To satisfy the diversification requirements, a plan must offer three investment alternatives other than employer stock.
Leveraged ESOPs must take a loan from a commercial source.
ESOPs cannot be integrated using permitted disparity.
For publicly traded stock, voting rights must be passed through to the participant in the ESOP.
For closely held stock, voting rights must be passed through to the participant in the ESOP.
Stock bonus plans may make distributions in employer stock.
ESOPs invest primarily in employer stock.
Many employers can contribute more to an ESOP than to other defined contribution plans.
A participant who is age 55 is eligible for IRC §401(a)(28) diversification.
Dividends paid to an ESOP may be tax deductible to the employer.
If an ESOP makes a prohibited allocation or accrual, an excise tax equal to 50 percent of the accrual is imposed on the S corporation and the disqualified person is deemed to have received a distribution in the amount of the prohibited allocation.
The definition of family used in IRC §409(p) is much broader than other definitions of family used under other attribution rules that apply to qualified plan requirements.
All of the following statements regarding ESOPs are TRUE, EXCEPT:
A. A money purchase pension plan can include an ESOP provision.
B. A 401(k) plan can include an ESOP provision.
C. An ESOP can allocate contributions using permitted disparity.
D. The deduction limit may exceed 25 percent of compensation in some ESOPs.
E. IRC §415 limits may be higher in ESOPs than in other defined contribution plans.
All of the following statements regarding ESOP diversification under IRC §401(a)(28) are TRUE, EXCEPT:
A. The right to diversify must be provided annually for six years.
B. Qualified participants must be able to diversify a total of 25 percent of their account balance for five years, and 50 percent in the sixth year.
C. Diversification must be provided at age 55 and ten years of service.
D. In the final election year, the participant must be able to diversify 50 percent of his or her account balance.
E. Diversification is based on the number of shares not on the value of those shares.
Based on the following information, determine the number of shares currently available for diversification. Participant A’s account contains 20,000 shares valued at $2 per share. Participant A is age 59 with 20 years of participation. Two years ago, Participant A diversified 1,500 shares valued at $4 per share.
A. 2,750
B. 3,500
C. 3,875
D. 5,000
E. 5,375
All of the following statements regarding leveraged ESOPs are TRUE, EXCEPT:
A. ESOP loans may be back-to-back (mirror) loans.
B. The shares purchased by the ESOP are security for the loan.
C. Loan proceeds may be used to repay another exempt loan.
D. Employer securities that are used as collateral are allocated to eligible participants.
E. Dividends may be used to repay the loan.
All of the following statements regarding calculating net unrealized appreciation (NUA) on a stock distribution are TRUE, EXCEPT:
A. It is the difference between the value of the employer stock at the time of distribution minus the plan’s cost basis in the stock.
B. If the employer stock is rolled over to another qualified plan, the recipient plan’s cost basis is equal to the value of the employer stock at the date of rollover.
C. A participant who received a lump sum distribution that includes employer stock, may elect to exclude from gross income the entire NUA.
D. A participant who receives a distribution prior to age 59½ and includes employer stock will be subject to the 10% tax on early distribution on the NUA portion that is excluded from income.
E. If the value of the employer stock at the time of distributions is less than the plan’s cost basis, the NUA is zero.
