This is a peak time of year for making deferral elections for nonqualified deferred compensation plans, and there are a number of issues that advisors can help participants consider.
A report by mystockoptions.com notes that in the analysis for deferrals to make in 2015, an ongoing issue stems from the tax increases that took effect in 2013, including the additional Medicare taxes for high earners.
According to the report, other points to consider include:
- Maximizing the amount contributed to their 401(k) plans (since those amounts are fully funded and protected by ERISA).
- Cash needs for the year ahead and multi-year projections for their income, in order to, at a minimum, determine if there is extra cash to defer.
- The financial security of the employer, and the individual's job security. If there are concerns about the employer's solvency, the report says you may want to avoid contributions to nonqualified plans because of the risks presented by corporate bankruptcy. Additionally, should the individual lose their job during the deferral period, the income in the plan will be distributed immediately, triggering taxes at an inopportune time.
- Company match. Though company matches are not as common in NQDC plans as they are in 401(k) plans, if a company match requires that a certain amount be contributed to the NQDC plan, that needs to be taken into account.
- The thresholds for higher taxes and rates. The report explains that higher tax rates make deferring income appealing, and that if you think the rate will be lower, pre-tax deferrals, which keep income below the current triggers for higher taxes, can make sense.
