Tag: Nonqualified

SALT State and Local Taxes: How Nonqualified Plans Can Help Protect Retirement Income

Fulcrum Partners shares, the tax overhaul signed into law in December 2017 (Tax Cuts and Jobs Act) set a $10,000 cap on state and local tax (SALT) deductions that can be taken from US federal income taxes. High-income earners who live in areas where state and local taxes are steep, such as California, New Jersey, New York and many other venues, are getting an eye-opening wakeup call as they face the impact of their first tax season under the new laws.

Some residents in high SALT states have chosen to relocate to more tax-friendly parts of the country. Others have tried to relocate on paper without actually doing so—a workaround that doesn’t always bode well for the taxpayer.

High-Earners Cutting Back on SALT: State and Local Taxes
Given that many high-earning executives spend a great deal of time traveling and that they may own or lease multiple homes, accurately identifying which city and state is their official state of residence can get into interesting gray areas.

Consider this example where a dog proved he’s truly man’s best friend.


A New York executive accepted a high-profile CEO position with one of his company’s subsidiaries based in Dallas. After a period of commuting between the Big Apple and the Big D, the executive decided he like Dallas enough to rent an apartment there, lease a car in Texas and join a local gym. He filed state and federal taxes as a resident of Texas.

Two years later, the executive was promoted again, and returned to New York. The State of New York then attempted to collect two years of state taxes, nearly a half million dollars plus interest and penalties, claiming that the executive had never truly relocated to Dallas at all.

A judge however, ruled in favor of the executive based on the fact that he ultimately had relocated his elderly dog to Texas, which in the eyes of the judge made it an official move.

Rarely is the issue of where an executive spends most of his or her work time or whether the executive owns or rents residential property in the new city sufficient for determining the authenticity of the move. Many details, and not always a lot of logic, can come into play in determining whether a person has sufficiently demonstrated a change of lifestyle, such that it constitutes a true relocation. Even relocation plus retirement may not always, protect your earnings from the long arms of a state where you previously lived as a taxpayer.

Source Tax Law – Nonqualified Plans Can Help Protect Retirement Income from Taxation by Former States of Residence
Typically, an individual is subject to income taxation by the state in which he or she lives when the income is received. Some states, however, attempt to tax nonresidents on this income on the basis that it was earned, or had its source, in the first state.

Retirement income has always been a key target of this type of state taxation. Under the federal “Source Tax Law,” however, retirement income meeting certain conditions will be taxable only by the recipient’s state of residence at the time of payment, regardless of its “source”.

The Source Tax Law generally protects current nonresidents from being taxed on retirement income by states where they previously lived while employed. It covers retirement income paid from tax-favored vehicles such as tax-qualified retirement plans and IRAs. It also protects income from nonqualified deferred compensation arrangements if the income either is paid from a certain type of plan or in substantially equal periodic payments over life or life expectancy or a period of at least ten years. Thus, properly structuring deferred compensation payouts (including compliance with Internal Revenue Code § 409A may provide significant state tax savings, depending on the states involved.

To learn more about the impact of state and local taxes on retirement earnings, contact the team of executive benefits professionals at Fulcrum Partners.

Reposted with permission from Fulcrum Partners. View their article here.

Nonqualified Plans: Understanding the Fundamentals

Since the passage of The Employee Retirement Income Security Act of 1974 (ERISA), companies have found it difficult to provide their top executives with a retirement accumulation program that matches the level of benefits the average employee will receive.

The Gap is Real

This information is from the Principal Financial Group® Replacement Ratio Calculator with source information from the Annual Statistical Supplements to the Social Security Bulletin (www.ssa.gov). It is intended to demonstrate the potential impact of Social Security and 401(k) plan benefits at various income levels. For more information on your individual circumstances, please speak with your financial or tax professional.

Nonqualified deferred compensation plans can serve an important function in helping to fill the significant gap between the combined amount of a worker’s social security retirement benefits plus his/her qualified retirement benefits and the amount of retirement savings he or she will need in order to replace current income.

Regulatory Limits on Qualified Plans Drive the Need for Nonqualified Plans
• 401(k) limits executive contributions to $19,000 (2019)
• The maximum compensation eligible for qualified 401(k) or pension plan benefits is $280,000 (2019)

As a result, many employers have established nonqualified plans to supplement their broad-based plans and, therefore, provide competitive retirement accumulation for executives.

Nonqualified Plans Function as an Employer/Employee Agreement
• A nonqualified plan is, fundamentally, a contractual agreement (plan document) between an employer and one or more key personnel
• The company makes an unsecured promise to pay benefits subject to all the terms of the “agreement”
• A participating employee can never be more than a general, unsecured creditor of the employer as to the benefits (if current taxation of that benefit is to be avoided)

The Need for Executive Benefits
Employees deserve retirement security—to be allowed to perform their jobs creatively and enthusiastically, without the burden of retirement security hanging over their heads.
Employers need to be able to attract and retain quality management talent; to create management incentives; and to restore retirement income shortfalls for key executives, balancing risk with reward for directors.

This article is shared with permission from Fulcrum Partners. Click here for more information.