What is AbbVie’s Deferred Compensation Plan?
The AbbVie Deferred Compensation Plan (DCP) offers an option for high-earning and essential workers who have used up their tax-deferred savings (such as 401(k), HSA, IRA) and still want to defer income from their current tax situation. This plan allows employees to defer some of their current income, earn a rate of return on those payments, and receive them later as a payment over a number of years. The most strategic approach is to defer the payments until retirement, when the employee is likely to be in a lower tax bracket.
Who can use the AbbVie Deferred Compensation Plan?
The AbbVie DCP is available to any employee or expatriate who is based in the United States and employed by AbbVie and has achieved a grade level of 20 or higher (or its equivalent). Although many AbbVie executives are likely to meet this requirement, corporate officers are not eligible for this plan, and instead, they can use AbbVie's Supplemental Savings Plan.
How does it work?
Annually, employees can choose the amount of their future salary that they wish to defer for that calendar year. This amount can be taken from base compensation, sales-related compensation, and bonus compensation, with a range of 5%-75% for each source. The percentages and sources of income can be modified each year, and an employee can choose to participate in one year and decline in the next.
The funds deferred by the employee are then invested into a chosen investment, and the rate of return associated with that investment is added to the deferred amount. It's important to note that in AbbVie’s DCP, the investments themselves are not owned by the employee - the deferral amount and rate of return are just allocated to the employee. One significant benefit of the plan is that each year, employees can assign their funds to different investments, allowing them to maintain their target asset allocation across their entire portfolio.
Is it just my income going into the plan or does AbbVie match money like they do with the 401(k)?
Like a 401(k) plan, AbbVie also contributes to each employee's DCP, which is equal to 5% of the employee's contribution. The allocation of this money is done in the same way that the employee's own funds are allocated during that specific deferral period.
Can you give me an example of how someone would use the DCP?
DCP plans are usually overlooked by a lot of people because they are not talked about and not very well used. It's only when you get above a certain income level and exhaust other plans that it really gets talked about – mostly in executive circles.
Here’s an example of how it’s used:
- Let's say it's September and you've seen your base salary, bonus and sales related income continually grow year on year. Going into the next calendar year, you can see it being at the same level or maybe even higher.
- You're finding yourself getting pushed into tax brackets that are in the 30%+ and you're running out of places to defer your income. You're meeting all your goals, life is very comfortable and you're not looking to increase your lifestyle.
- If you're planning on staying at AbbVie for the foreseeable future and are also interested in creating a retirement income stream, the DC plea plan is something that you really wanted take advantage of.
- Let’s run some math: You have 10 years until you retire, and you defer $50,000 a year of your income to the plan. You choose to invest it into the stock market at the end of those ten years you could be looking at an account balance of close to $800,000.
- You can choose over what period that balance is paid out, but if you're looking to create a long income stream and manage your tax brackets you probably want to stretch it over 15 years.
- Now you're in the first year of retirement and your income stream starts. Using an account balance of $800,000 and a 15-year payout period, you’ll receive just over $53,000 per year.
- Not only have you deferred that money from your higher tax brackets 10 years prior, but you are now producing an income stream which is taxed at a lower rate. This income stream may allow you to defer Social Security and even taking withdrawals out of your other retirement accounts.
To make the best use of the DCP, you should be finding yourself in the 30+% tax brackets, with a significant amount of money to save each year. Unless either of these are true, then the benefit of this plan doesn’t make sense.