Photo | Courtesy of Ryan Kittredge
Ryan Kittredge is a financial advisor and president of ClearPath Financial Partners in Northborough. Reach him at ryan@clearpath-fp.com.
Updated: July 24, 2023
Know How
Unlocking the power of your executive benefits & compensation
By Ryan Kittredge
Many businesses offer a suite of employee benefits ranging from retirement plans to insurance packages that may include health, life, and disability protection. For highly compensated executives, many companies offer supplemental plans to retain and incentivize their most talented and productive employees, extending beyond the traditional benefits packages. While maximizing Social Security benefits and retirement plan contributions is a foundational component, executives with aspirations of an early retirement or maintaining a higher standard of living in retirement will need to make smart decisions around these supplemental plans and utilize them effectively to optimize their long-term financial plan. Here are some considerations to get started.
Understand your benefits. Familiarize yourself with the options available to you, and provisions of the plans. While you want to take advantage of plans like stock purchase plans and deferred compensation, it’s important to understand key information such as vesting schedules, accessibility, and tax implications.
Determine how they fit in your plan. Your executive benefits should be considered in the context of your overall financial plan, which should incorporate other planning areas such as retirement planning, wealth accumulation, investment strategy, and income tax planning. Ideally, collaborate with trusted professionals including a certified public accountant and financial advisor with expertise in executive compensation planning.
Weigh tax benefits against liquidity. Many supplemental benefits and compensation plans offer tax advantages, including deferral of taxation to future years, or preferential tax treatment of long-term capital gains rather than at higher ordinary income rates. That tax benefit usually comes with restrictions on accessibility to the funds, so ensure you have enough liquidity to meet shorter-term goals while the funds are illiquid.
Exercise options strategically. Stock options require careful planning, including company stock analysis, tax consequences, market conditions, and your goals. Timing is critical, and you want to plan around exercise windows and vesting schedules on a periodic recurring basis. Devise a strategy for each phase, including accumulation, maintenance, and disposition of the shares to properly manage taxes and avoid concentration risk.
Paycheck protection. Attention should be given to your long-term disability insurance benefits. Many group insurance plans cap monthly income replacement benefits at $5,000 or $10,000 per month, which may not be enough to pay bills and still allow you to save the way you intended. You should review supplemental group or association plans to fill the gap.
Mega backdoor Roth. The 2023 limit for employer-plus-employee contributions to a defined contribution plan such as a 401(k) is $66,000. That means, in addition to the regular contribution limit of $22,500 (or $30,000 for those age 50+) and any employer match, your plan may allow for an additional after-tax contribution of $43,500, which can then be rolled over to a Roth 401(k) or IRA, where it will grow tax-free. Not all plans have this provision, but more are adding these features, so review your plan.
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