Building Your Wealth at UNUM

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Building Your Wealth at UNUM
Understanding your company's compensation and benefits plans

Do you know the answers to these important questions?

  • What can you do now with your compensation and benefits plans at UNUM to ensure you will be able to meet your financial goals, such as:

- living comfortably in retirement

- sending your children to college

- paying off your mortgage

- buying a vacation home

- building a reserve fund so you can weather the twists and turns of life

  • How should you invest your 401(k) plan and other investments today to build wealth?
  • How much of your overall investments should be in company stock?  Should I participate in the ESPP? 
  • When is the best time to sell your restricted stock? 
  • Are you taking full advantage of tax savings strategies available to you?  
  • Is the medical insurance plan you have elected the best one for you and your family?
  • If something happens to your job, will you and your family be financially OK?  What moves should you take now to make sure you will be?  
  • Should tragedy strike, will your family be secure without your income?
  • Are your life insurance and 401(k) plan beneficiary designations coordinated with your will and overall estate plan?

Brightworth specializes in helping busy professionals build and maintain a financial strategy to address their retirement planning, college funding, taxes, cashflow, investments, risk management, estate planning and philanthropic objectives. One of the most common themes we’ve heard when speaking with an executive during their working years can best be summed up in a quote: “I am so busy with my career and family life that I have no time to focus on my finances, nonetheless understand the details of how all of my company plans work.” Yet, your personal finances are so critical to your future. It is the means to reach many of your life’s goals such as paying for your children’s college, retiring and moving to the beach, or making a sizeable contribution to your favorite charity. Achieving your financial goals is like putting together a puzzle; each piece must fit together in order to complete the whole picture. If you want to make sure the pieces of your financial puzzle fit together, we can help.

Below are some highlights of how Brightworth approaches coordinating corporate compensation and benefits plans with a client’s overall financial picture.

Restricted Stock

Restricted Stock is company stock that vests and is released to you after the end of a period of time, dependent upon meeting certain criteria laid out in the plan. This criteria could include being employed for a period of time, or a combination of an employment time period and company performance. Upon vesting and release of the stock, the fair market value of the shares is taxed as ordinary income and is typically reported on a paystub. Some shares are often held back to cover the tax liability, yet the 22% federal tax withholding may not be enough for your particular situation. So, you may need or want to sell some of your released shares and set this cash aside for next April’s tax return filing.

Remember, your holding period for capital gains tax purposes starts the day the shares are released to you and your cost basis is the fair market value on the day of the release. If you sell the shares right away, essentially no additional capital gain taxes would be due. If you sell the stock within 12 months of release, any post-release date gain will be taxed as a short-term capital gain at your top marginal tax bracket (as high as 40.8% for federal tax including the 3.8% Medicare surtax). Don’t forget about state income taxes, too.

Holding the stock for more than 12 months from release date will allow any post-release date gain to be taxed at long-term capital gain rates – a top federal rate of 23.8%. For example, assume 1,000 shares are released to you in February 1, 2021 and the stock is trading at $20/share that day. This $20,000 will be included as compensation on your paystub. Assume further that you wait until March 1, 2022 and sell the shares at $25/share. The $5 per share gain is taxed as a long-term capital gain.

Employee Stock Purchase Plan (ESPP)

As an employee of Unum you have the opportunity to participate in the Employee Stock Purchase Plan. This program offers you the opportunity to purchase Unum stock at a discount of 15% using after-tax dollars. Purchases are funded through payroll deductions from your paycheck.

Owning company stock further aligns employees’ interests with the future well-being of their employer, and the company in turn provides the benefit of the purchase discount to support their employees. This can be a win-win strategy.

Once you have participated in a few offering periods, keep an eye on when to sell the Unum stock acquired through this ESPP, and the tax implications. While you don’t report the 15% purchase discount as income when you acquire the stock through the ESPP, you will report the 15% discount as income when you sell the stock, and may owe capital gains tax on the appreciation in the shares above what you paid for them.  The tax calculation when you sell ESPP shares can be tricky as you need to have several pieces of data available – when the offering period began for that lot of stock you purchased, the amount of the discount, and the final price you sold the shares for.  To minimize taxes, plan to hold onto each lot of your ESPP stock for at least two years from the beginning of the offering period, and more than one year from the date you acquired the stock. Consult with a tax advisor before disposing of a large amount of ESPP stock.

While receiving a “guaranteed” 15% return on your investment appears attractive, it’s important to limit your contributions and total investment in the ESPP so that your exposure to Unum stock doesn’t become too large. Remember, your paycheck and health benefits are tied to whatever company you work for – you don’t want the majority of your investment portfolio tied to your employer as well. 

Long-term Incentive

For those that qualify for long-term incentive rewards (ELTI), you also have annual reward payments to look forward to. Long-term incentives reward employees for their tenure with the company and represent a grant of Unum stock that vests over a period of 4 years. For example, if an employee was granted a $16,000 Unum stock reward on March 1, 2016, a payment of $4,000 was made on March 1, 2018 and on March 1 for the following three years.

LTI awards are taxed as ordinary income and taxes will typically be withheld, yet the tax withholding may not be enough to satisfy your personal tax rate that year. So be sure to plan accordingly with cash to pay extra tax. LTI payments represent a great opportunity to boost personal retirement or education savings, or make additional strides towards paying down debt.

401(k) and Defined Contribution Plans

Many professionals working in corporate America use their 401(k) plan as their primary savings vehicle. It’s convenient, you often get a company matching contribution, and the money you save is automatically deducted from your paycheck. You will be amazed at how quickly you can build a nest egg for retirement within your 401(k) plan because of these features. As such, you should consider setting up automatic monthly savings with all of your investment accounts, not just your 401(k)! It is a great way to build wealth systematically and keep your lifestyle in check.

Professionals should consider putting the maximum amount into their 401(k) plan each year. For those under age 50, in 2020 this deferral amount is $19,500. Those age 50 or older can contribution an additional catch-up contribution which is currently $6,500, so make sure in the year you turn 50 that you have elected to defer the additional catch-up contribution. Once you are regularly maximum funding your 401(k) plan each year, try to never reduce your savings election. This also ensures that you always capture the full company match of 5%. In addition to the 401(k), Unum also contributes 4.5% of your pay to a Defined Contribution plan.

Your 401(k) and Defined Contribution plans offer a number of investment choices which should be coordinated with your overall investment strategy.Typically, the younger you are, the more equity funds you should have since you are most likely in accumulation mode. As you approach retirement, adding in a few more bond, real estate, or alternatives funds makes sense. Brightworth can provide our clients with specific investment recommendations for their retirement plans based upon their personal situation.

Finally, be sure you have an updated beneficiary designation on file with Fidelity, your 401(k) and Defined Contribution plan administrator. Especially if your 401(k) plan administrator changes over time, be sure you have re-entered your beneficiary elections every time the plan administrator changes, even if you’ve been told your elections will carry over. We have seen many instances where they do not. Make sure your beneficiary designations are properly coordinated and integrated with your overall estate plan. For example, if you have created a trust in your will to hold assets for minor children, but your 401(k) beneficiary designation still shows your children’s names individually as the ultimate beneficiaries, none of the 401(k) money will land in the trust created by your will. This is one of the most common mistakes we see people make with their 401(k) plans – not having their beneficiary designations updated and coordinated with their estate plan.

Supplemental 401(k) Plan

The Supplemental 401(k) plan is different from the qualified 401(k) plan. It is a non-qualified retirement plan that allows you to defer a higher level of salary and/or bonus each year if you meet the eligibility requirements to participate. This can be a powerful way to save for future goals and significantly reduce your current tax bill, especially in years you may have high income from bonuses or restricted stock vesting. Deferral elections are made during an open enrollment period and have strict limitations about changing the elections you make for each plan year. 

During open enrollment each year when you make a distribution election for when your deferred compensation account will be paid back out to you, it is wise to have a cash flow strategy in place to know whether you should elect a lump sum distribution, 10 year installments, etc. Without this your cash flow, especially in retirement, could be sporadic and haphazard. Perhaps you are planning to retire after age 60 and have enough projected stock option income for the first five years of retirement to cover your cash flow needs. If this is the case, you may not need your deferred compensation plan paying out fully in those first five years.

The value of this account is subject to ordinary income tax the year the proceeds are distributed to you, and some income tax will be withheld from this distribution. Again, it may not be enough to cover your personal tax liability on the payout of this plan that year.

There are typically a number of investment options to choose from with your deferred compensation plan and they may be different from your 401(k) investment options. Once again, this asset allocation should be coordinated with your overall investment game plan and rebalanced periodically. We provide our clients with specific investment recommendations based upon their unique financial situation.

Finally, a beneficiary designation is needed for a deferred compensation account, too. However, the way this account pays out upon death of the account owner is different than a 401(k) plan – the proceeds cannot be rolled over tax free to an IRA as it’s not a qualified plan.  In many cases the beneficiary will receive a lump sum payment of the balance, and the payout is fully subject to ordinary income tax. It is important that your estate attorney understands the payout rules at death so they can advise how the beneficiary designation should be worded to coordinate with your overall estate plan.

Investments

A solid investment strategy is the cornerstone to building and preserving wealth. It should be designed to meet your specific cash flow needs, time horizon, growth requirements, tax objectives, and risk tolerance. Successful investing requires a long-term perspective and discipline to avoid making short-term emotional mistakes. Having a coordinated and comprehensive strategic asset allocation is the foundation for your entire portfolio. As such, the investments you have outside of company plans should be designed to complement, not contradict, the investments you have within your company plans.

As your time frame for needing to spend down your investments for goals like college and retirement comes closer, you should adjust your investments to be more conservative. However, since you can spend more time in retirement than in your working years, stocks or other assets that have growth potential are still important for a portion of your portfolio to outpace inflation. Timing the market is not an investment strategy nor is looking at what did well last year and assuming that’s where your money should be invested. Investing is about looking forward, placing probabilities on various scenarios, and aligning your investments so that you’ll do well in multiple future scenarios. Brightworth provides investment management services to our clients using sound investment disciplines with customized, innovative planning. The core of this system is a portfolio of carefully selected investments designed to enhance wealth while protecting capital over the long term. Through ongoing monitoring and evaluation, tactical shifts, and flexible managers, we are able to take advantage of opportunities and help mitigate risks for our clients.

Taxes

As a W-2 employee, you have limited ways to save taxes each year, but there are a number of strategies to take advantage of. Saving in the before-tax plans available to you at your company: 401(k), Supplemental 401(k) and health savings account (HSA) are typically “must-do” moves.

Next, consider funding an IRA or backdoor Roth IRA strategy for additional tax-advantaged retirement savings. College savings 529 plans are solid investment and tax savings strategies – research your home state’s 529 plan as you may receive a state tax deduction on your contributions. With 529 plans, the withdrawals used for qualified education expenses are tax-free.

Some states offer tax credits for film, energy, and/or low-income housing. Purchasing these credits can lower your overall state tax bill as you buy the credits at a discount, while receiving a dollar-for-dollar credit towards your state taxes in most cases.

Finally, read on for charitable giving strategies which can help you save considerable taxes while fulfilling your charitable intent. Above all, consider working with a qualified accountant who is familiar with executive compensation strategies and can advise you on a variety of tax reduction strategies especially in LTI or restricted stock income years.

Charitable Giving

If you have held stock for a long time and you have a lot of built up gain in these shares, they could be great candidates for charitable giving. When stock is given to a charity and the charity sells it, nobody pays capital gains tax on the sale.  A terrific tool for charitable giving that has great tax advantages is a donor advised fund. This is essentially a brokerage account with a charitable wrapper around it. Cash, stocks, real estate and other appreciated assets can be transferred into the account, the assets are sold with no capital gains tax due, and the cash proceeds become available for benefitting your favorite qualified charities. You receive a tax deduction for the value of the assets the year they are transferred into the donor advised fund, and you can determine how much and when to gift out the assets in the account to charity.  This makes for very easy tax reporting, no more keeping track of various receipts, and more control over the timing of charitable gifts for tax deduction purposes.  

Insurance

You may have the bulk of your health, life, and disability insurance through your group coverage. For health insurance, this is typically fine and provides adequate coverage. For life and disability insurance, your group coverage may not provide enough benefits and you may need to supplement with outside insurance policies.

Life insurance is most important during your working years while you are accumulating wealth to reach your long-term goals, as well as covering daily living expenses and debts. This is the time where your life insurance need is greatest, yet as you build wealth, your need for life insurance goes down. You should run numbers with a professional to determine how much life insurance is right for you and your family. Consider the need to replace your income for a period of time, top off college savings, pay off the mortgage and other debts, and whether you want a retirement fund secured for your spouse or partner should something happen to you. Buying supplemental life insurance through an employer plan may be more expensive than securing it with an outside company, where you can also lock in your premiums for a period of time.

It is very important that your life insurance beneficiary designation is coordinated with your estate plan. Your life insurance may not payout according to your wishes unless the beneficiary designation is worded accordingly.  One common question to address with your estate attorney is whether your life insurance policies should be in a trust. If the answer is yes, you must fill out the proper assignment and beneficiary change paperwork to transfer your group coverage into the trust.

Disability insurance replaces a portion of your income if you are unable to work for an extended period of time.  For most people in corporate America, your ability to earn an income is your greatest asset, so it should be protected. It often makes sense to have supplemental disability insurance above the basic amount your employer offers. Purchasing disability insurance with after-tax dollars is ideal, as the disability income received would be tax-free to you. 

High deductible medical insurance plans have become increasingly popular in corporate America due to their lower monthly premiums. However, as the name states, the employee pays more of their first medical expenses each year until the higher deductible is met. A health savings account (HSA) is available with high deductible medical plans. It’s a great tool to take advantage of the “triple tax play” as an HSA is the only investment vehicle where it’s pre-tax going in, tax-deferred while the money is in the account, and withdrawals are tax-free if used for qualified medical expenses. If you can build up this account and avoid using it for current medical expenses, this is a good tax efficient strategy to help pay for higher medical expenses in retirement. Plus, once you turn age 65, you can take penalty-free withdrawal from the HSA for non-medical expenses. There is a list of investment options to choose from in the HSA plan which might make sense if you’re trying to accumulate a large balance for retirement. Don’t forget about a company’s contribution of $700 to the HSA each year – this is “free” money!  

Finally, we’ve seen many executives have insufficient liability insurance through their home/auto/umbrella policies. If you were to become involved in litigation without proper protection, your balance sheet and possibly paycheck could be at risk. Have your home/auto/liability insurance plan reviewed every few years. It may save you money and more importantly, address potential gaps in your coverage.

As a fee-only firm, Brightworth does not sell insurance but instead, provides objective advice and analysis on this often confusing topic.

Estate Planning

Every adult needs at least a basic estate plan consisting of a will, a financial power of attorney, and a healthcare directive. These documents should be drawn up by a qualified estate attorney, and reviewed at least every five years. As the estate tax law change, your family dynamics change, and you build your wealth, periodically reviewing your legal documents is necessary to protect your wealth and ensure that your final wishes would be fulfilled. Remember, beneficiary designations for life insurance and retirement plans need to be coordinated with your overall financial and estate plan.

Conclusion

Understanding the “ins and outs” of Unum’s compensation and benefits plans is absolutely critical to making wise decisions, maximizing the options presented to you, and putting the pieces of the puzzle together into one coordinated strategy. Having a financial advisor who is knowledgeable and experienced with executive compensation strategies, and who will do a “deep dive” into your plans can provide you with more confidence and peace of mind as you navigate your career. It will help put you on a better path to achieving your financial and life goals.

If you have questions about your financial strategy or would like a second opinion, we are happy to sit down with you to discuss your unique situation in more detail.

Who Is Brightworth?

Brightworth is a nationally recognized, fee- only wealth management firm with offices in Atlanta, GA and Charlotte, NC. The wealth advisors at Brightworth have deep expertise across the financial disciplines, allowing us to provide ongoing, comprehensive financial advice to families across the country.

This information is provided as a guide to assist you in your financial planning. The examples are provided for illustrative purposes only

and are not intended to be specific financial planning recommendations or tax advice. Please consult with a professional for specific questions regarding your particular situation.

© 2020 Brightworth. All Rights Reserved.

This information is based on information deemed to be factual and reliable. Please also refer to the UNUM company plan documents and your benefits department.