Every year at or near the beginning of November, certain Intel employees are provided the opportunity to participate in the company’s deferred compensation plan, called SERPLUS.
It should be noted that, technically speaking, a deferred compensation plan can refer to any program through which employees can elect to have a portion of their income paid out at a date later than when it was earned. Using this definition, 401(k) plans and other retirement plans are “deferred compensation”. However, in this case we are referring to a non-qualified, deferred compensation plan.
Intel’s SERPLUS plan is different from a qualified plan like a 401(k) in several important ways:
- The balance in your SERPLUS account – which consists of income you elected to have paid out at a later date, plus any earnings – is an unfunded liability of Intel. This means that if Intel gets into financial difficulty or goes bankrupt, you could lose part or all of your account balance.
Future distributions from your SERPLUS account are made according to a predetermined schedule, not when you choose to take distributions, as is the case with a 401(k) plan.
An employer can choose who is eligible to participate in the SERPLUS plan, and at Intel this means only employees above a certain pay grade are eligible.
- The primary benefit of participating in a plan like SERPLUS is tax deferral. It is almost always preferable to pay a liability later than sooner. With the SERPLUS plan, the dollars you would have otherwise used to pay taxes can be invested and earn a return over time.
- Another potential benefit is the ability to pay taxes at a lower rate when the SERPLUS payments are made than you would pay now, assuming that you are in a higher tax bracket today than you likely will be in retirement.
Understanding the risk and the benefit of participating in the plan, what factors should you consider before deciding to participate?
How much, if anything, should you contribute?
If you’re close to retirement, the benefit of tax deferral is less than for someone with several years or even decades of working life ahead of them. Also, you should keep in mind the percentage of your net worth or savings that are held in the SERPLUS plan, given its unfunded nature.
How much should you defer?
If you decide to participate, you need to decide how much, and whether it will be salary or bonus. This is really just a question of personal preference. You may wish to consult with your CPA or accountant to discuss your tax brackets and phase-outs.
When would you like to receive distributions?
When you elect to participate in the plan, you must also decide when you want your deferred compensation distributed. You’ll need to decide on a start date (either at retirement, or a year at least three years out from retirement), and on a distribution schedule – a lump sum, 5 year instalments or 10 year instalments. Note that receiving a large lump sum, as opposed to a series of smaller payments, can be unattractive from a tax perspective.
How would you like your dollars invested?
The benefit of tax deferral is greatest when the dollars invested grow. But it is important to keep your overall investment mix and asset allocation in mind when deciding how to invest your SERPLUS account.
You should consult your tax professional and financial advisor before making any changes to your SERPLUS plan.
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