CEBS Executive Compensation & Nonqualified Plans 2

Question 1

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

Accepted Answer

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

Answer

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.

Question 2

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

Accepted Answer

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

Answer

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.

Question 3

A phantom stock plan provides executives with:

Accepted Answer

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

Answer

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.

Question 4

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

Accepted Answer

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

Answer

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.

Question 5

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:

Accepted Answer

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

Answer

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.

CEBS - Certified Employee Benefits Specialist Practice Test

CEBS - Certified Employee Benefits Specialist Practice Test

CEBS Executive Compensation & Nonqualified Plans 2