Executive Compensation & Nonqualified Plans Flashcards

An Incentive Stock Option (ISO) differs from a Nonstatutory Stock Option (NSO) primarily in that:

Answer: ISOs must be exercised within 10 years and may generate preferential AMT treatment

ISOs receive preferential tax treatment—no ordinary income tax at exercise—but the spread at exercise is an AMT preference item and must meet strict holding period requirements.

Restricted Stock Units (RSUs) are generally taxed to the executive at:

Answer: The date of vesting, as ordinary income on the fair market value of shares delivered

RSUs are taxed as ordinary income at vesting when the shares are actually delivered to the executive, since there is no property transferred at grant for a Section 83(b) election.

A phantom stock plan provides executives with:

Answer: A cash or stock payment equal to the value of a specified number of hypothetical shares

Phantom stock plans credit executives with hypothetical share units that track the company's stock price, paying out cash or actual shares based on the appreciated value without issuing real equity.

Stock Appreciation Rights (SARs) granted to an executive pay out:

Answer: Only the increase in stock value from the grant date to the exercise date

SARs pay only the appreciation in stock value (the spread between grant price and exercise price), allowing executives to participate in stock growth without investing their own capital.

Section 280G of the Internal Revenue Code imposes an excise tax on 'excess parachute payments' made to executives. This provision is triggered when payments contingent on a change in control exceed:

Answer: Three times the executive's average annual compensation over the prior five years

Section 280G applies when total change-in-control payments equal or exceed three times the executive's base amount (average W-2 compensation for the prior five years), and imposes a 20% excise tax on the excess.

An 'excess benefit plan' under ERISA is a nonqualified plan established to:

Answer: Restore qualified plan benefits limited by Section 415 or Section 401(a)(17) caps

An excess benefit plan is a top-hat plan that provides the benefit an executive would have received under the qualified plan but for the IRS limitations on contributions and benefits.

The 'constructive receipt' doctrine requires an executive to include deferred compensation in income when:

Answer: Amounts are set aside and made available to the executive without substantial limitation

Constructive receipt occurs when compensation is credited to an executive's account or made available without a substantial limitation or restriction, even if not actually received.