Stock Distributions – An Occasional Trap for the Unwary

Distributions from an ESOP in the form of shares of company stock have many advantages. One of the compelling reasons for making distribution in the form of company stock, for example, is that distributions in the form of company stock enable participants to have a portion of their distribution taxed at long term capital gains tax rates rather than having the entire distribution taxed at ordinary income tax rates. This tax benefit derives from IRC Section 402(e)(4)(B), which provides that the employee will not be taxed at the time of distribution on the net unrealized appreciation attributable to employer securities. The result is that the employee pays tax on the cumulative cost basis of the employer securities at the time of distribution, and pays a long term capital gains tax on the appreciation at the time that the stock is sold back to the plan or to the company, as ... Read More..

Highlights of EGTRRA 2001

I. INCREASES IN CONTRIBUTION, DEDUCTION AND BENEFIT LIMITS Contribution Deduction Limits. The limit on an employer’s deduction for contributions to a non-leveraged ESOP or a profit sharing plan is increased from 15% to 25% of participants’ aggregate compensation. 401(k) deferrals are not counted for purposes of the deduction limits. However, 401(k) deferrals will be included for purposes of calculating the compensation on which this limit is based. The deduction limit for money purchase pension plans remains at 25%. Effective: Taxable years beginning after 2001. Individual Benefit and Contribution Limits. The dollar limit on “annual additions” to a participant’s account in an ESOP, profit sharing, 401(k) or other defined contribution plan is increased to $40,000 in 2002. The alternative limit of 25% of compensation is increased to 100%. Effective: Limitation years beginning after 2001. Annual Compensation. The maximum annual compensation of a participant that may be used to calculate contributions and ... Read More..

Economic Growth and Tax Relief Reconciliation Act of 2001

Comparison of Old and New Provisions Current Law New Law (EGTRRA) I.  Increases in Contribution, Deduction and Benefit Limits Contribution Deduction Limits: An employer’s deduction for contributions (including 401(k) deferral contributions) to a profit sharing or stock bonus plan is limited to 15% of participants’ taxable compensation. The money purchase plan limit is 25%. The 15% deduction limit is increased to 25%. 401(k) deferrals do not count against the limit. Compensation used to determine deductions   includes deferrals. Money purchase plan limit remains at 25%. Effective: Employer’s taxable years beginning after December 31, 2001 Individual Benefit and Contribution Limits: Allocations of employer and employee contributions and forfeitures in a profit sharing, 401(k) or other defined contribution plan cannot be greater than the lesser of (i) 25% of gross pay or (ii) $35,000 (indexed). Allocations of employer and employee contributions and forfeitures cannot be greater than the lesser of (i) 100% of gross pay or (ii) $40,000 (indexed). Effective: Limitation years beginning after December 31, 2001 Annual Compensation: Currently a ... Read More..