For many of us, our day-to-day lives have never experienced more disruption. Between massive shifts in corporate strategy and company structure to home schooling your kids, it is harder than ever to maintain control of your personal finances. If you are preparing for a job transition, or if your firm has terminated its Supplemental Retirement Plan/Deferred Compensation Plan, you probably have a few questions. As always, we are here to help!
What is a “Supplemental Retirement Plan” (SRP)?
Your SRP is a Non-Qualified Deferred Compensation plan. It is funded in two ways. The first way is if an associate were to elect to defer his/her base or IC directly into the plan in the form of pre-tax contributions. The second way is for the company to make contributions, which typically applies for highly compensated associates.
What happens when such a plan terminates?
Unlike a 401(k), this plan cannot be rolled into an IRA or similar retirement plan. Once the plan terminates, it is 100% taxable as ordinary income. These plans are typically released to the associate as part of a regular paycheck with tax withholding.
I don’t need all of that money now. Can’t I defer the income?
Unfortunately, no. The plan cannot be rolled into a retirement plan and deferred, however with some help from your CPA or tax professional, there are creative avenues you may be able to take to offset your overall ordinary income in a given year. If certain deductions can be accelerated, and it is one of your largest tax years, such strategies should be taken into consideration.
Will my stock plan terminate in conjunction with this transaction?
If a stock grant is eligible for prorated vesting at termination, its vesting could also be accelerated. This is good and bad news, as you would gain control of the shares sooner, however you will not receive the full amount.
Am I losing anything going forward?
If a Deferred Compensation plan terminates, associates will no longer have the ability to defer income into this retirement plan. You could be losing the ability to reduce your taxable income and max-fund your retirement. Additionally, highly compensated folks will no longer receive company contributions, some of which have been extremely fruitful in the past.
So, what should I DO??
Our advice is to make sure you formulate and implement a plan that is tailored to fit your individual situation and circumstances. Make sure it is well-coordinated with your tax advisor and it has your family’s goals at the forefront. The termination of company retirement plan is a major event, so there is no reason to go through it alone – especially at a time when you have so much on your plate.
Adam Weingartner is a registered representative of Lincoln Financial Advisors. Securities and advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (Member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. Bluestone Wealth Partners is not an affiliate of Lincoln Financial Advisors. Lincoln Financial Advisors does not offer legal or tax advice. CRN-3578767-050521