Deferred Compensation: Hoyt: Spring 2013
Objective is to maintain the same standard of living as when you were working.
Pension income will come from 3 sources:
· Social Security
o For 73% of Americans, this is a majority of their pension income.
o For 30% it is their only pension income.
o Most is 30-40k per year for the higher earners, and 15-20k for the lower income.
· Company Pension
o After WWII, labor unions made headway into making the companies have pension plans for their employers.
o Defined benefit plans: Monthly check each month that the company pays to you.
§ Private sectors typically pay out 10k per year.
§ Public is typically 20k per year.
ú Most of these plans have been replaced with 401k plans.
o We are seeing a lot more situations where people are not saving enough to make it by the end of their working lives.
· Your own savings
· Working after you retire.
Social Security: Kicks in at 65
· 1950=life expectancy of 63.
o 8 workers for every 1 retiree.
· Now=76 life expectancy.
o 2020: 2 workers for every 1 retiree.
Qualified Retirement Plans
· Big plans for saving money.
· 3 stages of QRP
o Accumulation stage
o Liquidation after death
· 3 phases of QRP
o Deduct into the plans.
§ If you put in $1k, then you get a $1k tax deduction.
§ As it grows, it is a tax exempt trust.
o Investment – tax exempt trust
o Distribution – this is when they tax you
Types of QRPs
· Company Plans (3 types)
o Account plans
§ Defined Contribution: put money into the an account for every year that the employee works for the employer.
ú Money purchase pensions
ú Profit sharing plans
ú 401k plans
· Take money out and put it into an account.
· Code section 408.
ú Stock bonus plans
o Annuity plans
§ Employees get a certain amount of what they earned while they worked.
§ Defined benefit plans
o Charities and Government Employers (Section 403(b and 457(b)).
§ Tax-sheltered custodial accounts
§ Tax-sheltered annuities
· You do not want to have a non-deductible IRA.
· You will not have to pay any tax when you take the money out because you paid taxes when you put the money in.
· What must you do to qualify for a Roth IRA?
o You have to work
o Max contribution of $5k or 100% of income
o Contribution is limited is adjusted gross income is over $95k ($150k for married filing jointly). A Roth IRA is not available to a person whose adjusted gross income is over $120k ($177k for married filing jointly).
o No tax deduction at time of contribution.
o MAIN APPEAL: After 5 years, all distributions of the accumulated investment income from Roth IRA will be tax-exempt if the distribution is made.
· The big picture is that this is essentially just contract law.
· Perspective of the employee and employer.
xed for the money they pay in.
Why should a company offer a plan?
· In order to compete with other companies.
· You are forced to.
· Sense of social responsibility.
Timeline of Activities
o Social Security enacted
· 1940s and 50s
o Labor unions negotiate and they want pension plans.
§ They wanted pension plans that provide them with income for the rest of their lives.
o Typical plan is a defined benefit plan.
§ D/B formula typically:
ú %x(COMP)x(# of years of service)
§ 2% x 5 highest average years x # of years
o Life expectancy was 68 in 1958.
§ Now it is 78, so it is longer.
o Studebaker and
o White Motor Company:
§ These two companies went bankrupt, so all of the employees who were promised pensions were just fucked.
o IRS was concerned with discrimination for the highly paid executives.
§ They also wanted to make sure that all of the employees were properly compensated.
o Department of Labor decided that they needed a way to protect employees when companies went bankrupt.
o ERISA was enacted on Sept 1, 1974.
o Employee Retirement Income Security Act
§ You will see things like 26 USC something
§ 29 USC something or
§ ERISA §