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 Post subject: Being moved from 401(k) to Deferred Comp Plan Question
PostPosted: Thu Nov 15, 2012 4:21 pm 

Joined: Thu Nov 15, 2012 4:13 pm
Posts: 3
I just received an email notification from my employer, that because of my compensation over the last 12 months I now (barely) fall into the bucket of the "Highly Compensated Employee" and thus they are moving me out of the 401(k) plan into a company sponsored non-qualified deferred comp program (assuming that I elect to exercise it). Not necessarily a bad problem to have, but not sure how to handle it from a personal finance and tax point of view.

My current 401(k) contribution is 17% of my base salary, which essentially maxes me out annually. Company provides a 25-75% match on the first 6% of contributions to both the 401(k) and the differed comp plan.

Am I better off reducing my pre-tax contribution amount to 6%, with the company match up to that, and then taking the after-tax difference up to 17% and putting it into some non-dividend paying investments (to mitigate my tax liability...try to keep my dividend/bond vehicles in my tax efficient accounts)

OR

keeping that 17% as is (increasing a bit each year like I have been) and paying the taxes when I eventually leave the company?

Deferrals and the Company match are credited with tax-deferred interest. The interest rate for each calendar year is based upon Moody’s long term corporate Baa bond index rate average for the month of October that precedes the calendar year. The interest rate for 2013 will be 4.58%.

As best I can tell, since it is a non-qualified deferred comp plan, I won't be able to roll it into an IRA/ Roth if or when I leave the company and it gets cashed out, thus getting hit with income tax on the cash distribution. Unless there is something with the Roth roll-over loop hole, assuming that it stays in place for a number of years, that I missed.

I also have to select the disbursement method at the time of enrolling in the next couple of weeks. Either lump sum or payments spread over 10 years...I'm thinking just lump sum and then investing the remainder if/when I leave the comp.

Looking for thoughts/ input...


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 Post subject: Re: Being moved from 401(k) to Deferred Comp Plan Question
PostPosted: Thu Nov 15, 2012 4:56 pm 
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You plan should have a name referring to a section of the tax code - 401(k), 401(a), 457, etc. If you find that out we will have a better idea what it really is and what the rules are. From your description it is hard to picture what this animal looks like.

I have access to an option "deferred compensation" plan that in most respects is almost identical to a 401(k) so the name alone means very little.


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 Post subject: Re: Being moved from 401(k) to Deferred Comp Plan Question
PostPosted: Thu Nov 15, 2012 7:14 pm 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
If you only make $100k or so, I'd personally pass at this time on the NQDC offer. The intent of NQDC's is to help those with a relatively low "savings rate" (e.g. high income, small % of salary contributed to a direct contribution plan) save more without realizing the income until a certain event happens (tax deferred growth). IF you are talking about lowering your 401k contribution, it probably isn't the plan for you. If you can continue to max out the 401k and have more money to save, then it may be ideal. The 401k is the better deal IMO, unless you plan to stick with this company until the end (really rare these days). Taxes are most likely due when you experience an event which dumps this all on you.

Can you get on the train anytime you'd like? Or is it a use it or loose it situation? Do you have high potential for continued salary growth?

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 Post subject: Re: Being moved from 401(k) to Deferred Comp Plan Question
PostPosted: Thu Nov 15, 2012 8:04 pm 
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Bichon Frise wrote:
If you only make $100k or so, I'd personally pass at this time on the NQDC offer. The intent of NQDC's is to help those with a relatively low "savings rate" (e.g. high income, small % of salary contributed to a direct contribution plan) save more without realizing the income until a certain event happens (tax deferred growth). IF you are talking about lowering your 401k contribution, it probably isn't the plan for you. If you can continue to max out the 401k and have more money to save, then it may be ideal. The 401k is the better deal IMO, unless you plan to stick with this company until the end (really rare these days). Taxes are most likely due when you experience an event which dumps this all on you.

Can you get on the train anytime you'd like? Or is it a use it or loose it situation? Do you have high potential for continued salary growth?


Another reason for being identified as a highly compensated employee has to do with top heavy tests on the 401k itself. The poster may be getting kicked out of the 401k because too many of the high paid people contribute as opposed to the 99 percenters. If that is the case then knowing the details matters mucho.


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 Post subject: Re: Being moved from 401(k) to Deferred Comp Plan Question
PostPosted: Thu Nov 15, 2012 8:25 pm 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
DoingHomework wrote:
Bichon Frise wrote:
If you only make $100k or so, I'd personally pass at this time on the NQDC offer. The intent of NQDC's is to help those with a relatively low "savings rate" (e.g. high income, small % of salary contributed to a direct contribution plan) save more without realizing the income until a certain event happens (tax deferred growth). IF you are talking about lowering your 401k contribution, it probably isn't the plan for you. If you can continue to max out the 401k and have more money to save, then it may be ideal. The 401k is the better deal IMO, unless you plan to stick with this company until the end (really rare these days). Taxes are most likely due when you experience an event which dumps this all on you.

Can you get on the train anytime you'd like? Or is it a use it or loose it situation? Do you have high potential for continued salary growth?


Another reason for being identified as a highly compensated employee has to do with top heavy tests on the 401k itself. The poster may be getting kicked out of the 401k because too many of the high paid people contribute as opposed to the 99 percenters. If that is the case then knowing the details matters mucho.


understood. not saying they shouldn't look into it, just that it probably doesn't make sense to do it they have the choice (which it sounds like they may have) and can't really save more than they are already doing.

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"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: Being moved from 401(k) to Deferred Comp Plan Question
PostPosted: Fri Nov 16, 2012 6:55 am 

Joined: Thu Nov 15, 2012 4:13 pm
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This program is a NQDC program, so there is no "tax" number for it. It's non-qualified according to the federal tax code because there is a "risk of loss" as the money is allocated out there, I can see the matches and interest, but in the event that the company goes bankrupt the money is not protected in a trust...I'm a creditor like everyone else. Risk of bankruptcy is minimal, but because it is non-qualified I can't roll it when I leave.

My read on is that I'm being moved to the NQDC program based on top heavy testing. The compensation situation is evaluated on an annual basis, so if my compensation is lower this year than last then I could be allowed back into the 401(k) next year. Really annoying. I have 30 days to decided if I will participate in the NQDC program and then I'm not eligible to make any elections until next year.

I'm thinking my best move is to do 6% in order to get the match, select lump sum payout for when/if I leave the company, and then take the difference between my now 17% contribution and the 6% and put it into a straight investment account.


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 Post subject: Re: Being moved from 401(k) to Deferred Comp Plan Question
PostPosted: Fri Nov 16, 2012 7:43 am 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
glasskopf wrote:
This program is a NQDC program, so there is no "tax" number for it. It's non-qualified according to the federal tax code because there is a "risk of loss" as the money is allocated out there, I can see the matches and interest, but in the event that the company goes bankrupt the money is not protected in a trust...I'm a creditor like everyone else. Risk of bankruptcy is minimal, but because it is non-qualified I can't roll it when I leave.

My read on is that I'm being moved to the NQDC program based on top heavy testing. The compensation situation is evaluated on an annual basis, so if my compensation is lower this year than last then I could be allowed back into the 401(k) next year. Really annoying. I have 30 days to decided if I will participate in the NQDC program and then I'm not eligible to make any elections until next year.

I'm thinking my best move is to do 6% in order to get the match, select lump sum payout for when/if I leave the company, and then take the difference between my now 17% contribution and the 6% and put it into a straight investment account.


Assuming decent investment options within the NQDC (I've never been invited despite having a single digit 401k contribution rate to max out, so I don't know exactly how it works), I'd put as much into the NQDC you could if the risk of your company going under is minimal. Any other risk you'd be taking on? Reasoning is the money will grow tax deferred while in the NQDC and then you'll be hit with taxes when a trigger event occurs. Tax deferred growth is always better than taxable growth, ceteris paribus.

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"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: Being moved from 401(k) to Deferred Comp Plan Question
PostPosted: Fri Nov 16, 2012 9:20 am 

Joined: Thu Nov 15, 2012 4:13 pm
Posts: 3
The NQDC account pays an annual interest rate determined by a bond index. FY13 will be 4.58%. I have no options to invest in any other vehicles within the program...company match and 4.58%, that's it...so all in total return on "my" money will probably be 7-8%. That's the only risk I can see...not being able to control my returns. I'm thinking that I'll consider the NQDC bucket as a portion of my "bond" portfolio, then I just re-adjust my 401(k) holdings accordingly into more security heavy holdings to compensate.

So assuming that I go with a least a 6% contribution to the NQDC plan, do I set a single lump sum distribution or do I have the distribution spread over 10 years? It's a pick one and you can't change it situation...


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 Post subject: Re: Being moved from 401(k) to Deferred Comp Plan Question
PostPosted: Fri Nov 16, 2012 10:30 am 

Joined: Fri May 04, 2012 2:23 pm
Posts: 810
I'd be all over that bond return! Of course, I have a portfolio to make up the difference outside. Assuming you are in a similar situation, I'd crank up the contribution. Can you set your contribution rate on the fly? Annually? Or just this one shot?

Can you roll over your existing 401k?

Hard to know whether to take the lump sum vs 10 yr distribution. I assume they are mathematically the same? the only difference is trying to spread out the tax burden. kinda hard to know without knowing how long you'll be there, what your current salary is, your potential for salary growth, overall financial picture, future tax rates etc etc. Or you could always default to the, "one in hand is better than two in the bush."

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Bichon Frise

"If you only have 1 year to live, move to Penn...as it will seem like an eternity."


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 Post subject: Re: Being moved from 401(k) to Deferred Comp Plan Question
PostPosted: Fri Nov 16, 2012 2:50 pm 
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I guess I'm with you guys...

Initially I was thinking it better to pass on the NQ plan but a 4.58% "guaranteed" rate plus teh guaranteed match is hard to beat.

I'd pick the lump sum distribution although there is a big tax risk there. I believe tax rates are headed higher regardless of the current battle. I think rates will be at least 5% and probably 10% higher across the board 10 years from now so that means you'll be paying higher rates. Plus in the year you get the lump sum you could be pushed into a much higher bracket. So, it's a risk you take regardless of what you expect or hope for.

I'd also want to be very sure my company was solid. One way to do that if it's a big company is to look at its bond rates. If it';s a small company I think I may not put in more than the match if only because I don't believe ANY small company (<500 employees) is without risk of BK. I've helped run a profitable one so I know how close to the edge things can get behind the scenes sometimes.

You might also run this by a paid professional - a CPA.

Good luck.


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