The Ins and Outs of Deferred Compensation Plans

If your income is greater than $400,000 a year, does making a $18,000 deferral to your company’s 401(k) retirement plan do much toward replacing your income in retirement? This less than 5% of income deferral to your retirement plan would leave you significantly underfunded to maintain your lifestyle in retirement. While you can save elsewhere through non-retirement accounts, your company may permit you to postpone receiving income through a Section 409A deferred compensation plan.

There are no IRS limits on how much compensation can be deferred; however, your company’s plan may have a limit. You could defer a bonus, incentive, or part of your salary in the present year and receive that, plus the potential for earnings on its investments, in future stated years. To do this, you must make an irrevocable election to defer compensation prior to the year in which you expect the compensation to be earned. If you’re in the top tax bracket (39.6% in 2017), this can allow you to defer income now and receive it at a later date (such as when you retire) in a lump sum or a series of payments when you expect to be in a lower tax bracket.

The major requirement to receive this deferral status is that your funds are subject to substantial risk of forfeiture. Unlike 401(k), 403(b), and 457(b) accounts where your plan’s assets are qualified, segregated from company assets, and all employee contributions are 100% yours, a Section 409A deferred compensation plan is nonqualified, and your assets are tied to the company’s general assets. If the company fails, your assets are subject to forfeiture, as creditors would have priority. Only through accepting this risk does the IRS permit unlimited contributions to this plan. If your employer doesn’t include this deferred compensation as part of the company’s general assets, making them subject to forfeiture, the deferred compensation becomes taxable immediately, plus a 20% penalty and interest. A potential reason for this requirement of substantial risk of forfeiture is to incentivize executives and business owners to maintain the health of the company, and to ensure they don’t inappropriately withdraw too much of its resources, and then try to leave.

A Section 409A deferred compensation plan can provide payment no earlier than the following events:

  • A fixed date or schedule specified by the company’s plan or the employee’s irrevocable election (usually 5 or 10 years later, or in retirement)
  • A change of control, such as a buyout or merger
  • An unforeseen emergency, such as severe financial hardship or illness
  • Disability
  • Death

Once your income is deferred, your employer can either invest the funds in securities, insurance arrangements or annuities, or keep track of the benefit in a bookkeeping account. The funds can be set aside, often called a Rabbi Trust; however, those funds remain a part of the employer’s general assets. Beneficiaries must be designated at the time of the income deferral election, but they can be changed as long as it doesn’t affect the time or form of benefits payments.

Consider the following pros and cons of deferred compensation plans.


  • They allow you to defer a significant amount of income to better help you replace your income in retirement. No IRS limits on contributions.
  • They give you the ability to postpone income in years where you’re in the top tax bracket for consumption in future years when you expect to be in a lower tax bracket.
  • If investment options are available, they provide the ability to select investments to increase earnings like other employer retirement plans such as a 401(k).
  • There are no nondiscrimination rules on who can participate, so the plan can be used to benefit only owners, executives and highly compensated employees. Other retirement plans may limit contributions or participation due to discrimination rules.


  • Your deferred compensation plus any investment earnings are subject to forfeiture based upon the general financial health of the company.
  • The election to defer compensation and how/when it will be paid out is irrevocable and must be made the prior to the year the compensation would be earned.
  • Depending on the terms of your deferred compensation, you may end up forfeiting all or part of your deferred compensation by leaving the company early. That’s why these plans are also used as “golden handcuffs” to keep important employees at the company.
  • The plan may or may not have investment options available. If investment options are available, they may not be very good (limited options and/or high expenses).
  • You have a lack of control of the assets.
  • If you leave your company or retire early, funds in a Section 409A deferred compensation plan aren’t portable, meaning they can’t be transferred/rolled over into an IRA or new employer plan.
  • You can’t take a loan against a Section 409A deferred compensation plan, while you can take a loan against many other types of employer retirement plans.

Ask your employer benefits department and peers the following questions when deciding whether to defer compensation.

  • Is the company financially secure? Will it remain financially secure?
  • Will my tax rate be lower when this deferred compensation is paid in the future?
  • Can I afford to defer the income this year?
  • Will my tax rate be lower when the payments are made?
  • Does the plan have investment options? Are the fees and selection of funds reasonable?
  • Does the plan allow a flexible distribution schedule?

We recommend that you speak with your advisor to determine whether it makes sense in your financial plan to participate in your employer’s Section 409A deferred compensation plan.

Why We Now Incorporate Your Held-Away Accounts in Your Investment Plan

When creating and monitoring a retirement plan, and providing advice on how to best achieve your financial goals, we often run into a roadblock on implementation when a large portion of your wealth is tied up in an employer retirement plan. This isn’t to say that participating in your employer plan is a bad thing; it’s more an issue related to investment options, fees and how to best align that account with your overall investment plan. By incorporating your outside retirement plans into your overall allocation, we can now pick the best investment options available in your retirement plan and manage your wealth like it’s one portfolio, instead of viewing accounts separately.

The benefits of incorporating your outside retirement plan into your overall asset mix include the following.

  • Higher net-of-fee, risk-adjusted expected returns through:
    • Stronger small and value tilts
    • Greater diversification with more international exposure, larger exposure to specialized risk premiums (Reinsurance and Marketplace Lending) and reduction in concentrated stock positions
    • Closing the behavior gap (reduced performance chasing)
    • Lower expense ratios
    • Disciplined rebalancing
  • Increased tax efficiency and reduced trading costs
  • More comprehensive reporting of returns and portfolio history

We can enhance what we do for you by bringing your employer retirement plan onto our Merriman web portal. This allows us to monitor your total portfolio allocation on a daily basis. By using the best of what’s available in your retirement plan and augmenting it with the accounts Merriman manages, we can estimate a net-of-fee performance improvement annually that’s specific to your situation. In many cases, there may be just two to five funds utilized in your retirement plan.

If you have a taxable account, we can move the international holdings into it, so you may be able to deduct the foreign taxes that are withheld, and place the less tax-efficient investments, like REITs, Reinsurance and Marketplace Lending, in your IRAs.

We suggest speaking with your advisor about how to incorporate your employer retirement plans into your overall investment allocation.

The Benefits of Consolidating Dormant Retirement Plans

Like most people, you’ve probably switched jobs at some point in your career. If you’ve done this a few times, you may have several outstanding retirement plans, like a 401(k), 403(b), etc. In the flurry of paperwork between leaving your former employer and starting a new job, you should have been given the option to either leave the retirement plan as-is (default), transfer it to an individual retirement account (IRA), move it to your existing employer retirement plan or cash it out. If these plans aren’t consolidated after each job change, whether to an outside rollover IRA (or Roth IRA if you made after-tax contributions), or to your current employer retirement plan, they can start to accumulate and become more of a frustration later to deal with.

Consolidating your retirement plans has several benefits:

Investments align with the asset allocation your financial plan recommends 

When you enroll in a new employer’s retirement plan, they ask how you’d like to invest the proceeds. You may not have even made a choice and were put into the default investment option. In the past, the default option was the stable value or money market fund, which is not designed to help you grow your assets; instead, it preserves the value with minimal interest. Nowadays, the default options are target date retirement funds that at least have a more diversified breakdown of assets between stocks and bonds.

Importantly, your financial plan may require that your investments be more aggressive (stocks) or conservative (bonds) than how your dormant retirement account is invested. Regardless of the account’s size, you want all of your investments functioning in a cohesive manner, as that investment allocation will drive the long-term returns necessary to achieve your financial goals.

Coordinates beneficiaries

Early in your career, you may not have been married or had any children, so the beneficiaries listed on those accounts may still be your parents, siblings or a friend. Or, you may have gone through a divorce and still have your ex-spouse listed as your primary beneficiary. If you were to pass away, retirement account beneficiaries have claim to the assets over who may really be your intended beneficiaries. This is because IRA and retirement plan beneficiaries supersede your will.

If you consolidate to one retirement account, you can just confirm the beneficiaries on that account instead of updating beneficiary paperwork for several plans. At a minimum, you should check your listed beneficiaries to ensure they align with your current estate plan.

Ensures you get the best investment options and lowest expenses

Not all employer plans have low cost investment options within all of the necessary asset classes. In fact, many plans that smaller employers offer have high cost investment options that even charge a front-load fee on every contribution made.

Ends the need to update your contact information in multiple places

It’s important to keep your contact information up to date on these plans because you don’t want mail or confidential information being sent to the wrong person. Also, not having your correct address and contact information on file will add extra steps to the consolidation process and for accessing account information.

Avoids having your former employer plan’s change custodians

This goes hand in hand with updating your contact information, as retirement plans must notify you that your assets are being moved from one custodian to another. This happens more often than you’d think. Employers change their plan providers from time to time, and if you didn’t receive notice of the money movement because they don’t have the right address, you might get an unpleasant surprise when you log into your retirement plan and see a balance of $0. Don’t worry – your money isn’t lost, but now you have to play catch up to figure out where your account is and how to gain access.

Simplifies your finances

Having accounts all over the place that you can’t readily access or stay up to date on can be a recipe for disaster. Consolidation reduces the clutter and allows you to have better oversight of your assets.

If you were to pass away, it could be a nightmare for your beneficiaries and the executor of your estate to deal with multiple custodians of multiple retirement accounts. It would require a visit to each custodian’s office to deal with how to settle your accounts. Since many people’s wills designate their surviving spouse as the executor, this can be a significant burden to someone who is mourning your loss.

For IRAs, you can take the aggregate of your required minimum distributions (RMD) after reaching age 70 ½ from one IRA or proportionally from all of your IRAs. 401(k)s are different because you’re required to take that account’s RMD out of it, rather than having the option to aggregate. If you have several dormant 401(k) plans, it can be quite a hassle to request a withdrawal from each plan. Also, if you forget to take your RMD, you’re subject to a penalty equal to 50% of your RMD that you did not withdraw by year-end.

Avoids having to move your assets if your balance is below $5,000 

Many retirement plans have rules where if you no longer work there and your balance is below a threshold, such as $5,000, you must move your assets out of the plan by a certain date. If you don’t do anything before the deadline they give you (for example, a year from termination of employment), they will move your funds into an IRA by default, and you may not know whether these funds will be invested in a target retirement fund or sit in money market if you do nothing.

Be aware that plans often charge a termination fee of $50 to $100 when you move your assets.

If you’re deciding whether to consolidate a former retirement plan, we suggest you discuss your options with an advisor.

Here’s what generally happens when rolling over a former retirement plan:

IRS special tax notice

When you call to roll over your retirement plan, they’ll ask if you’ve read the IRS special tax notice. Your plan has a version of this notice specific to the custodian, such as Fidelity. The purpose of this notice is to ensure you’re aware of the options available to you with your retirement plan assets, and any tax consequences. In this article, we’re discussing a tax-free, trustee-to-trustee rollover, so there wouldn’t be any tax consequences. The notice lists your options, such as leaving the funds in the account, moving them to an IRA with the custodian or an outside custodian of your choice, rolling them to your current employer or withdrawing the funds for spending.

Keep in mind that if you request a check payable to you and not the new custodian, the custodian is required to do an automatic federal and state tax withholding. You may also be subject to an early withdrawal penalty if you are under age 59 ½.

Your employer’s retirement plan website

If you haven’t set up a log-in, contact the retirement plan provider, such as Fidelity, and request online access credentials. Your plan provider and their contact information should be listed on a recent statement. If you don’t have a recent statement or don’t know where the plan is located, contact your former employer’s Human Resources department.

401(k) plans 

Plans that private employers provide often don’t require paperwork, and withdrawal requests can be initiated online or by phone.

After you log in, search for a withdrawals section to see if they permit you to request a withdrawal (rollover) online. You may find that they do allow it, but that the online form can be used only to move the funds to a rollover IRA at the same custodian. If the 401(k) is held at Fidelity and your rollover IRA is at Charles Schwab or TD Ameritrade, then it doesn’t make sense to move it to an IRA at Fidelity.

403(b), 457 plans

Plans that public employers provide almost always require paperwork to initiate the rollover, rather than online withdrawal requests. A primary reason for this is that the plans have a section for spousal consent of the rollover, where the spouse needs to sign and then get their signature notarized. Fortunately, many plans allow you to fax the request, rather than mailing the original copy.

Often it makes sense to call the provider to have them prepare the paperwork for the withdrawal request. (They’ll either mail the paperwork to your home address or upload it to a secure message center.) However, when you tell them you want to withdraw funds, don’t be surprised if they transfer your call to an “asset retention” customer service group that temporarily gives you a much improved and interested customer service experience.

Receiving the funds

After the custodian/provider approves your withdrawal request, they’ll issue a check. About half the time, they mail the check to your address of record, while the other half of the time they mail it to any address of your choice (such as your advisor’s firm, current employer plan or IRA custodian). The provider/custodian should issue the check within 1 to 3 business days and send it either express mail or regular mail, so you should receive the check within 1 to 2 weeks of the request. If you receive the check, either give it to your advisor or deposit it at a local branch of the custodian.

We recommend that you speak with an advisor about your options so they can assist you with the rollover process and any necessary paperwork.

Provide Support for Disabled Family Members with an ABLE Account

ABLE, short for Achieving a Better Life Experience Act, is a type of savings plan established in 2014 to provide support for those with disabilities. The accounts are similar to traditional 529 plans in that contributions can grow and be distributed tax-free for qualified expenses. The difference between a college savings 529 plan and an ABLE 529A savings plan is that ABLE funds can be withdrawn tax free to cover qualified disability expenses versus just qualified education expenses.

Does having assets in an ABLE account impact federal benefits?

Assets in an ABLE account won’t impact federal benefits unless the balance exceeds $100,000. Any excess beyond $100,000 in an ABLE account is considered personal assets, and once personal assets exceed $2,000 (such as in their checking account), Social Security benefits are suspended. This means that if assets in an ABLE account are $100,000 or more, plus checking or any other account surpass $102,000, Social Security benefits are halted. Social Security benefits resume once personal assets fall below $2,000 ($102,000 including $100,000 in ABLE account).

If you take distributions from your ABLE account for qualified housing-related expenses and retain them to be paid the following month (such as paying rent the following month), those distributions are countable resources for Social Security.

ABLE accounts do not impact Medicaid eligibility. However, upon the death of the recipient of aid, Medicaid can claim assets, such as those in an ABLE account, for payback. Outstanding qualified disability expenses, such as burial costs, receive priority over Medicaid claims. If Medicaid payback claims are greater than the remaining ABLE account, there is no further recourse against the disabled beneficiary’s other assets. (more…)

Determining the Best Charitable Vehicle for Your Goals

We’ve been working with clients across the country for over 30 years, and we understand how important it can be to share your success by donating to charitable organizations, whether it’s through volunteering time or giving money. Once this charitable intent is determined, the next step is to determine how best to give. The following steps can help you identify the most efficient way to give, according to your circumstances.

Step 1 – Identify a cause that’s important to you

From supporting education and providing funds for cancer research, to protecting the environment and ensuring human rights for all, the list of worthy causes is endless. What’s important to remember when being philanthropic during your lifetime is that you have complete control over who receives your money or time.

Step 2 – Decide if you want to volunteer your time, money, or both

Being philanthropic doesn’t always mean writing a check. Many people give their time or expertise to organizations. This includes volunteering at events, raising money, participating on the board of directors, committees, etc. Some volunteer and also give money to organizations that are important to them. For many, they may not have the time or ability to volunteer due to a number of circumstances, however they choose to share their financial resources instead.

Step 3 – What are your funding sources?

If you decide to give part of your wealth, then the next step is determining how best to fund your gift. Do you have cash? Taxable investment accounts with securities (stocks or bonds) that have appreciated in value? Do you have a retirement account? Do you have a life insurance policy?

Step 4 – Is this a one-time or recurring gift, and do you want to make it during your lifetime or from your estate?

These are important considerations, as they impact the method you use to make your donation. For some of the methods listed in step 5, you can make a one-time, planned gift that can be distributed over many years to one or many charitable organizations. The giving method may be different for a one-time gift or recurring annual gifts to an organization or to charity in general. (more…)