[et_pb_section admin_label=”section” transparent_background=”off” background_color=”#ffffff” allow_player_pause=”off” inner_shadow=”off” parallax=”off” parallax_method=”off” padding_mobile=”off” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” custom_width_px=”1080px” custom_width_percent=”80%” make_equal=”off” use_custom_gutter=”off” fullwidth=”off” specialty=”off” module_id=”ll-blog-post-item” disabled=”off”][et_pb_row admin_label=”Row” make_fullwidth=”off” use_custom_width=”off” width_unit=”on” custom_width_px=”1080px” custom_width_percent=”80%” use_custom_gutter=”off” gutter_width=”3″ padding_mobile=”off” allow_player_pause=”off” parallax=”off” parallax_method=”off” make_equal=”off” column_padding_mobile=”on” parallax_1=”off” parallax_method_1=”off” parallax_2=”off” parallax_method_2=”off” parallax_3=”off” parallax_method_3=”on” parallax_4=”off” parallax_method_4=”on” disabled=”off”][et_pb_column type=”2_3″][et_pb_text admin_label=”Text” background_layout=”light” text_orientation=”left” use_border_color=”off” border_style=”solid” custom_margin=”3px|||” custom_padding=”3px|||” disabled=”off” border_color=”#ffffff”] By: Andrew Rosen, CFP®, CEP® In working with a lot of upper level executives some interesting things start to happen as one moves up the corporate ladder. Once such thing happens, an executive hits a certain income threshold. By IRS limits, they actually become reversely discriminated against. I know that sounds like a crazy assertion, but the issue is real. In order to keep top talent, companies use some creative tactics to make sure all levels of the corporate ladder are treated fairly. The Background There is a mandated restriction put in place by the government on annual compensation limits to most qualified retirement plans. In 2018, the limit used to determine contribution limits to the majority of corporate sponsored retirement plans is $275,000 per year. This means for any regular income (base + bonus usually) above this threshold you may not receive qualified benefits (i.e. employer match). Where and why is this an issue? I’ll describe two examples to illustrate the “reverse” discrimination.
Example 1: An employee earns $150,000 total income. Their company matches 6%, as long as the employee contributes 6%. This person puts in their pre-tax limit in 2018 of $18,500 + $6,000 (50 or over catch-up) for a total of $24,500. Since this individual put in the required 6% (or $9,000), they’ll receive another 6% (or $9,000) in employer matching contributions.
Example 2: An upper level executive (also 50+ years old) earns $400,000 in total income working for this same company. This executive also contributes the 2018 maximum allowable to their 401(k) — $24,500. However, this individual is only entitled to 6% of their first $275,000 of income. In 2018, that means their employer match amount is $16,500, not the $24,000 that would represent 6% of their salary. The Problem The issue here isn’t that the higher compensated employee received more matching dollars (as they simply have more salary to be matched). The executive employee in the above example has $125,000 of additionally earned income for which they are not allowed to receive employer benefits.
$400,000 – $275,000= $125,000 Therefore, the higher level executive is only receiving matching dollars on a little over 4% of their income. The other employee however receives the full 6% matching contribution on all their salary.
Thus if a large corporations want to keep these upper level executives, they must come up with a creative solutions to entice top talent. The Creative Solution So what do these companies do? Smart companies when faced with this conundrum get creative! They offer the adversely impacted executives some form of a non-qualified plan, usually in the form of deferred compensation. Since these plans aren’t governed by ERISA, they adhere to an entirely different set of rules.
A deferred compensation plan allows the employer to offer these executives a savings vehicle where they can contribute and receive match dollars on income over and above the 2018 threshold of $275,000. This way, these employees are receiving similar employee benefits as their less compensated counter parts.
Although many nuances exist in these plans (such as they are unsecured assets until a separating or vesting even), they are generally put into place with very good intentions. Employers keep and treat top talent equally. Employees have more deferral possibilities and can save in line with their retirement lifestyle needs.
I suggest working with someone to help guide you through the ins and outs of these alternative retirement plans. At Diversified, we deal with these plans every day. We are well equipped and happy to help!
[/et_pb_text][et_pb_text admin_label=”Social Share Buttons” background_layout=”light” text_orientation=”left” use_border_color=”off” border_style=”solid” custom_margin=”0px|||” custom_padding=”0px|||” disabled=”off”] [ayssocial_buttons id=”2″] [/et_pb_text][et_pb_text admin_label=”Find Out More banner” background_layout=”dark” text_orientation=”left” background_color=”#00945d” use_border_color=”off” border_color=”#ffffff” border_style=”solid” custom_padding=”10px|10px|10px|10px” disabled=”off” global_module=”743″ saved_tabs=”all”] In his role as Financial Planner, Andrew forges lifelong relationships with clients. He coaches them through all stages of life and guides them to better achieve their life goals. For more information about Andrew or the other firm partners, Kyle Hill and David Levy, click the link below. Find out more about Andrew Rosen CFP®Find out more about Kyle Hill CFP®Find out more about David Levy CFP® [/et_pb_text][/et_pb_column][et_pb_column type=”1_3″][et_pb_signup admin_label=”aWeber – Email Optin” saved_tabs=”all” global_module=”1325″ provider=”aweber” mailchimp_list=”none” aweber_list=”4484965″ button_text=”Subscribe” use_background_color=”on” background_color=”#00945d” background_layout=”dark” text_orientation=”center” use_focus_border_color=”off” use_border_color=”off” border_color=”#ffffff” border_style=”solid” custom_button=”on” button_text_color=”#00945d” button_bg_color=”rgba(255,255,255,0.5)” button_letter_spacing=”0″ button_use_icon=”off” button_icon_placement=”right” button_on_hover=”on” button_text_color_hover=”#00945d” button_bg_color_hover=”rgba(255,255,255,0.34)” button_border_color_hover=”#00945d” button_letter_spacing_hover=”0″] Subscribe to Blog [/et_pb_signup][et_pb_text admin_label=”Blog Post Sidebar” background_layout=”light” text_orientation=”left” module_class=”blog-post-sidebar” use_border_color=”off” border_color=”#ffffff” border_style=”solid” disabled=”off” global_module=”292″ saved_tabs=”all”]
In his role as Financial Planner, Andrew forges lifelong relationships with clients. He coaches them through all stages of life and guides them to better achieve their life goals. To set up an appointment with Andrew, or any of our qualified financial advisors, contact us at [email protected] or call 302-765-3500.
Financial planning and Investment advisory services offered through Diversified, LLC. Securities offered through Purshe Kaplan Sterling Investments, Member FINRA/SIPC. Headquartered at 80 State Street, Albany, NY 12207. Purshe Kaplan Sterling Investments and Diversified, LLC are not affiliated companies.
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Financial planning and Investment advisory services offered through Diversified, LLC. Securities offered through Purshe Kaplan Sterling Investments, Member FINRA/SIPC Headquartered at 80 State Street, Albany, NY 12207. Purshe Kaplan Sterling Investments and Diversified, LLC are not affiliated companies.
Diversified, LLC is an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the SEC. Diversified only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Diversified’s current written disclosure brochure which discusses, among other things, the firm’s business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. Diversified does not provide tax or legal advice and individuals should seek the advice of their own tax or legal advisors for specific information regarding their situations. Investments in securities involve risk, including the possible loss of principal. The information on this website is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.