Melissa J. Linn, CFP®
Senior Wealth Planning Strategist
Comerica Wealth Management
Frank A. Jennings IV, CFP®, CTFA
Senior Wealth Planner
Comerica Wealth Management
Executive Benefits: Don’t Leave Money on the Table
- A corporate executive’s benefits package contains many components. To take advantage of every opportunity, an executive must understand each element and how it fits within their overall financial picture.
- Executives have many planning opportunities that require expertise to ensure compliance with company policies, tax laws and securities laws.
Corporate leaders have a wide range of executive benefits and compensation arrangements. There are planning opportunities as well as income tax, company policy and potentially securities law considerations for each arrangement. Base pay is generally a small component of an executive’s overall compensation, so it is important to understand the total benefits package.
"Base pay is generally a small component of an executive’s overall compensation, so it is important for corporate leaders to understand their total benefits package." -Melissa J. Linn
Below is a list of common considerations and planning opportunities for corporate executives.
Common Benefits for Corporate Executives:
1. Salary and cash bonus: Corporate executives typically receive a salary and cash bonus, which are generally structured as any other employee’s salary and bonus. These are the most liquid form of compensation an executive will receive, making them critical components of the executive’s personal cash flow.
2. Deferred compensation: Deferred compensation plans allow executives to elect to receive a portion of their salary or cash bonus to be paid later. The deferral can result in income tax savings for the executive by delaying recognition until they are in a lower tax bracket. Some plans also provide a match for contributions. Potential pitfalls of deferred compensation plans include potentially high concentrations in company stock and exposure of deferred compensation funds to creditors of the company in the event of insolvency. The executive may also be in the same tax bracket at the elected time of payment and has no control over the funds until the elected payout begins.
3. Stock grants: It is important to understand the vesting rules for the various types of stock grants. Similarly, knowing what happens to the grant if the executive were to pass away, become disabled, separated from service for cause or not for cause, or if there is a change of control or merger of the corporation is important for planning and could guide future decisions about the grants.
a. Restricted stock units and restricted stock awards: Restricted stock units (RSUs) and restricted stock awards (RSAs) are two types of restricted stock grants that usually vest over multiple years or cliff vest. These types of grants are considered ordinary income as of the vesting date and may be paid in cash or shares of the company.
b. Performance share plan grants: Performance share plan grants (PSPs) are like restricted stock but are based on performance measures set out by the company. PSPs are generally intended to provide a performance incentive for management over a multi-year period and could pay anywhere from 0% to 200% of the performance target. These are also considered ordinary income as of the vesting date and may be paid in cash or shares of the company.
c. Non-qualified stock options: Non-qualified stock options (NQOs) are an option to purchase company stock at a specified price, regardless of the current fair market value of the stock. Vesting periods may apply depending on the company. NQOs are taxed as ordinary wage income for the spread between the grant price and the fair market value at the date the option is exercised. The income is also subject to U.S. federal payroll (FICA) tax. Options have an expiration date. There are strategies for timing the exercise based on the fair market value, time remaining on the option and potential upside to the stock through the expiration date.
d. Incentive stock options: Incentive stock options (ISOs) are granted for a 10-year period before expiration. Vesting periods may apply depending on the company. ISOs have greater income tax benefits to the recipient compared to some other types of options. The difference between the grant price and the fair market value is not taxed at the time of exercise. The difference between the fair market value and grant price is an AMT preference item. If the stock is held for two years post grant and one year post exercise, all the gains are capital gains and there is no ordinary income recognition. However, any liquidation of the stock before that time is ordinary income.
4. Other Forms of Benefits:
a. 401(k) matches: Corporate executives may make use of the company’s 401(k) match.
b. Pensions: Corporate executives may be eligible to participate in company-offered pensions.
c. Fringe benefits: There are various types of fringe benefits provided by companies. A few examples include employer-provided commuter benefits, meals, car services, planning services, and tuition assistance. Some fringe benefits are considered imputed income for tax purposes, while others are not.
Planning opportunities for executives:
1. Beneficiary designations: The executive should review beneficiary designations for their employer-provided plans — 401(k), life insurance and deferred compensation, among others — to ensure they are up to date, accurate and consistent with any other financial planning they have done. Each benefit may have a different beneficiary designation election.
a. 83(b): Consider 83(b) elections to recognize income in the year of the grant if the stock value is expected to increase quickly. This applies to RSUs and RSAs.
b. 10b5-1 trading plans: These plans permit executives who are insiders to trade company stock based on specific elections. This is a written agreement between the executive and the brokerage firm that trades the stock. The plan is very specific on the number of shares that will be sold at a specified price. The plan specifies a timeframe for which it is in effect. At the end of the timeframe, a new plan can be written. This predetermined plan can also allow for trading during blackout periods.
3. Net unrealized appreciation: Net unrealized appreciation (NUA) applies to company stock held in a qualified retirement plan and allows the executive to distribute company stock in kind from the plan to an investment account. The cost basis of the company shares is subject to ordinary income taxation, and the securities are subject to capital gains when sold.
4. Income and estate tax planning: There are many income and estate tax considerations at play when working with a corporate executive. It is important to maintain a big picture perspective when looking at an executive’s overall financial situation.
5. Stock diversification strategies: There are many ways to diversify a concentration in company stock. A few examples include selling vested shares, employing an option-based strategy, using an exchange fund, using the company stock as collateral for a loan and gifting vested shares as part of an overall giving plan.
Executives have many planning opportunities that require expertise to ensure compliance with company policies, tax laws and potentially securities laws. Your Wealth Strategist can provide a holistic review of your entire benefits package as well as a review of your overall financial picture. Please contact your Wealth Relationship Manager for additional information.