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Five percent Owner and Stock Options to Consider

Stock Options and Determining a “Five-Percent Owner”

“One of my clients in a 401(k) plan has been given stock options, which have not been exercised.  When determining a five percent owner for plan purposes, does ownership of stock options count?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

Highlights of Discussion

  • The answer to your question is clearly addressed in Internal Revenue Code Sections (IRC) §§416 and 318 and underlying regulations.
  • Under IRC §416(i)(1)(B)(I), the term “five-percent owner” means the following:
  • If the employer is a corporation, any person who owns (or is considered as owning within the meaning of IRC § 318) more than five-percent of the outstanding stock of the corporation or stock possessing more than five-percent of the total combined voting power of all stock of the corporation, or
  • If the employer is not a corporation, any person who owns more than five-percent of the capital or profits interest in the employer.
  • A person might be a more than five-percent owner through the “constructive ownership” rules of IRC § 318. IRC §318(a)(4) states:  If any person has an option to acquire stock, such stock shall be considered as owned by such person. For purposes of this paragraph, an option to acquire such an option, and each one of a series of such options, shall be considered as an option to acquire such stock.

 

Conclusion

When determining ownership for plan purposes, if any participant has an option to acquire stock, such stock shall be considered as owned by such person.

 

 

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RMDs and More than 5 Percent Owners

“My client’s 401(k) plan allows participants who are not five-percent owners of the company to delay taking their RMDs until after they retire. How is ‘five-percent owner’ defined for RMD purposes?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

Highlights of Discussion

•The IRS requires those who are considered “five-percent owners” of the employer to begin their RMD no later than April 1 of the calendar year following the year in which they attain age 70½. For example, if a five-percent owner turns age 70 ½ in 2016, he or she must begin RMDs by April 1, 2017.

•For RMD purposes, a five-percent owner is an employee who is a five-percent owner [as defined in Internal Revenue Section (IRC §416) with respect to the plan year ending in the calendar year in which the employee attains age 70 ½ [Treasury Regulation §1.401(a)(9)-2, Q&A-2(c)].

•Under IRC §416(i)(1)(B)(I), the term “five-percent owner” means the following:

•If the employer is a corporation, any person who owns (or is considered as owning within the meaning of IRC § 318) more than five-percent of the outstanding stock of the corporation or stock possessing more than five-percent of the total combined voting power of all stock of the corporation, or

•If the employer is not a corporation, any person who owns more than five-percent of the capital or profits interest in the employer.

•A person might be a more than five-percent owner through “constructive ownership.” The IRS outlines its constructive ownership rules in IRC § 318. Generally, an individual shall be considered as owning the stock owned, directly or indirectly, by or for his spouse, and his children, grandchildren, and parents.

Conclusion

401(k) plan participants who are more than five-percent owners of the business sponsoring the plan must begin their RMDs no later than April 1 of the year following their age 70 ½ year. Constructive ownership rules could cause a plan participant to be considered a more than five-percent owner for RMD purposes.

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© Copyright 2017 Retirement Learning Center, all rights reserved