The Potential Tax Benefits of Deferred Compensation and Retirement Plans

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1 The Potential Tax Benefits of Deferred Compensation and Retirement Plans By Craig Main, Founder and CEO TRENDS REPORT

2 The Tax Cuts and Jobs Act has created a new tax planning dynamic for companies. Under the new rules affecting Section 162(m), companies generally can no longer deduct performance-based compensation over one million dollars in any given year for Covered Employees, which now includes the CFO, along with the CEO and the top three highest paid other executives. However, if an executive voluntarily defers their pay in a nonqualified deferred compensation plan or if they earn company contributions to an executive retirement plan in lieu of non-deductible cash or equity compensation, the company may be able to recognize a deductible compensation expense if, when the executive terminates employment and the nonqualified retirement or deferred compensation annual distributions commence, payouts do not exceed one million dollars in any given year. While the taxation rules for nonqualified plans are unchanged, the analysis of the cost of a plan relative to current cash or equity has changed. The potential for deductibility of deferred compensation may negate the plan adds cost argument. Let s look at an example: If the Covered Employees defer $1,000,000 in aggregate, a deferred tax asset would be available to the company, as long as the company had a reasonable expectation that it would be a tax paying entity when the executive s deferred compensation was projected to be paid. The company would immediately recognize a deferred tax asset of $210,000 assuming a 21% corporate rate for Federal taxes. The deferred tax asset may even be a little bit higher if State and local taxes are considered. If the executives did not defer the income in a nonqualified plan, the deferred tax asset would not be available under the next tax rules. As a result, the perceived cost of offering a plan would be reduced under the new rules. Given this new tax landscape, Main Data Group s breadth of data can uniquely help companies examine a more complex pay mix strategy that includes retirement plan design. The following is a summary of key content you may want to access with our platform if a retirement project is on your work calendar this year Main Data Group 2

3 Summary Compensation Table Total Compensation Benchmarking All compensation benchmarking starts with a view of the benchmark position of each executive s total compensation and each executive s pay-for-performance position on a scatter chart that plots total compensation against performance. Our platform supports analysis of definitions of total compensation that include retirement pay Main Data Group 3

4 Summary Compensation Table Retirement and Perquisites We break the Summary Compensation Table s All Other column into its constituent pieces to identify retirement compensation and perquisites and make it possible to include those pieces of an executive s total reward in your overall benchmarking Main Data Group 4

5 Pay Mix Analysis Another view of compensation is the pay mix. We plot the pay mix percentages for total compensation, total direct compensation, long term incentive pay, and the combination of target long term incentive pay and retirement pay, which is sometimes called wealth accumulation pay mix Main Data Group 5

6 Retirement Plan Detail and Benchmarking Retirement design conversations typically start with general descriptions and our data set provides both summary descriptions and easy access to more detailed information including nonqualified plan documents filed by companies Main Data Group 6

7 In Conclusion Main Data Group provides a series of apples-to-apples comparisons that support analysis of retirement pay from a compensation design perspective and from a retirement plan design perspective. The platform also provides comparisons of key design features. With each of these layers of information, companies are in an informed position when they talk to their compensation advisors and/or service providers about the newly attractive tax-saving options available via deferred compensation plans. About the Author Craig Main is the Founder and CEO of Main Data Group. A leader in the retirement planning and executive compensation communities, he created Snapshot Data with a mission to provide executive compensation professionals with comprehensive total rewards benchmarking and corporate governance analytics. About Main Data Group Main Data Group is a provider of high-resolution executive compensation benchmarking and corporate governance analytics. Its mission is to empower executive compensation professionals with comprehensive total rewards and corporate governance information in an affordable, easy-to-use online service. For more information contact us at info@maindatagroup.com or by filling out our contact form at Main Data Group 7