Ep 15 - Executive Edge: Understanding Elite Employee Benefits

Voiceover: [: 00:00:00

Now your hosts[00:00:30]

ys doing today? Doing really [: 00:00:45

Ethan Hutcheson: It, it's Friday and the weather's okay for now. There you go. The afternoon. They're pretty

Jeb Graham: hot here recently, but uh, it is always nice to do these on Fridays 'cause it's like, you know, we get done with this and we're off to the weekend having fun.

Right? [: 00:01:00

And so we, we have a lot of corporate executive clients and I think, um, today what we really wanna focus on is, you know, when you think about a corp corporate executive or a highly compensated employee, [00:01:30] uh, at a big firm, uh, they have their salary, they have their bonus, but so much of what their compensation package is, are a lot of the benefits that are afforded, uh, to these corporate executives.

na do is focus in on some of [: 00:01:45

And then 80% of publicly traded companies offer some sort of stock based compensation to their or RSUs, or. Or, uh, or stock options to their executive [00:02:15] team. And then a lot of times, uh, executive benefits can account for up to 40% of more of a, of an executive's total compensation package. So, uh, bottom line is the, the benefits that you get, [00:02:30] uh, from a large company as an executive or as a highly compensated employee can really be a big part of your compensation package.

ere is gonna talk about, uh, [: 00:02:45

And Ethan's gonna kind of explain some of the ins and outs of that. And then I'm gonna talk about [00:03:00] stock options, RSUs, employee stock purchase plans, uh, and then we're gonna go through 4 0 1 Ks pensions and h HSAs, which are all benefits. Uh, that, that executives have. But, uh, let's get right into talking about, uh, deferred, uh, compensation.

Eric Wymore: [: 00:03:15

Right? So outta that million dollars, they're going to make their 401k contributions. The company is gonna make their matches. They're also going to [00:04:00] obviously take the rest of that in a salary. Well. Maybe because of some kind of a strategy or tax strategy, that individual is saying, you know what? I don't need that entire amount this year.

f that paid out to me in the [: 00:04:15

And then when the salary starts getting paid out in the, in the, in, in the current year, a portion of that's gonna be set aside and go into [00:04:45] their and be part of, kind of the part of their 401k or in that employer retirement plan. Um, the cool thing about that is they can actually invest it a lot of times.

ght be able to, to invest it [: 00:05:00

So. Or, or you might do it three years or you might do it 10 years. It all kind of depends on your current [00:05:30] situation. But I think for, for practical pur purposes, the reason you would do this is because you might have a, a gap or a period of time when you are ending your career or retiring and maybe you wanna retire at [00:05:45] 55, let's say.

ll, right? So if you're at a [: 00:06:00

When you have very little income, maybe you retire to a low income state like Texas or Florida. Now, all of a sudden, as you're drawing out that, that. You're starting to make [00:06:15] that payment on that deferred comp plan, you're in a lower tax bracket and it's a, you know, a successful way to defer those taxes.

comp plan is that that is an [: 00:06:30

Yeah. Um, so it's, it's obviously a plan that you want to consider, uh, certainly as you're climbing the corporate ladder. Uh, certainly a benefit that you want to take advantage of amongst others.

are typically gonna be. Uh, [: 00:07:00

And I'd say even like the example that you just gave, like, so somebody that's making a million dollars a year, they're in the, the top tax bracket, right? So they might be, they're paying 35 plus [00:07:15] percent taxes. So let's say like in that example you give, so they save $200,000 into their deferred comp plan.

, [: 00:07:30

Right. And that's a, that can be a really [00:07:45] huge benefit, especially for those people, like you said, that wanna retire early. Uh, I think it can be, be huge. So, I don't know, Ethan, when, when we were talking about, we had a couple clients in a couple. Uh, or a week or two ago, uh, that [00:08:00] were part of some organizations around town that had those ESOP employee stock ownership plans.

Eric Wymore: Mm-hmm.

Jeb Graham: Um, which are unique as well, and such a wealth builder for so many people. Yeah.

se are my favorite. I, I'll, [: 00:08:15

We work with clients all across the [00:08:30] Kansas City Metro and across the United States. Um, you know, some of the main ones we work with are, you're gonna see a lot of engineering firms, burns and McDonald, uh, black and Veatch, uh, construction from Macallan, Gordon JE Dunn. Uh, Shamrock Trading has a big 1:00 AM Stead Rail.

There's a lot of [: 00:08:45

Um, your company, your privately held company is issuing you shares that vest over time inside of this esop. So employee stock ownership plans, it, it, it is kind of exactly how it sounds, uh, similar to Eric's deferred comp. [00:09:15] Uh, they don't really try to hide anything behind the name, but. Employee stock ownership plans are given to employees of employee owned companies.

tion where a business owner, [: 00:09:30

Um, they're very unique in the fact that they provide, uh, a very, very good retention benefits to employees as well. So if you have an ESOP plan and you've been there for five years, let's say the ESOP's $250,000, then you're there for 10 years. That ESOP's, you know, north [00:10:00] of a million. And then you get to the 20 and 30 year employees that are there and they've got, they might have a $600,000 401k and they have a $5 million ESOP that is kind of parked alongside that 401k plan.

they blink. And now they're [: 00:10:15

So you're not always gonna be making money in these, these things. They're kind of dependent on the profitability and the growth of the organization. Um, so it's really nice 'cause you're, you're [00:10:45] a stakeholder alongside with all your other employees and you want these things to grow. Mm-hmm. How do these work in retirement?

where, you, you are entitled [: 00:11:00

So there's not really in very good tax benefits to them other than, you know, you're, you're [00:11:15] accumulating a lot of wealth very quickly. Inside of a lot of these ESOP plans,

ax, anything you're given is [: 00:11:30

And that's, um, you know, we haven't, we haven't seen any Roth ESOPs yet, but maybe someday that'll happen, huh?

Eric Wymore: Yeah. Where you, where you, I

at'd be a pretty great deal, [: 00:11:45

Ethan Hutcheson: Yeah, yeah, that'd be great. But even then, you know, we see, we see folks, you know, retiring at age 50 and they might have 5 million in an ESOP and 500,000 in a 401k.

e's some cool things you can [: 00:12:00

Yeah. If you can [00:12:15] set that up, you know, at 72 T and really draw that out over time, it's simply just like a 401k.

ies that have what you would [: 00:12:30

That make a, a good living, but they're not high earners by any means that end up with millions of dollars in these things. And it's just such a cool benefit and, um. And so anyway, uh, it, it's neat to see, and they're great clients for [00:12:45] us to work with because there's a ton of good things that we can do, uh, for those people as they exit, as they retire, as they exit the company and try to figure out what to do with those dollars.

So, and the ESOPs

uff like that? That's right. [: 00:13:00

Jeb Graham: Yeah. So that, that was where, um, you know, to, to Ethan's point where you've got privately held companies that have ESOPs.

e talk about executives, uh, [: 00:13:15

You've got restricted stock units, which we see a lot. Uh, you have stock options, which we see some, but not quite as much as restricted stock units. And then you have, uh, what's called an employee [00:13:45] stock purchase plan, uh, in a publicly traded company. Um, so, so big difference between all three of those. And I think, uh, the, the one that we really wanna focus on the difference of is gonna be the restricted stock units.

ions because they, those are [: 00:14:00

Okay. [00:14:15] And when you think about stock options, think about a coupon to buy shares at a set price in the future. Okay? So let's talk about these restricted stock units. And we get these a lot. Uh, we're a company, let's just say you work for x, y, Z corporation, and [00:14:30] at the end of the year they say, Hey, we're gonna give you a bonus of restricted stock units.

typical vesting schedule we [: 00:14:45

You're on the hook because it's a gift and [00:15:00] it's basically income. You have to pay ordinary income tax on the value of those restricted stock units. So, um, but there, uh, it's a great benefit because you actually own the stock in a restricted stock unit, and then basically you can hold it [00:15:15] as long as you want.

e value that you were gifted [: 00:15:30

And then when you're talking about stock options, it works kind of similarly because they grant it to you at a certain time. I. But then a lot of times it could be three years later, five years later, [00:15:45] um, they have a, so, so when they grant it to you, that's at the strike price. Okay. So let's just say it's $20 a share today.

's three years from now, you [: 00:16:00

So again, back to that example, it was worth $20 of a strike price. And let's say five years later that [00:16:15] same stock is worth $40. Well, now you have a, basically a gain of when you exercise that you make the $20 of gain on that stock. So. And that too is going to be ordinary income in the year that you, you do that because that is [00:16:30] income.

oth great benefits. And then [: 00:16:45

Um, available for almost everybody in the company if you wanna participate in it. But think about like in an employee stock purchase plan, think about, uh, [00:17:00] your 401k where you just set up a percentage of your salary that you're gonna put aside every, every paycheck and you're gonna buy into your 401k.

typically what you're doing [: 00:17:15

Well, you might be buying that a hundred dollars share of stock at at 85, [00:17:30] 80 $5 or, or 15% discount. And then typically you have to hold that for a certain amount of time, which a lot of times call it six months or something like that. And then you can sell it. So you, so if you sell it, uh, you've, you've made an instant 15% profit, right?

use you got to buy that at a [: 00:17:45

And we've, [00:18:00] we've run into that many, many times, uh, where we have somebody that's worked at the same company for a long time. They've had all these stock benefits, and then all of a sudden they wake up one day and 60 or 70% of their money is in that company stock. And so now they've got this big. Risk if that [00:18:15] stock does poorly.

ut those are great benefits. [: 00:18:30

And then, you know, I think that the next thing that we were really wanting to talk about was some of the more. Uh, common benefits mm-hmm. That are available to all employees, right. Such as 4 0 1 Ks, pensions, [00:18:45] HSAs, and stuff like that. So, so yeah. Absolutely. Let's talk a little bit about 4 0 1 Ks.

Eric Wymore: Absolutely.

over a little bit on the ma [: 00:19:00

Uh, if you're 50 years or older, [00:19:15] you can add another, an additional $7,500. There's also a super ketchup clause. I'm, I'm, we're not gonna get into that one here. Uh, today, we've talked about it on previous, uh, podcasts, but, uh, keep it kind of high level today. So if you're [00:19:30] over 50 years old, 50 years old, 50 years old or older, you can put away $31,000 into your 401k, uh, as a, as a, uh, contribution.

Um, there's also, [: 00:19:45

Why would you want to kind of consider, why would you want to consider doing an after-tax contribution, uh, to into your 401k? Well, with a lot of major [00:20:30] corporations, they allow you to do an after-tax contribution into that, that 401k, and then immediately you can convert it to a Roth. Uh, a lot of plans, we'll call this some kind of mega backdoor Roth, uh, plan.[00:20:45]

So again, let me run that. That's

Ethan Hutcheson: where we have, sorry. That's where we have confetti that blows up in the background. The mega backdoor. It's mega. Exactly.

tributing, you know, you can [: 00:21:00

Is 77 [00:21:15] 5, and that allows you to put another $34,500 into an after tax, uh, after tax portion of your 401k plan. Call up. You know, if you're with Fidelity, you call up Fidelity and say, Hey, as soon as this hits [00:21:30] the plan, my after tax contribution, I want you to convert it to a Roth and put it in the Roth part of the 401k.

, into a Roth IRA each year. [: 00:21:45

You know, 59 and a half [00:22:00] or into retirement. It's a phenomenal situation that most individuals that work at a large corporation have access to and they absolutely need to take a look if they're able to.

when you think about putting [: 00:22:15

The chances are you're gonna live till you're 90, right? Mm-hmm. And so that's 40 years of that thing growing tax free. And it just, the compounding, I think [00:22:45] people, uh, underestimate the power of that over time and not ever having to pay taxes on that, let alone when your kids inherit it or whoever it is that's gonna inherit it, inherit it on a tax, tax-free basis.

It's

ake an extra step. Um, we've [: 00:23:00

Jeb Graham: Yep. So, so that, so what Eric was just talking about is a defined contribution plan that's 401k. Right. There's also a defined benefit [00:23:15] plan. Everyone's heard of the old, uh, pension plan or the defined benefit pension plan, and I actually saw a statistic that says, well, only 4% of private sector employees have a defined benefit pension plan anymore.

mber is significantly higher [: 00:23:30

What they would do is they'd put money away in a pension plan, and then once you retired, you know, you basically got a salary for the rest of your life based on that pension plan. And over the years in the private [00:24:00] sector, that's kind of faded away for. Uh, you know, for your average employee, there's just not that many of them out there anymore.

ployees, when you're talking [: 00:24:15

And by the way, they're clients that we love to work with, right? Because when you have somebody that retires with a pension, a lot of times [00:24:30] they don't even need. To use a lot of the money that they've saved in, in retirement plans. But what I will say is if you've got a pension, so say you're a public employee or if you're, uh, you know, a, an executive that has a cert plan and, and or if you're one of [00:24:45] those 4% of people, you know, I was actually just talking to a client yesterday that works for Johnson and Johnson.

nd he is got a pension plan. [: 00:25:00

And it's really important, in my opinion, to meet with a financial advisor to go through 'em. [00:25:15] Because a lot of them have lump sum options, you know, where basically you can take either all or a portion of your benefit in a lump sum and roll it to an IRA to take ownership of those dollars and to get control over them.

f having, uh, what they call [: 00:25:30

Took the highest level benefit for [00:25:45] yourself. Um, whereas they also have what are called joint and survivor benefits. So, uh, if you have, you know, you might be able to take. You know, if your pension was $5,000 a month, you might be able to take $4,000 a month. And that actually survives both you and your spouse.

Meaning if you [: 00:26:00

So.

, all, there's some of these [: 00:26:30

And a health savings account is, is one of them. And I'm gonna throw confetti in the background [00:26:45] after I say this, but they're, they're triple tax exempt. Boom, boom. So you're gonna have, you, you, you, you, you put the money in. It does, it's, it's, the contributions are tax deductible when the money grows inside of that.

HSA, if you [: 00:27:00

Um, how do you become eligible? You've gotta be enrolled in a high deductible health plan. You cannot be on Medicare. You cannot be claimed as an in, as a dependent on someone else's tax returns, and you cannot be covered by a non [00:27:30] uh, um, uh, high deductible health plan. I gotta look up the limits. I'm going to run off my cheat sheet here because they change change every single year.

[: 00:27:45

So if you're not taking advantage of that, that's a free $1,000, uh, that you could definitely be taking advantage of. So those are, those are unique. Um, the best part about 'em, I know with the FSA, um, if you, if you [00:28:15] don't use it, you lose it. Well, with an HSA, it's portable and it rolls over into the next year.

r account, um, that you own. [: 00:28:30

So what we encourage people to do is if you're gonna fund these things and, and you want these to start growing, invest the dollars that you put in there. Maybe leave $500 in cash so you can [00:28:45] swipe your HSA debit card. But if you're going to Walgreens to buy Advil or Robitussin for your sick, you know, toddler, don't use your HSA pay for that out of pocket.

you need it for surgeries or [: 00:29:00

People don't wanna put money into an HSA because they're [00:29:15] like, well, when I'm in retirement, I'm gonna be on Medicare. Um, my premiums are low. Uh, most surgeries that I need in retirement are gonna be covered by Medicare, so I'm not gonna use the HSA. Well, if you fund that HSA healthy over the course of your lifetime or [00:29:30] working years.

bution. I. So it's kind of a [: 00:29:45

You don't really wanna take 'em out and pay taxes on that, but you can, uh, it's not, you know, advised, we don't tell people to use an HSA as an IRA, but you're, you don't get locked up into that thing. You can still access those [00:30:00] dollars.

Jeb Graham: Yep. Nice. That's a great benefit to have and the triple tax exempt. I mean there's just not, it's the only thing out there.

's a pretty neat deal 'cause [: 00:30:15

So great. Guys, this has been a super, uh, informative. And I tell you what, if you're, if you're an individual out there, an executive that has questions on your benefits [00:30:30] plan, uh, we would love to visit with you. And, uh, I think this has been super productive. Half hour, and this is Metcalf Money Moments podcast signing off.

Voiceover: Thanks for tuning [: 00:30:45

Disclaimer: Jeb Graham, Ethan Hutchinson and Eric Wymore are registered representatives with and securities offered through LPL Financial Member FINRA SI PC Investment advice offered through W [00:31:15] CG Wealth Advisors, a registered investment advisor, W CG Wealth Advisors and Metcalf Partners Wealth Management is AR separate entity entities from LPL Financial.

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