Every year around the beginning of November those eligible to participate in Intel’s deferred compensation plan (called SERPLUS) get a friendly reminder: the election window for the upcoming year is open. It’s only during this window the contribution amount and distribution elections can be made.
What is the best way to make your election decision? Keep reading to find out the four factors you should consider when making your SERPLUS elections.
But first we will review how deferred compensation works and the benefits of participating.
How Deferred Compensation (SERPLUS) Works
Technically, deferred compensation refers to any plan by which employees elect to have a portion of their income paid at a later date from the time in which the income was earned. Under this definition, 401(k) and other retirement plans are deferred compensation. However, most of the time when people use the term deferred comp they are referring to non-qualifying, deferred compensation.
SERPLUS is Intel’s name for this non-qualified comp plan and it differs from the qualified plan in a few ways:
- Most importantly, any balance in your SERPLUS account is an unfunded liability of Intel. Meaning if Intel goes bankrupt you could lose all, or a majority, of this account. This is the primary risk and drawback of participating in the plan.
- Distributions are made, and taxes are paid according to a preset distribution schedule, not as you draw it out like a 401(k) or IRA account.
- Non-qualified plans give employers flexibility over who is eligible to participate. At Intel, this means employees above a certain grade level are eligible.
The Benefits of SERPLUS
And why would anyone voluntarily elect to earn income now but not receive it until sometime in the future? To lower their taxes of course! There are two benefits to deferring compensation; both of them are tax benefits.
- The first and primary benefit is one of a tax deferral. By delaying when you pay taxes you can invest more money now, earning returns on the portion you would have paid in taxes.
- The second benefit is the potential of being in a lower tax bracket when the funds are distributed than you are in now. This is especially true if you are someone planning on retiring before the age in which RMD’s from your IRA accounts are required (70 ½) and social security starts to payout.
The Four Factors To Consider When Making Your SERPLUS Elections
So now that you know the benefits of deferring income and understand the risk (unfunded liability of Intel), what are the key factors to consider in making the decision? There are four:
- What to contribute?
- How much to defer?
- When to distribute?
- How to invest?
Let’s take a look at each.
What, if anything, to contribute?
Are you close to retirement? If so, the tax deferral benefit is less valuable than it is for someone with more time to retirement.
What percent of your net worth is in the SERPLUS account? If you have a high percentage of your net worth inside the SERPLUS account, the fact that it’s an unfunded liability of Intel becomes meaningful. It ultimately comes down to a trade-off of the tax benefits vs. personal comfort, but being too concentrated here is definitely a risk to consider.
How much to defer?
If you decide to defer income you must decide how much to defer. And would you rather defer salary or your bonus?
Employees can defer 1-60% of salary or 25%, 50% or 100% of their bonus. This really comes down to personal preference, do you want to defer out of your monthly cash flow or once per year. It’s important to note the elections made in the current year (in this case Nov. 2015) are for income earned in the next year (2016 in this case).
When to distribute?
When making your election you also must decide when the income is distributed. And it’s important to note, this decision cannot be changed. You have two options when selecting a distribution schedule:
- First, elect either a specific year (at least 3 years out) or at separation to trigger distribution.
- Second, elect distribution schedule.
- Immediate lump sum (paid 60 days after separation)
- Lump sum in March of next year.
- 5yr installments beginning in March of next year.
- 10yr installments beginning in March of next year.
Also to note, SERPLUS balances are paid to your beneficiaries at your death.
Again, this decision comes down to the tradeoff between deferring taxes and the account being an unfunded liability of Intel. The sooner you elect a distribution the less tax-deferral you receive, but a longer distribution schedule means a greater time period the liability remains with Intel.
How to invest the funds?
The last step is deciding how to invest your contributions. In order to maximize the benefits of the tax deferral it’s important to invest and grow the funds.
For more help on making the most of the investment options in the Intel SERPLUS and the other retirement accounts we suggest attending our upcoming webinar on November 19th titled “Navigating the Investment Options in the Intel Retirement Plan”. Click here for more information and to register.
Making your annual SERPLUS elections is obviously a complex decision with a number of factors specific to your individual circumstance. However, we hope this four-factor framework helps you think though the critical steps in making the best decision for you.
For clients of Cordant, we walk through this framework each year together helping them make the decision and running multiple scenarios when necessary.
If you’re interested in finding out how Cordant can help you make your SERPLUS elections as well as creating a financial plan and investment strategy that aligns with your goals and objectives, please send us an email at [email protected].
*The information contained in this post is based on Cordant’s understanding of the Intel SERPLUS plan as of 2015. The Plan is subject to change by Intel. Please see your latest Plan document for the most up to date information.