Before we dive into the details of AbbVie’s Deferred Compensation Plan, let’s explore the basics of a DCP in general.
For high-income and key employees who have exhausted their tax-deferred savings (i.e. 401(k), HSA, IRA) and still want to defer income from their current tax situation, a Deferred Compensation Plan is a way of doing this. Held by the company the employee is hired by, an employee can defer some of their current income, earn a rate of return on these payments, and then receive them at some point in the future. The best planning is done when these deferrals are not received until retirement when the employee is in a lower tax bracket.
Who can use the AbbVie Deferred Compensation Plan?
For any AbbVie employee or expatriate who is employed and based in the United States and has obtained a grade level of 20 or higher (or its equivalent), they will have access to the Deferred Compensation Plan. While many AbbVie executives will have obtained this, the Deferred Compensation Plan is not eligible for corporate officers who can use AbbVie’s Supplemental Savings Plan.
How does it work?
Each year, an employee elects how much of their upcoming salary they’d like to defer in that calendar year. The amount deferred can be from base compensation, sales-related compensation, and bonus compensation. From each of these, an employee can defer 5%-75% of this income into the plan for that year. The sources and percentages of income can be changed each year, and an employee can participate one year and then decline the next.
These funds are then allocated to a specific investment, and the rate of return associated with that investment is credited to the deferred amount. (Note, in a Deferred Compensation Plan, you don’t own the investments themselves). One advantageous feature is that each year can be allocated to different investments. This helps keeps an employee’s overall asset allocation in line with their target 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 the 401(k), AbbVie does contribute to each employee’s Deferred Compensation Plan, equal to 5% of the employee’s contribution. This money is allocated the same way that the employee’s money is allocated for that deferral period.
How does this money get paid back to me?
On a Distribution Election Form, an employee can elect when to receive their money. It can be as soon as two years after the deferral has been made or all the way into retirement. For planning purposes, most employees defer income while their income is high. This allows them to create an income stream that will be taxed at a lower rate and serve as an additional income source from their investments / pension / Social Security.
How does it get paid to me at retirement, or if I leave the company?
There is a distinction in how this money gets paid out, depending on your employment status upon leaving AbbVie. If you choose to receive money at retirement (as most participants do), but are terminated from AbbVie before that point, then all of your deferred compensation is paid out within 90 days of the last day of employment.
However, should you retire from AbbVie of your own accord, then the distribution elections made on your last election from will be adhered to. These elections are as follows:
- in substantially equal quarterly or annual installments to the Participant over fifteen (15) years; or
- in substantially equal quarterly or annual installments to the Participant over ten (10) years; or
- in substantially equal quarterly or annual installments to the Participant over five (5) years; or
- in a lump sum; or
- if no such election is on file with the Plan Administrator, in substantially equal quarterly installments to the Participant over ten (10) years.
Each piece of deferred income can have a different election made, or they can all have the same election. If the balance in your Deferred Compensation Plan is less than $15,500, then the amount will be paid as a lump sum.
So, it’s that simple? The money I defer is always there?
Well, not quite.
By not receiving the income in the given year, you are returning it to the general account of AbbVie. They can then do with it as they please. Your deferred income is an unfunded liability of AbbVie. The money you defer is not invested in anything, but your “account” is credited with the return of the asset allocation that you have selected.
In the best-case scenario, you’ll defer income and then receive a payout bigger than the income you would have received, at a lower tax bracket. In the worst-case scenario of AbbVie going bankrupt, all of your deferred income can be claimed by creditors. Officially, a Deferred Compensation Plan is known as an “unfunded” plan, meaning you don’t have money in a specific account – it’s a promise that AbbVie will pay you that money on a timeline that you have elected. It’s a risk you take by deferring income, but given AbbVie’s size and revenue, it can be seen as a small one.
Given this risk, how do I know if I should participate in the DCP?
For one, defer as much money as you can into funded accounts (401(k), HSA, etc.) for you and your spouse (if applicable). At that point, balance your savings into tax-free and taxable accounts, and save for any financial goals that you have mapped out (pay off your mortgage, fund college educations). At that point, it might be wise to defer more of your income into AbbVie’s Deferred Compensation Plan.
If you’d like advice as to your specific situation, I provide this to clients when we design a comprehensive financial plan for their situation. If you’d like to see if using AbbVie’s Deferred Compensation Plan is in your best interest, let’s talk.