Preparing the Higher Paid for Retirement

Retirement readiness is getting lots of press these days. With the decrease in the number of ongoing defined benefit (DB) retirement plan, many people are finding that they are not on a path to perhaps ever be ready to retire. While most of the focus has been on lower paid, nonhighly compensated (NHCE) workers, the discussion may be more relevant for the higher paid (HCEs) workers, especially those who are not among the very highest paid. When I was growing up, these people were often referred to as the upper middle class. Today, I don't hear that term as often.

Yesterday, I read an article that on its surface would seem to address this issue. It focused on the small employer, small plan world. It laid out a multi-step additive solution:

• Safe harbor 401(k)
• Cross-tested profit sharing
• Cash balance plan
• Nonqualified plan

There is nothing wrong with this solution. In fact, at companies that take this approach, it is likely that full career employees whether they are NHCEs or HCEs will have sufficient retirement benefits to be able to retire with a style of living similar to what they had when they were working. 

That's not bad.

But, as I said, the focus here is on small employers in which the management team (often one or two owners) are earning really substantial amounts of money. While the approach outlined above and in the article may be somewhat optimal, it's not unlikely that with a less optimal approach that these HCEs could retire comfortably.

Before we go on, however, why should we care about the rest of the HCEs -- those people who for the most part have annual incomes in the range of, say, $125,000 to $200,000. They are pretty well paid. What could possibly make it difficult for them?

They do pay more in taxes. It's not unlikely that they will have to fund college educations for their child(ren) as they may make a little too much for significant financial aid to be available. And, as most people aspire to a style of living in retirement at least similar to what they had when they were working, it's going to take a lot more savings for these people to make it to that retirement target. Further, in today's world, with so many employees having a 401(k) plan as their only retirement vehicle, those HCEs who would like to save as much as the financial gurus recommend are just not able to do that in a qualified plan.

Many of these same HCEs have jobs that are not physically stressful. As a result, if they choose to, and if an employer will have them, these people can work well past traditional retirement ages. One might question whether that is good for society. Is it a desirable result? (I'll leave the thinking on that to the reader.)

What can we do? 

Since most people reading this (likely all) will not be legislators, we can't change the law even if that might be a desirable result. As I have said many times, using the 401(k) as a core retirement plan prepares almost no one for retirement. To the extent that companies feel any obligation to their employees, they must do something different.

That different plan should have some particular characteristics:

• It should be affordable to the employer
• The cost of that plan should be relatively stable; that is, volatility should be limited
• The plan should offer annuity and lump sum options to participants when they reach retirement age
• The plan should be easy to understand
• The plan should be easy to administer
• The benefit should be portable since in today's modern workforce, an employee who stays with you for more than five years is the exception, not the norm
• It should benefit the rank and file well
• It should benefit the upper middle class well
• It should benefit the executive group well

Most of the retirement world doesn't seem to want you to know about it, but this plan exists today and it is specifically sanctioned by the Internal Revenue Code.

And, for all of you who are scrambling to learn more, there is plenty of information for the industry insider and the lay person alike. But, if you have more questions, you can always click here.

Expect Reported CEO Compensation to be Down for 2015

Last year, there was an uproar. CEO compensation had gone through the roof. Or, so people thought. I predicted it would happen and I was correct. We heard the cries from all directions. Politicians including presidential hopefuls talked about the millionaires and billionaires and oftentimes, they pointed to executive compensation.

As the 2016 proxy season evolves, perhaps some will tell you that their cries were heard. But, were they?

I predict that reported (in proxies) CEO compensation for 2015 generally will be down from 2014. There are several reasons that you don't hear in the campaign ads, notably:

• Pension discount rates have risen
• Equity markets generally did not perform well

What does all that have to do with CEO compensation?

People who recall my tirade last year know that many CEOs, especially those who run large companies and do have very high compensation have a defined benefit (DB) SERP as part of their compensation package. And, when discount rates fall as they did during 2014, SERP liability generally increases and that increase is considered by the SEC to be part of executive compensation. Similarly, when discount rates rise, SERP liability generally decreases meaning that the contribution of many SERPs to reported DB compensation for 2015 will be 0 (you're not permitted to report a negative number). When pay ratio reporting finally kicks in, this may be a really big deal.

What does the performance of equity markets have to do with CEO compensation? Again, most large public company CEOs receive sizable chunks of their compensation in stock whether that be in options, restricted stock, or some other form of stock compensation. When the value of that stock decreases, so does the value of that piece of their compensation.

This leads to an interesting question with an obvious answer. Did the economic conditions in 2014 that resulted in extremely large reported CEO compensation meant that CEOs were overpaid in 2014 compared to other years. And, similarly, were those same CEOs underpaid in 2015 compared to 2014? 

The answer to both questions is of course not. For most of these people, their pay packages were extremely similar in 2015 to what they were in 2014 and similarly in 2013. It's not that often that we see radical changes in the way that a particular CEO is paid. 

But, these external factors drive the numbers and those numbers often drive the conversation.

The final pay ratio rules won't be effective for about 2 years. Of course, companies are being encouraged to disclose earlier and some will. Perhaps this is the proxy season to start. Perhaps this is just the proxy season to understand how volatile it will be.

I can explain it. I can help.

The Fallacy of the Participant Outcomes Mantra

I read about them virtually every day. One fund manager/defined contribution recordkeeper (vendor for purposes of the rest of this post) or another is concerned about participant outcomes. In other words, the reason that a plan sponsor should choose that particular company is because if they do, employees of that company will be prepared to retire someday.

Balderdash! Fiddlesticks!

Almost all of those vendors are preaching the same things:

• Automatic enrollment
• Automatic escalation
• Target date funds
• Retirement education

These are all great concepts, but they are not actually preparing people for retirement. Let's consider Abigail Assistant who works for Zipper Zoomers. Abby just recently started with ZZ. ZZ has hired Abby with cash compensation of $30,000 per year, based on an hourly rate of about $14.50 per hour. When she interviewed, she asked ZZ if they had medical benefits and a 401 plan (yes, she left off the "k" part). When she learned that they do, she didn't ask about details.

It turns out that ZZ does provide health benefits, but they don't pay as large a percentage of the cost as many other companies do, and their plan is a high-deductible plan. Abby and her husband Anson had already decided that 2016 would be a good year for the Assistant family to have their first child and a quick scan of her Facebook page shows that she will, in fact, be delivering Archibald Assistant later on this year. We also learn from her Facebook page that she plans to take 6 weeks off and then put dear little Archie in daycare.

Abby and Anson are going to have really high health care costs in 2016. But, when she started with ZZ, she got all this paperwork and didn't know what to do with it. She accepted her auto-enrollment at 3% of pay ($900 if she didn't take maternity leave). She also accepted her auto-escalation that will kick her up to a 4%  deferral next year. With ZZ's 2% budget for pay raises, her 2017 pay is expected to be $30,600 resulting a deferral of $1224. So her take home pay reflecting only the deductions for the 401(k) plan has only increased by $276 (600 minus 324) or less than 1%. But Abby and Anson's expenses have gone up far more than that. How will they cope?

Always resourceful, Abby and Anson have the answers. They have credit cards with hefty credit limits. That's a source of funds to pay the bills with. And, they learned that they can borrow against Abby's 401(k) account.

Okay, you all know where this is headed. The Assistants are not on the right track and unless they can get off of it, they will never be prepared for retirement. But, how does this make their vendor wrong?

Auto-enrollment and auto-escalation work for those who can afford it. It doesn't work for those who are living day to day, and sadly today, that seems to be the majority of American families.

In the Pension Protection Act of 2006, Congress claims to have intended to protected pensions. They did take some very positive steps while they were at it though by statutorily legalizing what are known as hybrid plans (cash balance, pension equity, variable annuity, etc.) and while they were at it, statutorily legalizing market return hybrid plans.

If you really want to help to prepare your employees for retirement, these are better vehicles. With modern designs and investment strategies, you can control costs. In fact, you can budget your costs better than you can in a 401(k) plan where the amount of matching contributions that you have to make is dependent on the amount that employees choose to defer.

I've seen all the illustrations and projections. Yes, Polly and Peter Professional who both came out of college and got higher paying jobs and who don't plan to have kids until they have been in the workforce for 10 or more years, bought a house and saved both inside and outside their 401(k) plans will be well-prepared, but for all the Abby and Anson's of the world, the participant outcomes will defy what the vendors are saying.

It's not pretty.

Are You Getting the Best Ideas For Your Money?

How about it? Is your [fill in the blank with attorney, accountant, actuary, adviser, consultant] bringing you their best ideas? I had  a few conversations yesterday with people who might be in a position to know. What they told me in a nutshell is that if you are not a key client for whoever it is that you filled in the blank with, the answer is probably not.

One person related to me that when she was in the corporate world, the people sent to audit their 401(k) plan were first-years who asked exactly what a 401(k) plan is. The bill for those services was large. Another told me that he went to a client conference sponsored by a large actuarial firm (conference was his term, but I'm not convinced it was the term I would have used). He found that the larger clients that were there had been getting different and more proactive advice from the firm's national experts, but all he got were answers to the questions that he specifically asked. But he did note to me that the billing rates of the team that services him had gone up by about 1/3 in the last 2 years.A third person said that her adviser (defined benefit investment) seemed to be pawning off the investments that he couldn't dump elsewhere on her. Each of these three people said that they were paying top dollar for substandard services.

Why?

In the late 80s (that's last century for people who don't recall), I was with one of those large firms. I recall a discussion with an internal IT person who was lamenting the high cost of putting IBM personal computers on every one's desk. He said that he thought Compaqs that were less expensive were better. Naive me asked me why then was he buying IBMs. The answer that he gave me struck me as odd then, but wouldn't now. He said something to the effect of "They're IBMs. If I buy Compaqs and something goes wrong, I lose my job; if I buy IBMs and everything goes wrong, I can say I bought IBMs."

The world has changed, but has that part of it? Is it okay to take a risk on getting great advice from people who want your business and want to give you their best advice, but don't have the big name? I don't know what the answer is at your company, but it should be a resounding yes.

The business world has gotten too complex. There are great advisers of all sorts out there who are not charging top dollar. If you're using one of the big firms in whichever field you're thinking about and you're getting their best people -- their national experts -- then you probably are getting their best thinking. If that's the case, then they likely view that you have the money to spend that justifies bringing those people in. But, suppose you're not in New York (this is not intended to imply that all the best people are in New York, but that experts will travel to New York, for example, but perhaps not to Wichita, Kansas). Suppose you're not a Fortune 100 company. Then, you might not be getting the best ideas that your adviser's firm has to offer.

What should you do differently?

Find out who are the strong players that may be less well known, but really want your business. Trust me -- if they think that you are interested in hearing what they have to say, they'll bring you their best ideas. And, they might charge less for them than the bigger companies will.

On that note, if your company sponsors retirement plans and most do, I'd like to talk to you about some of our ideas. You may not hear anything like them from anyone else.

Fees and Higher Cost Asset Classes in Retirement Plans

Earlier this week, I wrote about Bell v Anthem and the rampant litigation over fees in defined contribution plans. I thought I'd take this one step farther today and discuss a few related topics.

Since this post in particular is highly legal in nature and deals with a number of investment topics, I am going to reiterate that I am not an attorney and do not provide legal advice nor am I a CFA, CFP, or RIA, and I do not provide investment advice. Any of either that you glean from this piece is at your own risk and is not intended.

For the most part, the fee-related class action suits have been about failure of the plan sponsor and its committee to properly follow its own Investment Policy and to fail to use the least expensive funds available when it does. Suppose the retirement plan in question along with its committee believe that it's in the best interest of plan participants to have a truly diversified set of investment options available to them in the plan. And, by truly diversified, they have included a set of alternative investments and hedge funds. Many plans do not.

Alternative investments as a group tend to be expensive. One might argue that it takes a more unique skill set to manage them and that simple supply and demand justifies the higher fee structure. Whether that argument holds water or not is not the purpose here, but in any event, you just don't see inexpensive alternative investment funds. Hedge funds tend to be among the most expensive of all. Seen as the ultimate in risk and reward, fees are usually extraordinarily high when compared to other asset classes.

Now, we return to the ERISA requirements that a fiduciary act in the best interests of plan participants and that expenses not be more than reasonable (as an aside, I don't think the word reasonable should ever be in the statute because your idea of reasonable may incorrectly differ with my correct idea of reasonable ... just kidding).

What makes an expense reasonable? In the case of an S&P 500 index fund, we would expect the returns before subtracting out expenses to be virtually identical for two funds, and therefore would hope that the funds with expenses toward the lower end of the spectrum available for the plan would be considered reasonable. Two international real property funds, on the other hand, will not have the same returns. And, each probably only has one share class (in other words, there is not a retail and wholesale or institutional). If Fund A has been returning (over the last 10 years) 14% per year before subtracting expenses and Fund B only 11% per year before subtracting expenses, does Fund A justify a higher level of expenses?

I don't know.

Could you get sued if you offer Fund A in your plan with expenses at 3.5% rather than Fund B with expenses at 2%? Yes, you could. Would you win that suit? I don't know.

The whole concept raises an interesting question that I touched on the other day. With all of these 401(k) lawsuits, is it prudent to offer a 401(k) plan? Is it prudent to be on the Investment Committee of a 401(k) plan? Is it prudent to offer a fund lineup in a 401(k) plan over which you could get sued, but on which you have absolutely no idea on which merits or lack thereof the case would be judged?

I don't know the answer to any of those questions, but I think they are food for thought.

Three decades ago, the defined benefit plan was king and defined contribution plans were far more often thought as a supplemental means of saving. This concept makes more sense to me.

Is it time for a return? Is it time for a return if you have all of the characteristics of that 401(k) plan without the attendant litigation risk? I think maybe it is.

Will Fee Litigation Kill the 401(k)?

401(k) litigation is going mad. In two of the most publicized cases, Tibble v Edison and Hecker v Deere, there may have been something legitimate for plaintiffs to complain about. In the latest case, however, this one fashioned as Bell v Anthem, the litigation makes this blogger wonder why a company would offer a 401(k) plan at all.

Essentially, all of this litigation stems from ERISA Section 404(c) which among other things establishes that a retirement committee and its members individually are to act in a fiduciary manner in the best interests of plan participants with respect to the plan. For years, issues under 404(c) were not litigated, and in fact, most of us weren't entirely sure how to apply 404(c).

As plans have gotten bigger and the number of investment options has grown significantly, some attorneys have found this to be particularly fertile ground for litigation. In some cases, the issues have been judged by the courts to be clear.

As an example, suppose that XYZ Investment Company offers a large cap equity fund. Not only does XYZ offer that fund, but it has two share classes -- a retail class to which it charges accounts a fee of 80 basis points and a wholesale or institutional class to which it charges a fee of 40 basis points. This is a large difference and to the extent that a plan sponsor and committee have the leverage to have the institutional class as compared to the retail class in its fund lineup, they should.

You can do the math if you choose. Using something as simple as the Rule of 72 (you can google it if you are not familiar to estimate the results), Ms. W's account balance will double approximately every 15.6 years while Mr. R's will double about every 17.1 years. Or said, differently, at the end of 35 years, Ms. W will have roughly 3 years of excess returns over Mr. R, at least on her initial deferral. Her more recent deferrals will have smaller amounts of excess returns.

Is this material? I don't know; you tell me. Is it significant enough that the plan committee should be held liable if they opted for retail class instead of institutional? That's up to the courts.

Now, we return to Bell v Anthem. The plan in question is large. Its assets total roughly $5 billion. A plan of that size certainly has the leverage to get the least expensive share classes available for its participants, regardless of whose funds they are placing in the plan. Even the big players drool over the prospects of picking up a large mandate in a plan that big.

In the particular case, all but two of the funds offered were Vanguard funds. Vanguard has a reputation, supported by data, in the industry as having one of the lowest fee structures of anyone out there.

Of the funds that were not Vanguard, one was the Touchstone Sands Capital Select Growth Fund (Institutional Class) with a 1.31% expense ratio according to Touchstone's website. The other was the Artisan Midcap Value Fund (Institutional Class) with an expense ratio in the vicinity of 1.15% according to Artisan's website.

None of the Vanguard funds had expense ratios exceeding 0.5%. The Vanguard Target Date Funds had expense ratios of less than 0.2%. Index funds in the plan had expense ratios ranging from 24 basis points down to 4 basis points. Very few knowledgeable observers would consider those expenses to be high, and in fact, most plan advisers that I know would consider them low.

Plaintiffs, however, allege that the 4 basis point fee is too high, as there was an asset class available for the same fund that only charged 2 basis points. I saw that and wondered how material that is.

Going back again to the rule of 72, I compared the two different expense ratios. With an expense ratio of 2 basis points, an initial investment would double with a 5% gross investment return about every 14.46 years. With the 4 basis point expense ratio, it would double about every 14.52 years. That's a difference of less than one month.

Could Anthem have had the less expensive fund? Probably. Are there any complications associated with it? I haven't looked into that? Was the committee and its members guilty of some sort of fiduciary malfeasance by offering the higher cost (4 basis point) fund to its participants? The courts will have to decide that.

The issues in the suit continue. It contends that because of the size of the plan that even the Institutional Class Fund is not good enough. Instead, the suit contends, Anthem could have negotiated separate Anthem accounts at an even lower cost.

Is this practical? I don't know. Does ERISA hold fiduciaries to that standard? I don't know. If it does, would I want to be on a defined contribution plan's investment committee? Absolutely not.

My reading of ERISA suggests to me that a fiduciary is to take reasonable care in acting in the best interests of plan participants. It strikes me that reasonable care includes making good decisions. It does not strike me that reasonable care requires each committee and committee member to spend enough time to make the best decision possible.

Perhaps I am wrong though. It wouldn't be the first time.

But, let's return to the separate accounts. How long would it have taken Anthem to negotiate those separate accounts? How good a deal would they get? Since that negotiation would be on behalf of plan participants, could they charge their time back to those participants? I don't know.

Either way, if this sort of suit becomes the norm, it's time to get rid of employer-sponsored individual account plans. Businesses are in business to provide products and services. When their 401(k) plans change the way they do business, it's time to stop.

What You Might Find in the Actuary's Bag of Tricks

As actuaries, we work a lot with attorneys. In fact, for the most part, those attorneys are what as known as ERISA attorneys, employee benefits attorneys, executive compensation attorneys, and tax attorneys. Save perhaps intellectual property attorneys/patent attorneys, the ones that we work with would be considered the geekiest by their peers. Some have quite a bit of quantitative ability. Some have actuarial training. A few are credentialed actuaries. For the most part, however, even actuaries who happen to be practicing law don't think the same way that experienced, practicing actuaries do. For their clients, that's probably a good thing as they are engaged to think as lawyers. Similarly, those practicing actuaries who happen to be attorneys as well tend to think as actuaries. And, since that is why they are engaged by their clients, that's probably a good thing as well.

Okay, John, you've written a paragraph saying that actuaries and attorneys are different people. We all know that. Who cares?

Let me illustrate with a case study where the names and numbers have been changed to protect the innocent. And, while those elements are changed, this really happened.

Two similar Fortune 1000 companies were getting ready to merge. Technically, company Y was buying Company Z (they were keeping Z's name, but keeping Y's management team, Z's shareholders would receive stock in Y, and Z's executive team would generally be the beneficiaries of golden parachutes).

The deal was to close on a Friday morning. One of my colleagues was spearheading the benefits and compensation side of due diligence. He was very good at his job, but he was not an actuary. We'll call him Eddie just so that he can have a name.

Late that Wednesday afternoon, I was contacted by Eddie. He told me about the deal he was working with and that he had run into a strange looking SERP. I'll spare you the details, but when he described it to me, it was like none I had ever encountered. He asked if I had some time to look at it which I did.

What had happened was that the old CEO of Z had had a custom-designed SERP and employment agreement and then he went and upset the apple cart -- he died completely unexpectedly. The Board knew who had been intended as the CEO's heir apparent although that was not supposed to happen for a little more than five years. With nowhere else to turn, YRS (young rising star) became the CEO. Frankly, YRS was probably a pretty good choice, but when things are done in a hurry, things can go wrong.

The SERP and employment agreement that the old CEO had had been written by counsel. Counsel said that an actuary had valued the SERP and that the company was comfortable with the costs. So, right along with the rest of the employment agreement, the YRS, the new CEO, got the same package.

The SERP itself wasn't too unusual as it turned out. But, when you integrated the SERP with the employment agreement which was necessary in the event of a change in control, the numbers just exploded.

After determining that the golden parachute payout of the SERP alone was to exceed the entire balance sheet of the merged company (that part is true without specifying numbers), talking to the Chairman of the Board of Y, and working on negotiations with YRS, I did spend some time with Y's management and counsel. I asked them as nicely as I could how they could have given YRS this package without really understanding it. I was informed that an actuary had carefully analyzed the SERP when it was written for the old CEO and he had said there was nothing wrong with it. Therefore, there should not have been a problem giving the same SERP to YRS.

But, the actuary had never seen the employment agreement. And, he had never done his analysis in the context of the employment agreement, a young CEO, and a change in control.

The attorneys in this particular case were good at their jobs. I've worked with them since and seen that. In fact, they are fairly facile quantitatively. But, they think as attorneys (as they should). They don't think as actuaries. And, that was the problem.

So, when you run into a complex quantitative situation where there might be some contingencies involved, save yourself some significant risk and find an actuary who can help.

Where Did We Go Awry With the 401(k)?

Section 401(k) was added to the Internal Revenue Code by the Revenue Act of 1978. It was such a significant part of that act that when I went to www.congress.gov to read the act summary, there was no mention of this new deferral opportunity. It was tossed into the legislation with little fanfare.

Why was that?

401(k) plans were never intended to be the primary retirement vehicle for the masses. In 1978, after the passage of the relatively new landmark law known as ERISA, defined benefit plans (DB) were all the rage and those companies that had chosen not to take the DB route frequently offered profit sharing plans, money purchase plans, or ESOPs, or because of the special tax treatment that they were given at the time, tax credit ESOPs, known back then as TRASOPs (bonus points for anyone who recalled TRASOPs before reading this).

Those were core retirement plans. Combined with Social Security, they were designed to be two legs of the so-called three-legged stool needed for retirement. The third leg was personal savings and the 401(k) plan was supposed to give people a more tax-efficient way to grow that third leg. Read that again; 401(k) plans were designed as savings plans, not as [core] retirement plans.

Somewhere, things went awry. I have written about this many times and blamed virtually everyone who had a voice. As our government and regulators made it more and more cumbersome to sponsor traditional retirement plans and the US economy took several turns for the worse, companies became less comfortable as sponsors of traditional retirement plans. They often placed the blame anywhere that they could. In fact, they placed it everywhere except where it belonged:

• Employees didn't appreciate the other plans (it turned out that the people who didn't have them sure thought their friends who had them had a good deal)
• They could be more competitive without them (don't you get higher productivity and better products and services from happy employees)
• The 401(k) would be enough (of course many of those same companies retained their executive retirement plans)

Now, in a workforce fraught with high turnover, low morale, and lots of part-time jobs, many of us expect employees to save for their own retirement. Projections done by proponents of those plans show that those who do will have a wonderful retirement. Those projections tend to leave out all of these complications:

• You can't defer when you are laid off and most of us seem to face one or more layoffs in our careers these days
• You will have periods in your career when you go through one hardship or another and can't afford to make the deferral you would like
• If you do have a hardship and have to pull money out, those penalties are severe
• You absolutely will not get the 7%-9% annual return on investment, net of expenses, that many of those projections would "promise"

But, companies persist in the belief that the 401(k) is the retirement plan of choice. Potential employees ask about the company's "401 plan." In the meantime, some people retire very early and many will be retiring well after the traditional retirement zone of ages 62 through 65 has passed them by. 

Isn't it time to bring back retirement plans and have more than just savings plans? Any of them can be designed today with the proper administration to show employees their account balance as of that day any day that they choose to look.

You can be an employer of choice.

Are You Handling Your FICA Taxes on Deferred Compensation Properly?

FICA taxes on nonqualified deferred compensation (NQDC) were never a big deal. Chances were that if you had NQDC that your pay was well over the Social Security Wage Base. So, while there were situations where that was not the case, the IRS largely ignored the issue. There just weren't enough situations where it applied and there wasn't enough tax revenue in it to worry about enforcement.

Then came the uncapping of Medicare wages. That is, employees and employers were required to pay HI (Medicare) taxes on all wages, not just those up to the wage base. Suddenly, large amounts of NQDC were subject to this tax and it mattered.

For the last few years, there was a court case in Michigan related to payment of FICA taxes. I had largely forgotten about Davidson v. Henkel, but another blog reminded me of it (thanks Mike Melbinger). In the case, Henkel failed to pay FICA taxes on behalf of Plaintiff Davidson and others in the class leaving that class with a significant (to them) tax liability including penalties.

Why do we care? Why am I taking the time to write about this?

Most NQDC plans are drafted by or reviewed by attorneys (as they should be). While this is not always the case, in the typical situations, the plans are somewhat boilerplate in nature. In my personal experience, counsel often does not ask the client all of the details about how the plan will actually be administered. Frankly, even when they do ask, the client may not know. After all, the client may not be administering the plan on its own.

The plan document is a legal document. When that document says that the company shall remit FICA tax, it must. When the document instructs how or when FICA taxes will be calculated, that is what must happen.

In many plans, this is really a non-issue. There may only be one way to calculate these amounts and taxes will be due annually. In defined benefit (DB) SERPs and Restoration Plans however, there are multiple ways of handling the FICA situation. Most prominently, the sponsor may calculate (and remit) FICA taxes when they are reasonably ascertainable (a technical term from the regulations, but for many, this means at the employee's date of termination from the company) or by early inclusion which essentially means that FICA is calculated and paid annually. Early inclusion is sometimes more beneficial than waiting until retirement, but it is also more administratively complex.

Some plan documents leave the option of payment entirely to the discretion of the sponsor or administrator. Others specify that there will or will not be early inclusion.

What does yours say? Do you know?

Suppose your plan specifies early inclusion and you've not been doing that, do you have a problem? You might.

In fact, in my experience, more companies than not are not particularly on top of the administration of their NQDC plans. They've never particularly focused on compliance with these FICA rules or, even worse, Code Section 409A.

Oftentimes, it will be a good investment to have someone assist you in making sure the processes in this regard are being handled properly.