Accredited Wealth Management Advisor Practice Exam

What describes the characteristics of a performance incentive plan?

1. Benefits are based on the performance of the company

2. Benefits included in income when forfeitable

3. Plan payouts taxed in the year of receipt

4. Section 83(b) election available for lucrative benefits

The correct answer is: Section 83(b) election available for lucrative benefits

A performance incentive plan is designed to align the goals of employees or managers with the financial success of the company. It typically provides benefits that are contingent on the performance metrics of the organization, such as profit margins, sales targets, or overall profitability. The definition of these plans typically includes aspects where the company’s performance directly influences the benefits awarded to participants. The option indicating that a Section 83(b) election is available for lucrative benefits highlights a key aspect of tax treatment related to incentive plans. Under Section 83(b) of the Internal Revenue Code, an individual receiving restricted stock must decide whether to include the fair market value of the stock in income for tax purposes at the time of grant rather than at the time when stock vests. This election can be beneficial when the stock is expected to appreciate significantly in the future, allowing recipients to potentially benefit from lower tax rates on long-term capital gains instead of higher ordinary income rates upon vesting. By choosing this path, participants can optimize their tax situation if the stock performs well, which reinforces the suitability of this option in describing characteristics of performance incentive plans. This flexibility in tax treatment can make incentive plans more attractive, aligning with the objectives of rewarding performers and motivating them to drive company success.