Right now, the Chemours (and several others) Deferred Compensation and RSP Restoration Plan are in an open enrollment period. This is a great opportunity to share with you how these plans work.
Who are they offered to?
First, it is important to note that these plans aren’t offered to everyone. They are meant as an additional perk to highly compensated employees. Much like stock options and restricted units, these plans are intended to retain key employees.
Why are they offered?
These plans are offered for one of three main reasons.
- As an additional benefit to attract and maintain highly compensated employees. Simply put, companies like Chemours, Dupont, Axalta, etc., must keep up with the Jones’s.
- They offer additional pretax retirement savings to supplement retirement (or future expense) above and beyond normal 401(k) limits.
- For the highly compensated employees, they prevent reverse discrimination as many are not receiving the entire retirement savings 6% match on their salary due to IRS limits.
How they work?
Those eligible for the deferred compensation plan have the opportunity to save additional dollars pre-tax (from 1%-60%) of their salary and/or bonus each year. Like a 401(k), these dollars grow tax deferred and are fully taxed at ordinary income rates when withdrawn in the future.
Once you elect your deferral amount (now for 2018), you have a series of further decisions to make. The biggest is when you want to receive these funds (severance or at a specific date). For instance, some use these plans as college savings, knowing that they will grow tax deferred until then. Be careful though. Once received, they are taxed as ordinary income. Therefore, if you expect your income to continually increase you may want to think twice about this option.
You may also elect the upon severance/termination option. Again, be careful. If you get laid off, or your company is acquired, these funds will payout at that time despite intentions otherwise. Most choose this option to defer high income tax dollars now for lower retirement income taxes. The intent here is supplementing fully your first few years of retirement.
If choosing the “in-service” date, your funds will simply pay out at that time. Choosing the “at separation/termination” payment date adds another level of complexity. In selecting this option, you’ll decide if all your funds will be paid in a lump sum at severance or 1-5 years after severance. If 1-5 years after, you’ll then have to decide between 2-15 years of equal installment payments of your balance.
Your final decision is how to invest these dollars. Basically, you’ll have the same options offered in your 401(k). If you are not working with someone, my general recommendation is to have these allocated similar to your 401(k) options.
In essence, a restoration plan is another deferred comp plan, with a few variances.
These plans give employees, who in 2017 made a base + bonus of over $270,000 and $275,000 in 2018, a 6% match on the dollars over these thresholds. The IRS only allows employers a matching 401(k) contribution up to that level. Therefore, it is a way of making the highly compensated whole (or restored). Chemours, for example, will match dollar for dollar up to 6% of your elected amount.
Related: 12 Estate Planning Mistakes to Avoid
There is no in-service election option. However, everything else is the same. You just have to decide how you want these funds paid at severance and the corresponding investment options.
What else should I note?
Since these aren’t government regulated ERISA plans, they have greater flexibility. Thus, they can be offered to a select group of employees. Unfortunately, these plans lack the traditional protection afforded under ERISA plans, as they are considered notional investments.
Here is the verbiage word-for-word from the pamphlet about notional investments:
Deferrals and contributions to the RSRP (and deferred comp) are notionally invested in the available investment alternatives, which mirror those made available under the qualified RSP. The term “notional” means account balances are not actually invested in any of the deemed investment alternatives, rather, the rate of return derived from the notional investments is credited to the individual account balances consistent with the participant’s investment direction elections.
In short these are not your dollars until you receive them. If Chemours (or any other company) went out of business, you’d get in line with the rest of the creditors for these funds.
Another thing, these plans don’t required you to meet the age 59.5 threshold to receive funds penalty free. Also, you must make an election each year, as your prior year selections will not carry over.
The million dollar question: should I?
These plans come with pros and cons like anything else and are customizable to your unique situation. In general, I tell most of my clients to contribute to the RSP restoration plan. It typically isn’t a ton of money and offers a 6% match on those dollars. I mean, come on. Who doesn’t like free money?
Whatever you choose, make sure it fits your needs, doesn’t make you max out your traditional 401(k), and doesn’t jeopardize your other retirement plants.
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