/General/General%2013.png?width=700&height=466&name=General%2013.png)
What Is It?
Company Purchase of Shareholder Stock During Lifetime or At Death
A Section 302 stock redemption is a corporation's purchase of its own stock which, when specific requirements are met, is subject to favorable tax treatment under Section 302 of the Internal Revenue Code. A stock redemption qualifying under Section 302 can occur during your lifetime or at your death. When used after your death, a Section 302 stock redemption can provide your estate with liquidity for taxes and expenses. A Section 302 redemption can be used during your lifetime to dispose of some or all of the business interest.
Here's how it works: You are a shareholder of a closely held corporation. You sell all or part of your interest to the corporation itself. If the sale of your shares meets certain specific criteria (which will be explained later), the sale will qualify for favorable tax treatment.
Tip: The favorable tax treatment mentioned above and explained below refers to the fact that a qualifying redemption under Internal Revenue Code Section 302 is treated as a taxable sale or exchange, allowing the shareholder to pay taxes on the capital gain at capital gains tax rates. A stock redemption that doesn't qualify under Section 302 for sale or exchange treatment is treated as a dividend distribution.
Tip: In general, the American Taxpayer Relief Act of 2012 permanently extended the preferential income tax treatment of qualified dividends and capital gains. Capital gains and qualified dividends are generally taxed at 0% for taxpayers in the 10% and 15% tax brackets, and at 15% for taxpayers in the 25% to 35% tax brackets. However, dividends and capital gains are generally taxed at 20% for taxpayers in the 39.6% tax bracket. Also, as a result of the Affordable Care Act of 2010, an additional 3.8% Medicare tax applies to some or all of the investment income for married filers whose modified adjusted gross income exceeds $250,000 and single filers whose modified adjusted gross income is above $200,000.
Tip: There remains an advantage to classifying the transaction as a sale or exchange rather than as a dividend distribution despite the fact that both types of transactions are subject to tax at long-term capital gains tax rates. That is, in the case of dividends, part or all of the distribution is first treated as a dividend, any remaining distribution is then received tax-free to the extent of basis, and any distribution still remaining is taxed as capital gains. In the case of a sale or exchange, however, the shareholder pays tax only to the extent that the amount paid by the company exceeds his or her basis in the stock. Thus, more may be subject to tax with dividend treatment than with sale or exchange treatment.
Transaction Could Be Part of an Entity Purchase Buy-Sell Agreement
Although not a requirement, stock redemptions that qualify under Section 302 are often prearranged using an entity purchase buy-sell agreement (also referred to as a stock purchase agreement). With such an agreement, the business entity would be obligated to buy your ownership interest at the occurrence of some specified triggering event.
When Can It Be Used?
You Own a Corporation with One or More Other Owners
You are a shareholder of a business organized as a C corporation or S corporation. If your business is a family corporation, you may be able to structure a redemption that qualifies under Section 302, but it could be difficult. A Section 302 stock redemption can't be used when a corporation has only one stockholder because the corporation can't own itself. A Section 302 stock redemption can't be used with a sole proprietorship because the sole proprietorship is not organized as a corporation.
Strengths
Lifetime Redemption Can Qualify For Favored Tax Treatment
The sale of your stock to the business could be taxed in one of two ways. Sometimes favorable tax treatment on the sale of your business stock is available only after your death. Generally, when a company (other than an S corporation) redeems the stock of a shareholder, it is treated as a dividend. The (generally) more favorable tax treatment occurs when the redemption of your stock is treated as a sale or exchange, subject to capital gains tax. If a sale of corporate stock meets the tests for a Section 302 stock redemption, you can receive this favorable tax treatment on a sale of your stock during your lifetime.
Tip: In general, the American Taxpayer Relief Act of 2012 permanently extended the preferential income tax treatment of qualified dividends and capital gains. Capital gains and qualified dividends are generally taxed at 0% for taxpayers in the 10% and 15% tax brackets, and at 15% for taxpayers in the 25% to 35% tax brackets. However, dividends and capital gains are generally taxed at 20% for taxpayers in the 39.6% tax bracket. Also, as a result of the Affordable Care Act of 2010, an additional 3.8% Medicare tax applies to some or all of the investment income for married filers whose modified adjusted gross income exceeds $250,000 and single filers whose modified adjusted gross income is above $200,000.
Tip: There remains an advantage to classifying the transaction as a sale or exchange rather than as a dividend distribution despite the fact that both types of transactions are subject to tax at long-term capital gains tax rates. That is, in the case of dividends, part or all of the distribution is first treated as a dividend, any remaining distribution is then received tax-free to the extent of basis, and any distribution still remaining is taxed as capital gains. In the case of a sale or exchange, however, the shareholder pays tax only to the extent that the amount paid by the company exceeds his or her basis in the stock. Thus, more may be subject to tax with dividend treatment than with sale or exchange treatment.
Stock Sale at Death May Qualify for Additional Favored Tax Treatment
If the sale of your interest in the corporation occurs after your death, and your estate is subject to estate tax, the stock redemption might qualify for favorable tax treatment as a Section 303 stock redemption. Stock redemptions under Section 302 can be coordinated with Section 303 redemptions to receive the maximum allowable tax benefit.
Tradeoffs
Favorable Treatment of Stock Redemption May Not Apply to Family Corporation
If shareholders are related to each other (including spouse, parents of either spouse, and their children and their spouses, and any natural objects of the transferor's bounty), and the business is a corporation, the attribution rules of Internal Revenue Code Section 318 must be considered. The attribution rules can affect the tax treatment of a shareholder's stock redemption, and could make it impossible for a redemption to qualify under Section 302. In a family corporation, the sale of stock to the business under a stock redemption plan usually results in dividend treatment to the redeeming shareholder.
Local Laws Could Prevent Corporate Redemption
In all states, corporate law allows a corporation to buy its own shares only from surplus funds. The specifics of the laws vary by state, but generally the rule is that a corporation must have funds in excess of the minimum capital requirement to redeem stock.
Tip: If a corporation does not have funds in excess of the minimum capital requirement imposed under state corporate law, it may still be possible to structure a stock redemption buy-sell agreement. The corporation may be able to increase its capital through: (1) a revaluation of assets or (2) shareholder contributions. It may also be possible to fund the buy-sell agreement with life insurance.
How to Do It
Things to Do Now
Decide What You Want to Happen to Your Share of the Business
You should consider all of your financial, tax, and estate planning goals. Think about what you want to happen to your business during your lifetime and after your death.
You Might Want to Set Up a Buy-Sell Agreement
If you do not have a buy-sell agreement, you may want to create one. A buy-sell agreement is not required for a Section 302 stock redemption; the corporation may agree to buy your interest without an agreement. A buy-sell agreement, however, can be set up now to ensure that the corporation will agree (and be obligated) to buy your stock at some future time.
The entity purchase buy-sell agreement is the form you would want to consider if you want the business to buy your stock at your death or at another triggering event. If you have co-owners who will be part of the agreement, you will need to talk with them about it. Whoever has the authority to enter the corporation itself into legally binding contracts needs to be part of the discussion so that the corporation will be obligated under the entity purchase agreement.
Make Sure the Corporation Is Able to Buy Your Stock
If you want to redeem your stock now, or you think you might want to do so later, you should check to see that the corporation is financially and legally able to buy your stock from you. This is especially important if you don't have a buy-sell agreement, because the corporation might not be prepared to make the purchase. Remember that state laws dictate that a corporation can only buy stock using surplus funds.
Meet With Your Tax Advisor
If you are planning to have your corporate stock redeemed, meet with your tax advisor to make sure your redemption qualifies under Section 302. There are four possible paths to favorable capital gains tax treatment under Section 302. Your stock redemption only needs to qualify under one of them. The following summary will give you an idea of the requirements.
Qualify Under One of the Section 302 Tests
- Redemption not essentially equivalent to a dividend--This one is tough. The redemption must constitute a meaningful reduction of your interest in the corporation. This test is subjective and involves questions of fact. If the IRS challenges capital gain treatment, each redemption is analyzed individually.
Tip: If you want to apply capital gain treatment to the redemption under this test, you should consult with a tax attorney.
- Redemption is substantially disproportionate to the shareholder--A substantially disproportionate redemption will automatically qualify under Section 302. To qualify for this test, the redemption must reduce the shares held by certain minimum percentages.
Technical Note: To be considered both 'substantial' and 'disproportionate' the redemption must meet three mathematical tests:
- Immediately following the redemption, the shareholder must own stock with less than 50 percent of the total voting power of the corporation.
- After the redemption, the shareholder's percentage ownership of voting stock must be less than 80 percent of that shareholder's ownership percentage of voting stock before the redemption.
- After the redemption, the shareholder's percentage ownership of common stock must be less than 80 percent of that shareholder's ownership percentage of common stock before the redemption.
Note: The tests in 2 and 3 compare the ratio of stock ownership to the total outstanding stock of the corporation, not the shareholder's original holdings.
Caution: The attribution rules apply here, so your redemption might not qualify if family members or beneficiaries of your estate are shareholders after the redemption.
Example(s): You and Barney each own 500 shares of the 1,000 outstanding voting common shares of Gorp Corp. You and Barney are not related. Gorp Corp. has no other classes of stock outstanding. You would like to redeem 200 shares of your stock and you want to know if the redemption will qualify for capital gain treatment under the substantially disproportionate test. Before your redemption, the ownership of Gorp Corp. looks like this:
Before Sale--Stock Ownership
You
Barney
Total Shares Outstanding
500
500
1,000
50.0%
50.0%
100.0%
Example(s): After the redemption of your 200 shares, you will own 300 of the 800 outstanding voting common shares (the 200 you have sold are no longer considered outstanding). The ownership looks like this:
After Sale--Stock Ownership
You
Barney
Total Shares Outstanding
300
500
800x
37.5%
62.5%
100.0%
Example(s): Your new ownership percentage is less than 50 percent, so it meets the first test.
Example(s): Before the redemption, you owned 50 percent of Gorp Corp. Eighty percent of your original 50 percent is 40 percent, so 40 percent ownership of the total outstanding stock is the threshold for the next test. After your redemption, you own 37.5 percent of Gorp Corp. (as shown), so your ownership is below the 40 percent maximum threshold. Your redemption meets the 80 percent test for both voting and common stock since Gorp Corp. has only one class of stock outstanding. Your redemption qualifies for capital gain treatment under the 'substantially disproportionate' test of Section 302.
- Redemption is a complete termination of interest in corporation -- If your redemption is a complete redemption, meaning that all of your stock is redeemed, including all voting, nonvoting, preferred, and common stock held by you, the redemption will qualify for capital gain treatment under Section 302.
Caution: The attribution rules apply here, so your redemption might not qualify if family members or beneficiaries of your estate are shareholders after the redemption.
- Redemption is a partial liquidation of the corporation -- To determine if a redemption qualifies for capital gain treatment under this test, the transaction must be looked at from the perspective of the corporation, not that of the redeeming shareholder.
You will need expert guidance to see if your redemption qualifies under this test.
Things to Do Later
Periodically Review the Buy-Sell Agreement (If You Have One)
You and your buy-sell participants should review the buy-sell agreement on a regular basis, perhaps yearly. You want to be sure that the agreement still meets your objectives, and that any required updates are conducted.
Caution: Failure to update an agreement when called for within the agreement could lead to problems.
Tax Considerations
Income Tax
Redemption of Shares Is Not Tax Deductible for the Corporation
When a corporation redeems the shares of a shareholder, it is not an income tax-deductible expense of the business. When cash is distributed in exchange for the stock, the business recognizes no gain or loss on the transaction.
Redemption Qualifying Under Section 302 Avoids Dividend Treatment
Generally, when a company (other than an S corporation) redeems the stock of a shareholder, it is treated as a dividend. An exception to this treatment may occur if your redemption meets the qualifications of Section 302. In this situation, the redemption is treated as a sale or exchange.
Caution: If your family members (by blood or marriage) are also shareholders, the favorable tax treatment can be complicated or even eliminated by the attribution (constructive ownership) rules.
Stock Sold By Estate Receives Step-Up in Basis
Stock held by your estate receives a new basis equal to the fair market value (FMV) typically determined at the date of death. If your estate redeems from your estate stock held by you at death under an entity purchase buy-sell agreement, and the sale price is accepted as the FMV, there shouldn't be any capital gain or loss realized by your estate.
Remaining Shareholders Do Not Receive Increase in Basis
When the corporation buys out the interest of an owner, the remaining owners do not receive an increase in basis for income tax purposes. This means that if you are a remaining owner, and you sell your interest in the business during your lifetime, you will realize a larger capital gain.
Example(s): You and your two co-owners, Dick and Jane, originally invested $100,000 each in the business (original value $300,000). The FMV of the business is now $600,000.
You
Dick
Jane
Business
Original Basis
$100,000
$100,000
$100,000
$300,000
Current FMV
$200,000
$200,000
$200,000
$600,000
Example(s): Dick dies. The company buys back Dick's interest and pays Dick's estate $200,000, representing the FMV of his interest in the business. Now, you and Jane each own half of the business valued at $600,000 ($300,000 each). Because there is no step-up in basis to the remaining shareholders, your basis is still the original $100,000 you paid for your interest.
You
Jane
Current FMV
$300,000
$300,000
Basis
$100,000
$100,000
Capital Gain
$200,000
$200,000
Example(s): If you sell your interest during your lifetime, you would recognize a taxable capital gain of $200,000.
Gift and Estate Tax
Your Stock Is Included In the Gross Estate Value
When you die, the value of your stock is included in the value of your estate. This generally should be equal to the redemption proceeds.
Caution: If the price received is determined to be less than the fair market value (FMV), the estate will be taxed on the FMV determined by the IRS. This means it is possible that the estate could be required to pay tax on value it did not (and never will) receive.
Questions & Answers
Do You Have to Have an Entity Purchase Buy-Sell Agreement in Place to Qualify for a Section 302 Redemption?
The tax laws allow you to redeem stock under the favored treatment of Section 302 without a buy-sell agreement. However, without a legally binding agreement in place, the corporation is not obligated to redeem your stock. If you are the majority shareholder of the business, you can probably use your voting power to see that your redemption is carried out. Even so, the absence of advance planning could still make it impossible to redeem your stock, as the funds may not be available, and/or local laws may prevent it.
Tip: If you think you might want to redeem corporate stock during your lifetime, or you want to be sure that your estate can sell your stock to the corporation after your death, consider putting an entity purchase buy-sell agreement in place now to protect yourself and your estate.
Can Your Stock Redemption Qualify for Favorable Tax Treatment Under Section 302 and Section 303?
To qualify for favorable tax treatment under Internal Revenue Code Section 303, the redemption must occur after your death. If your estate is subject to estate taxes, state death taxes, and funeral and administration expenses, a stock redemption up to the total of these liabilities may qualify under Section 303. More than one shareholder might qualify for a Section 303 redemption if your will leaves stock to two or more people who are responsible for estate taxes.
Refer to the discussion of the Section 303 Stock Redemption for more information. Your estate's redemption of your stock may also qualify under Section 302. It is important for your estate to coordinate the stock redemption to take advantage of the benefits of both Section 302 and 303, and not waste redemptions qualifying under one section by applying them to another. Consult a tax advisor to maximize the benefit you derive from Sections 302 and 303.
What Happens If the Existing Agreement Calls for Periodic Updating and It Isn't Done?
If the agreement requires an update, the failure to do the updating could have serious consequences. For example, if the agreement calls for a revaluation of the business at specified intervals and the revaluation is not calculated, the value set under the agreement may be lower than the taxable value set by the IRS. If you die, your estate will be bound under the agreement to sell your shares at the agreement price. The taxable value assigned by the IRS may be higher, subjecting your estate to taxation on value it will not receive (assuming there is an estate tax). In addition to the potential tax consequence, the failure to update the agreement when called for in the terms could affect the ability of the agreement to stand up if challenged in court.
Featured Video
Articles you may find interesting:
- Corporate Employees: 8 Factors When Choosing a Mutual Fund
- Use of Escrow Accounts: Divorce
- Medicare Open Enrollment for Corporate Employees: Cost Changes in 2024!
- Stages of Retirement for Corporate Employees
- 7 Things to Consider Before Leaving Your Company
- How Are Workers Impacted by Inflation & Rising Interest Rates?
- Lump-Sum vs Annuity and Rising Interest Rates
- Internal Revenue Code Section 409A (Governing Nonqualified Deferred Compensation Plans)
- Corporate Employees: Do NOT Believe These 6 Retirement Myths!
- 401K, Social Security, Pension – How to Maximize Your Options
- Have You Looked at Your 401(k) Plan Recently?
- 11 Questions You Should Ask Yourself When Planning for Retirement
- Worst Month of Layoffs In Over a Year!
What are the key provisions of the Occidental Petroleum Corporation Retirement Plan that employees should understand to maximize their benefits, and how does the company structure its contributions relative to employees' earnings? As employees of Occidental Petroleum Corporation consider their retirement planning, it's vital to grasp how the company's contributions function, particularly concerning the wage base and annual earnings limits.
Key Provisions of the Occidental Petroleum Corporation Retirement Plan: The Occidental Petroleum Corporation Retirement Plan is fully funded by the company, with contributions based on an employee's annual earnings. The company contributes 7% of annual earnings up to the Social Security wage base ($137,700 in 2020) and 12% on earnings above the wage base. This structure is designed to help employees build substantial retirement savings. The plan's benefit limits align with IRS regulations, and employees should be aware of how these contributions are applied based on annual earnings limits to maximize their benefits(Occidental_Petroleum_Co…).
How can Occidental Petroleum Corporation employees manage their investment options within the Retirement Plan, and what resources does the company provide to help them make informed decisions? The investment options available through the Occidental Petroleum Corporation Retirement Plan serve as a significant tool for employees wishing to tailor their retirement savings according to their financial goals and risk tolerance. Understanding these options can be complex and requires an in-depth exploration of available funds, associated risks, and projected performance.
Managing Investment Options: Occidental Petroleum employees have control over how contributions to their Retirement Plan are invested. The plan offers various investment funds, including bond and stock market index funds, and target date funds. Employees can manage their investment elections through the online platform, oxy.voya.com, which also provides fund performance data and advice resources, such as Online Advice and Professional Management services, to assist employees in making informed decisions(Occidental_Petroleum_Co…).
In what ways do vesting schedules impact employees' retirement benefits at Occidental Petroleum Corporation, and what rights do employees have under the Employee Retirement Income Security Act (ERISA) regarding these benefits? Navigating the vesting schedule can make a profound difference in the go-forward retirement landscape for employees. Occidental Petroleum Corporation offers a structured approach to vesting, impacting when benefits are owned outright, and understanding the implications of ERISA for retirement planning is essential for all employees.
Impact of Vesting Schedules: Occidental Petroleum's Retirement Plan vests fully after three years of service. Employees are always fully vested in any Rollover accounts. Vesting schedules impact when employees can fully claim their retirement benefits, with protections under ERISA that guarantee the right to earned benefits. Employees who leave before vesting forfeit the nonvested portion of the company’s contributions(Occidental_Petroleum_Co…)(Occidental_Petroleum_Co…).
What are the distribution options available for employees of Occidental Petroleum Corporation when they reach retirement age, and how do these options affect their financial planning? The variety of distribution options at Occidental Petroleum Corporation can create a much more personalized retirement plan, allowing employees to consider how best to receive their benefits while factoring in tax implications and future income needs.
Distribution Options at Retirement: Employees reaching retirement age (60) have multiple distribution options from the Retirement Plan, including lump sum payments and annuity options. These choices impact financial planning, as each option has different tax and income implications, allowing employees to tailor their benefits to their future financial needs(Occidental_Petroleum_Co…)(Occidental_Petroleum_Co…).
How does Occidental Petroleum Corporation support employees who experience disability, and what provisions are in place for continuing retirement contributions during such periods? Understanding the support structure provided by the company, specifically in relation to short-term and long-term disability, is crucial for employees who may find themselves in unexpected circumstances. It’s important for them to know whether retirement contributions will continue during their disability or if they might need to make adjustments to their financial planning.
Disability and Retirement Contributions: Occidental Petroleum continues to contribute to the Retirement Plan if an employee is receiving short-term disability benefits. The contributions are based on the employee's actual pay during the disability period. This provision ensures that retirement savings can continue during times of temporary disability, supporting long-term financial planning(Occidental_Petroleum_Co…).
How can employees at Occidental Petroleum Corporation ensure their beneficiary designations remain current and what are the implications of these designations for estate planning? The process of maintaining accurate beneficiary designations is critical for the smooth transition of retirement benefits, and employees must be aware of how changes in personal circumstances can impact these designations.
Beneficiary Designations: Employees should regularly update their beneficiary designations to ensure their retirement benefits are directed as desired upon their death. Changes in personal circumstances such as marriage, divorce, or the death of a previously designated beneficiary should prompt an update. Failure to do so may result in unintended allocations(Occidental_Petroleum_Co…)(Occidental_Petroleum_Co…).
What are the specific eligibility requirements for the Occidental Petroleum Corporation Retirement Plan, and how do these requirements differ for various employee categories, such as full-time versus part-time employees? Recognizing the nuances of eligibility criteria within the retirement plan is essential for employees to understand when they can begin to participate and what contributions may apply, especially if they transition between roles.
Eligibility Requirements: Full-time and part-time non-union employees and some union-represented employees are eligible to participate in the plan. Contributions begin automatically on the first day of the month of employment or eligibility. Understanding the specific eligibility requirements, especially for employees transitioning between full-time and part-time roles, ensures accurate participation and benefit accumulation(Occidental_Petroleum_Co…).
How can employees reach out to Occidental Petroleum Corporation for assistance regarding their Retirement Plan benefits, and what are the best practices for ensuring their inquiries are addressed promptly? Effective communication with the company is key during the retirement planning process. Employees should know how to navigate company channels to maximize their understanding of benefits available to them.
Contacting Occidental Petroleum for Assistance: Employees can manage their retirement plan and address inquiries through the Oxy Retirement Service Center and the oxy.voya.com platform. Best practices for ensuring prompt responses include using the appropriate online tools and staying informed about plan updates and changes(Occidental_Petroleum_Co…).
What are the tax implications of distributions from the Occidental Petroleum Corporation Retirement Plan, and how can employees plan accordingly to minimize their tax burden during retirement? Having a comprehensive understanding of how taxes will impact withdrawals is crucial for employees as they strategize their retirement income, and these tax considerations can play a significant role in long-term financial planning.
Tax Implications of Distributions: Distributions from the Occidental Petroleum Retirement Plan are subject to standard federal and state taxes, including required minimum distributions (RMDs) starting at age 72. Employees should consider consulting a tax advisor to minimize tax burdens and maximize retirement income by understanding the specific tax consequences of various distribution options(Occidental_Petroleum_Co…).
How does Occidental Petroleum Corporation's retirement plan structure address the needs of employees transitioning from active service to retirement, particularly in terms of investment performance and management of existing accounts? As employees consider retirement, they should be well-informed about how the company manages contributions already made, ensuring that their investment strategy aligns with their anticipated retirement lifestyle and goals.
Transition from Active Service to Retirement: Occidental Petroleum supports employees transitioning to retirement by continuing contributions and offering a range of investment options that align with long-term financial goals. This structure allows employees to manage their investments effectively during retirement, ensuring that the plan remains aligned with their financial objectives(Occidental_Petroleum_Co…).
-2.png?width=300&height=200&name=office-builing-main-lobby%20(52)-2.png)
.webp?width=300&height=200&name=office-builing-main-lobby%20(27).webp)
-2.png)
.webp)