CEOs and Other Executives Are Saving Billions of Dollars in ‘Top Hat’ Retirement Plans, Study Finds

Retirement


By Beth Pinsker

Some companies have another system where the highest paid employee defers compensation indefinitely and pays taxes later.

The IRS says most employees can only contribute up to $22,500 in tax-deferred income to 401(k) plans in 2023, but U.S. corporate leaders have a special policy known as a “top hat.” Significantly more can be deferred by participating in a non-qualified deferred compensation program. schedule.

Some of the details of these plans are available in a thick company report, including details about the company’s chief executive. In 2021, top executives of S&P 500 companies will have a total of 89 of these non-qualified tax deferred (NQDC) accounts, according to a new study called “A Tale of Two Retirees” from the Institute for Policy Studies and Jobs for Justice. had billions of dollars. Sum of reported items.

For example, Walmart’s (WMT) latest proxy filed with the SEC shows deferred compensation balances for seven senior executives, including CEO Doug McMillon, at There was a total balance of $169 million in the deferred compensation account. That balance currently bears a “fixed interest rate that is set annually based on the 10-year Treasury yield on the first business day of January plus 2.70%,” according to the filing, but Walmart is more likely to pay more. Aim for an open system. The statement said that contributions will begin in fiscal year 2024 and will be market-based.

While SEC filings show only the highest-paid executives, a study by MBS Financial Group, which manages unqualified executive benefits, found more than 700,000 at more than 11,000 companies. Employees can participate in this type of scheme. The average plan holding is $16 million for him and the average participant balance is $265,000.

The “A Tale of Two Retirees” study surveyed large companies and their executives, including Hyatt Hotels (H), Home Depot (HD), Centene (CNC) and Pfizer (PFE). He was found to have 64% of the CEOs of this type of company participating in the Top Hat plan, and the average balance of participating CEOs was $14.6 million.

“Employers are obligated to pay income tax on this compensation when they withdraw their funds, but in the meantime benefit from tax-free compounding of investment returns,” said Sarah, director of the Global Economy Project at the Policy Institute. says Anderson.

salute the executive

So-called “top hat” plans are permitted by the IRS as a form of executive compensation. This plan is subject to the Retirement Plan Regulations (Erisa) but is not part of the annual 401(k) contribution limit. Executives can actually participate in both, deferring to annual 401(k) limits and contributing to non-qualifying options. These NQDC plans come in various forms. Some companies hold their contributions exclusively in their own stock, others in bonds, and others allow employees to choose where they invest. Some companies have limits on how much you can donate, while others allow unlimited donations.

The benefit for the employee is tax deferral and the benefit for the company is tax retention. The accumulated money grows tax-free until the employee withdraws it upon retirement or retirement. The huge potential tax burden could help convince some executives to keep their jobs.

One of the big potential downsides is that these holdings are not as protected from creditors as 401(k) funds are. “If the company goes bankrupt, you’re out of luck,” says Steven Golden, managing director of CSG Partners, a New York-based investment bank. “Most people don’t think about the worst-case scenario, but it honestly makes me nervous.

Mr. Golden also points out that the top hat plan only delays taxes, not eliminates obligations. “You would be better off paying up front and investing after tax to protect that part,” he says.

More by Beth Pinsker

A 401(k) match isn’t just free money, 3% could get you two years of retirement

How to start investing with Investment Club

Forget the $22,500 limit.Some workers can increase their tax-deferred retirement savings up to $265,000 in 2023

-Beth Pinsker

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(Closed) Dow Jones Correspondence

05/18/23 0006ET

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