Stock bonus plan

A stock bonus plan is an incentive plan under which employees are compensated with shares of their employer's stock. The arrangement is classified as a qualified retirement plan, so it is subject to the mandated rules for retirement plans, such as the prohibition on withdrawals prior to age 59 1/2, with minimum required distributions beginning at age 70 1/2. There can also be no discrimination in favor of highly compensated employees.

The arrangement is similar to a profit sharing plan, except that the employer's contributions into the plan are not necessarily based on its profitability. The maximum contribution is 25% of each employee's annual compensation. These contributions are tax-deductible for the employer. Employees can gain from any appreciation in the stock price, but the arrangement also puts them at risk of a stock price decline - which can be a major problem when a large part of their retirement savings is invested in one company.