Apparently, it is getting harder to be a highly compensated executive these days. The American Taxpayer Relief Act of 2012, interestingly enough, passed by Congress in 2013, raised the highest personal Federal income tax rate from 35% to 39.6% for the top 1% of all taxpayers. The maximum tax rate for long-term capital gains and dividends for these same taxpayers was also raised from 15% to 20%. When you add this to the increases in Social Security and Medicare taxes enacted under the 2010 health care reform that were already scheduled to go into effect for 2013, this raises the maximum income tax rate by 5.5% and the maximum long-term capital gains and dividends tax rate by 8.80%.
How will this increase impact your highly paid executives? While no one can predict how tax rates will change in the future, executives are looking for better ways to defer their present compensation into future years when their earnings may be lower; thus resulting in potentially lower tax rates. The best tools to accomplish this are qualified retirement plans and non-qualified deferred compensation plans. These types of programs, properly designed, can offer executives incredible opportunities to defer taxable compensation into the future.
Sure, it used to be easier to defer compensation prior to the passage of Internal Revenue Code section 409A. With less flexibility permitted and higher risks from noncompliance, participation in deferred compensation plans took a hit over the past five or so years. However, we fully anticipate that the increase in tax rates will again heat up Executive’s interest in deferring their compensation in to the future.
With this in mind, employers need to examine their qualified and non-qualified retirement plans to ensure they are offering the right opportunities and the maximum flexibility to defer compensation that their executives need/desire. So, with all that said, I ask again, “are your non-qualified deferred compensation and retirement plans up to speed?”