Stock Bonus Program

[Guest benefitstudent]

Urgent query!

The company has agreed to give employees the election to receive shares of stock or to have the shares put into the employees 401(k) account.

I think the election creates constructive receipt for all employees of the FMV of the stock on the date of distribution.

My questions are about what happens on a practical level. Is the employer required to wtihhold income and FICA and FUTA from the next payroll check? What if in that payroll period there is insuffcient income to pay the tax and withholdings? Can a 1099 be issued for the value of the stock instead?

For the employees who ask that the stock be put into their 401(k) accounts, is the income tax imputed because of constructive receipt a wash with the tax saved on the deferral/contribution? Or, is the 401(k) contribution a post-tax contribution?

I'm assuming that in this scenario there is no way to avoid FICA and FUTA, is that right?

This distribution is scheduled to happen within the month. I would greatly appreciate help to clarify the consequences incurred and the procedures that must be followed because of the election. Please help! Thanks.

[BeckyMiller]

Dear Student: Not sure how much work you have already done on this issue. But, realize that the 401(k) rules provide for an out from constructive receipt both for deferrals from regular wages and from nonperiodic bonus payments. Thus, it MAY be that this arrangement is covered by a 401(k) plan. (If you look at the Code, you will see that both profit sharing and STOCK BONUS plans are permitted to include cash or deferred features.)

Further, any "eligible individual account plan" under ERISA can receive and hold "qualifying employer securities." So, the fact that the contribution is going to be made in kind is not necessarily an obstacle.

So - you need to look at the plan.

Your are correct that the fair market value of the stock received would be wages reportable for employment tax purposes. Such wages are subject to FICA tax withholding, which is typically done out of other cash wages. Amounts paid in stock, not to the 401(k) are subject to income tax withholding - again typically done from other wages, though in some situations employees will write a check to cover the withholdings. The amounts deposited in the 401(k) plan, if subject to the cash or deferred election provisions of the plan would only have FICA withholdings, not income tax.

The employer should not put this on Form 1099 - the payroll tax enforcement folks have a lot of ammunition and tend to be very aggressive.

So - you need to talk to your tax advisor - attorney or CPA to work through these issues. This forum is merely a place to get pointed in the right direction - hopefully. I have seen folks pointed in the absolutely wrong direction.

[Guest benefitstudent]

Urgent query!

The company has agreed to give employees the election to receive shares of stock or to have the shares put into the employees 401(k) account.

I think the election creates constructive receipt for all employees of the FMV of the stock on the date of distribution.

My questions are about what happens on a practical level. Is the employer required to wtihhold income and FICA and FUTA from the next payroll check? What if in that payroll period there is insuffcient income to pay the tax and withholdings? Can a 1099 be issued for the value of the stock instead?

For the employees who ask that the stock be put into their 401(k) accounts, is the income tax imputed because of constructive receipt a wash with the tax saved on the deferral/contribution? Or, is the 401(k) contribution a post-tax contribution?

I'm assuming that in this scenario there is no way to avoid FICA and FUTA, is that right?

This distribution is scheduled to happen within the month. I would greatly appreciate help to clarify the consequences incurred and the procedures that must be followed because of the election. Please help! Thanks.