Delayed compensation benefits?

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smokeycanoe
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Delayed compensation benefits?

Post by smokeycanoe » Sun Oct 29, 2017 10:43 pm

I have the option of deferring my annual bonus for 5 years. If I leave, any deferred amounts will be paid lump sum. Unless I plan to retire (or otherwise have a sharp decrease in income) in that timeframe, what is the advantage to me?

I also worry that should I want to leave I'd need to factor in this lump sum income... DAFs only help so much!

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mhc
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Re: Delayed compensation benefits?

Post by mhc » Mon Oct 30, 2017 8:24 am

Welcome.

It is just a tax planning tool that may or may not work for you. It sounds like you understand the issues.

If you do defer it, are there good investment options? If so, the money grows tax free similar to an IRA. That is a slight benefit.

jebmke
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Re: Delayed compensation benefits?

Post by jebmke » Mon Oct 30, 2017 9:08 am

Keep in mind that deferred comp is typically non-qualified and you are just a general creditor of the company.
When you discover that you are riding a dead horse, the best strategy is to dismount.

euroswiss
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Re: Delayed compensation benefits?

Post by euroswiss » Mon Oct 30, 2017 9:33 am

If you can really only defer 5 years, then the benefits are likely small. Most plans will allow "re-deferment" basically until you retire or leave the company. THAT is more interesting because it allows you to defer taxes until you are, potentially, in a lower tax bracket. Most plans will also allow you to spread out the distribution over a number of years in order to minimize tax exposure. That said, yep, if you leave the company before you retire, then it may well all come as a lump sum (with the associated tax consequences). So, as someone else said, it is a tax planning tool. If already max out your 401k/IRA/etc then this is an additional way to minimize current taxes. If you don't, then max out the other options first instead - as jebmke said, deferred comp does not enjoy the same status as retirement plans when your employer goes bust, so make sure the company is stable.

saveinvestbecomefree
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Re: Delayed compensation benefits?

Post by saveinvestbecomefree » Mon Oct 30, 2017 9:43 am

If it's paid lump sum it doesn't sound very attractive. As others mentioned, the non-qualified part is a risk, which is why I stopped participating myself, despite the tax advantages (I didn't need to take a lump sum so the tax benefits were much better). It's not just the risk of your employer going bust either. "Change of control" is also something that can trigger this money being paid as a lump sum. So many companies undergo M&A that this is a high probability. In fact, this is happening at my workplace now and I'm glad I don't have more set aside in deferred compensation.

jebmke
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Re: Delayed compensation benefits?

Post by jebmke » Mon Oct 30, 2017 10:04 am

I always took the position that I already had a good bit of financial risk on with my company (career, NQ options) so I passed on deferred bonus plans.
When you discover that you are riding a dead horse, the best strategy is to dismount.

Ron Scott
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Re: Delayed compensation benefits?

Post by Ron Scott » Mon Oct 30, 2017 10:56 am

I did it once, for about 20k. It grew insignificantly and was taxed at a higher rate than it would have had I not done it in the first place.

If I could have delayed until I achieved a decent bracket drop it would have been worthwhile.

YMMV.

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Hyperborea
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Re: Delayed compensation benefits?

Post by Hyperborea » Mon Oct 30, 2017 11:05 am

Yes, unless you are planning to have reduced income the year that the deferred comp pays out then there is only a small or no benefit. I had a similar plan at the last company I worked for. Any employee could defer their bonus for 1-5 years though I'm sure the execs got a better deferral plan. I did so and it all paid out the year after I retired. It was a decent savings since I was able to take that bonus from my marginal tax rate during working to my average tax rate after retiring which was far lower even given that I had 5 years of bonus paying out at one time.

I have known some to do this when they planned for a longish unpaid leave or for some who were planning to go back to school. But again, only when their income was dropping. Otherwise, not a good idea.

Bacchus01
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Re: Delayed compensation benefits?

Post by Bacchus01 » Mon Oct 30, 2017 11:10 am

Lots of things here to consider, including what your investment options are and what the fees are.

I do this primarily for tax planning purposes.

IF you are still with the company in 5 years, one thing you can do is just take the disbursement and then re-allocate the same amount (or more) to a deferred comp plan. It extends that tax savings out essentially.

Look at your tax levels and see if you can get below some breaks (e.g. the next marginal band, or get below $250K to avoid some Obamacare fees, etc.). That's when it pays off.

My plan also pays in a lump sum if I leave the company. I weighed that closely, but in the end I figured one of three scenarios is likely:
- I get fired, and thus have to take the lump sum and pay roughly the same level of taxes I would have paid anyway. It's largely a wash (net the difference between LTCG in an after-tax account vs. income rates on growth in a tax deferred account)
- I leave the company for another company at which point I'm likely to be eligible for another deferred comp plan and can then just offset and move the taxes out
- I leave the company and essentially retire early, at which point I likely would leave just after bonus payouts in April, take the lump sum amount and am still likely paying taxes on it in a lower marginal bracket than I would have if it had been paid for a full year of earnings

Not considering the fact that it is non-qualified and essentially an unprotected asset, I thought the downsides were small relative to the potential upsides in tax savings.

That said, I put a pretty small amount in. This year it was about 3% of my earnings. Next year it will likely jump to 15% depending on my tax planning at the end of the year.

mass_biker
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Re: Delayed compensation benefits?

Post by mass_biker » Mon Oct 30, 2017 1:17 pm

I am using this. I have the option of deferring 50% of base and 100% of bonus. My plan also offers the option to re-defer the first distribution (yearly, over five years) for five years after a separation of service. Eyeballing how this could work, this could end up being the bridge between retiring early and the onset of RMDs. Of course the usual caveats of being an unsecured creditor, having comp at risk in the market all hold, but if you can stretch it out, it could be a good thing.

dcdowden
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Re: Delayed compensation benefits?

Post by dcdowden » Mon Oct 30, 2017 2:03 pm

You should look into the issue of when FICA taxes are paid on unqualified deferred compensation. I believe that FICA taxes on deferred amounts can be due before you actually receive the money. I believe that FICA taxes are due either when you earn the compensation or when it is vested such that you are not longer at risk of losing it. That's what happened with my supplemental pension (considered deferred compensation in an unqualified plan) when I retired. Fortunately, I had already maxed out the Social Security portion of FICA, but I had to pay the Medicare portion on the estimated present value of my supplemental pension. Income taxes are deferred until you actually receive the payment.

cajungal
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Re: Delayed compensation benefits?

Post by cajungal » Mon Oct 30, 2017 3:10 pm

I had a large amount of deferred compensation, thinking I would retire from the company I was working for. I didn't and taxes were horrendous. No one counseled me about the possibilities - you are way ahead to consider the various scenarios.

euroswiss
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Re: Delayed compensation benefits?

Post by euroswiss » Tue Oct 31, 2017 8:53 am

dcdowden wrote:
Mon Oct 30, 2017 2:03 pm
You should look into the issue of when FICA taxes are paid on unqualified deferred compensation. I believe that FICA taxes on deferred amounts can be due before you actually receive the money. I believe that FICA taxes are due either when you earn the compensation or when it is vested such that you are not longer at risk of losing it. That's what happened with my supplemental pension (considered deferred compensation in an unqualified plan) when I retired. Fortunately, I had already maxed out the Social Security portion of FICA, but I had to pay the Medicare portion on the estimated present value of my supplemental pension. Income taxes are deferred until you actually receive the payment.
- d
Yes, this is true - The payout is not subject to FICA taxes because those are due when you EARN the money, not when you receive it.

euroswiss
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Re: Delayed compensation benefits?

Post by euroswiss » Tue Oct 31, 2017 8:57 am

cajungal wrote:
Mon Oct 30, 2017 3:10 pm
I had a large amount of deferred compensation, thinking I would retire from the company I was working for. I didn't and taxes were horrendous. No one counseled me about the possibilities - you are way ahead to consider the various scenarios.
Yes, that is a significant risk and needs to be considered carefully. My own plan with my former employer. At least had the provision that the lump sum would be distributed 13 months after termination of employment, so if say, you lose your job, at least you don’t get hit with a huge tax bill for the same year. But yes, in a less than stable job situation, I would NOT have chosen deferred compensation. Definitely a risk

dcabler
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Re: Delayed compensation benefits?

Post by dcabler » Tue Oct 31, 2017 9:12 am

I've been in one of these plans before. I put 100% of my bonuses in it and 5% of my salary. When I signed up I had the choice of a lump sum upon leaving or paid out over 10 years. I elected paid out over 10 years as my goal was to leave the company concurrent to starting retirement. It is possible to change the election but those changes could only be made once every 5 years or so.

Anyway, despite my plans, the company had a layoff when I was a couple of years into it and I wasn't yet ready for retirement. So every January I get a check. And it counts as income and is taxed accordingly. I immediately take the check and deposit it into my taxable account...

At this point, if again presented with such an opportunity, I'll pass.

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