares of company stock. Steve held the stock for 1 year before he
exercised the option and then sold it six months later. Which of the following is true?
a. Steve must treat the total amount received from the sale as taxable wage income
b. Steve’s employer receives no tax deduction
c. Steve’s employer receives a tax deduction equal to the amount that Steve must include
as income
d. Steve has no taxable income from receiving or selling the stock
e. Steve must treat the total amount received from the sale as a capital gain
Answer: C [p. 296]