Accredited Wealth Management Advisor Practice Exam

Which plan allows an employee to recognize taxable income before selling stock?

1. Restricted stock plan

2. Phantom stock plan

3. Performance award plan

4. Qualified retirement plan

The correct answer is: Phantom stock plan

The phantom stock plan allows employees to recognize taxable income before selling stock because it provides a cash bonus that mimics the value of company stock without actual stock ownership. In this arrangement, the employee receives a payout based on the stock's value, which is considered taxable income at the time of vesting or payout, rather than waiting for an actual sale of shares. This form of compensation enables employees to benefit from stock price increases without needing to hold physical shares, thus triggering a tax event at an earlier stage compared to traditional stock options or restricted stock. In contrast, restricted stock plans and performance award plans typically involve receiving actual shares that are subject to certain conditions such as vesting. Taxes are generally due at the time of vesting or when shares are sold. Qualified retirement plans, on the other hand, provide tax-deferred growth and taxes are only assessed upon withdrawal, which is also not applicable in this scenario. Thus, the phantom stock plan is the most appropriate choice for recognizing taxable income before an actual sale of stock occurs.