One of the many facets of my financial advisory services is helping clients evaluate and choose to participate in their employer’s executive benefits. Many of these benefits supplement an executive’s overall income, now and in the future. But there are pros and cons as well as tax considerations that go along with them.
Companies that hold employees in executive positions for longer periods of time can do so, oftentimes, because of the benefits they offer. These benefits come in many shapes and sizes, but there are a few standard offerings across the board that are highly appealing to executives. Let’s take a look at some of these benefits:
Stock options are a pretty straight forward benefit. Your company grants you the option to buy a specific number of shares in the company at a predetermined price. The options vest over a period of time and/or when certain benefit goals are met. Once you are vested, you have options on how to exercise your purchase power in the stock. While a common offering, this is a popular one with holding power. There are different classes of options such as qualified and nonqualified, which will generally affect taxation.
With restricted stock units your company issues common stock, usually as a bonus, but puts some restrictions on the stock units. The restrictions usually include vesting percentages and schedules the award date, as well as limits on the sale of the stock once it is vested. The plus of restricted stock is that it is owned outright, and there are no cash outlays to be concerned about. The downside is that income taxes will be valued at the fair market value of the stock at the time you become fully vested. Once the stock is vested, it can be sold immediately with typically no gain or loss, or held for future sale with capital gains or losses as the stock value changes.
An employee stock purchase plan can be pretty broad-based, with several different plans for each level of worker in a company. The stock plans allow employees to purchase company stock at a discount (usually 15%) using after-tax payroll deductions. The discounted purchase price becomes the basis of the stock, and when sold, will generate capital gains or losses.
With deferred compensation, your company allows you to withhold a portion of your salary until any later date, usually after your retirement. For non-executive employees, these types of plans are provided through programs such as 401k. Deferred compensation plans allows more highly compensated employees to defer current income to provide future income when needed. It can be seen as a reliable supplement to retirement income, adding to the nest egg you have put together. The downside of this benefit is that it is not segregated from the employer’s general assets and is subject to potential loss. There are many considerations in determining if this plan is for you.
It’s important to do your research to ensure your company’s offerings remain competitive, or when evaluating a new job offer. Changes in employee benefits and how they work come up regularly, and it is always best to consult a trusted financial advisor to walk you through these benefits in light of your own particular financial goals.
Wood Smith Advisors, a woman-owned Registered Investment Advisor (RIA), is a fee-only financial services firm that partners with its clients to simplify their financial lives. We focus on women, entrepreneurs and individuals with complex financial situations, providing objective and competent advice, education and services to help them develop and build their businesses and reach their financial goals. We can be reached by clicking here.
“Finance Made Simple” blog posts are intended for educational purposes and not for specific advice. Each person’s situation is different. Consult your financial advisor for advice relating to topics discussed.