Stock bonus plan definition
/What is a 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 73. 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
Disadvantages of a Stock Bonus Plan
A stock bonus plan puts employees at risk of a stock price decline. This can be a major problem when a large part of their retirement savings is invested in one company, since this heightens the risk of a swing in stock price having a large negative impact on employee savings. This would be less of a risk if employee stock holdings were diversified among the securities of many issuers.