Building Your Wealth at UPS
Financial strategy insights for executives
Do you know the answers to these important questions?
- What can I do now with my UPS compensation and benefits plans to ensure I will have enough to live comfortably in retirement?
- How much of my overall net worth should I have in UPS common stock? Is this different while I’m working vs. retired?
- How do I properly diversify and invest my assets to protect my lifestyle during retirement?
- What considerations should I keep in mind regarding my UPS equity awards?
- Are my group life insurance, pension plan and UPS 401(k) Savings Plan beneficiary designations coordinated with my will and overall estate plan?
Brightworth specializes in helping professionals of UPS make sense of their benefit plans and develop financial strategies that properly address their needs for retirement planning, tax planning, investment management, estate planning, risk management, philanthropy, and other important financial matters. As a busy professional, it may feel like the demands of your career and family life leave little time to focus on your personal finances. Yet, thorough understanding and proper management of your personal finances has tremendous impact on achieving many of your goals. Achieving these goals requires coordination of several moving parts. If the idea of managing it all seems overwhelming, we can help.
Here are some highlights of how Brightworth approaches the coordination of UPS compensation and benefit plans with a client’s overall financial plan.
Component #1 – Equity Awards
UPS employees who are eligible for the UPS Management Incentive Program (MIP) and Long-Term Incentive Program (LTIP) as part of their overall compensation package will receive equity compensation in the form of Restricted Performance Units (RPUs) which are ultimately converted into shares of UPS common stock (the exception being first-time MIP participants whose awards are paid entirely in UPS stock) through a process known as “lapsing.”
LTIP awards consist of a target award of RPUs tied to the performance of the company over a 3-year time period. After the 3-year performance period, RPUs are converted to common stock, distributed to the employee, and taxed at ordinary income tax rates.
In the case of MIP awards, each award for existing participants is paid through a combination of electable cash and non-electable RPUs, the proportion of which varies by job classification. Vesting of the non-electable RPUs takes place in 20% increments each year for five years following the year of the grant for all 2018 and earlier awards. Starting with the 2019 MIP award, vesting will be 100% after one year. For example, the MIP award granted in 2019 will be 100% vested 12 months later in 2020. Upon vesting, RPUs are converted to UPS common stock and the value will be taxable to you at ordinary income tax rates. Shares are withheld to cover tax withholding, however, the standard 22% withholding rate may not be sufficient, so you may need to hold back an additional amount of cash to cover any additional tax due. Note that if an employee elects to use the electable cash portion of the MIP award to purchase UPS stock, there is no vesting period.
Your holding period for tax purposes begins on the date shares are released to you. Consequently, selling shares immediately after release should result in negligible capital gains tax. If you sell within 12 months, any gain will be taxed at short-term capital gains rates i.e. ordinary income tax rates. Waiting 12 months to sell following the release of shares will qualify any capital gains to be taxed at long-term capital gains rates – a maximum top of 23.8% for Federal purposes (don’t forget state taxes too). For example, if 1,000 shares are released to you in February, 2021 and the stock is trading at $170/share, $170,000 is taxed to you as ordinary income. If you wait until March, 2022 to sell the shares at $180/share, the $10 per share gain is taxed as a long-term capital gain.
After several years of qualifying work at UPS, you may have several different MIP and LTIP awards vesting in any given year. It is important to understand what these vesting events mean for your tax situation as it relates to deferrals you choose to make into 401(k)/Savings Plan and deferred compensation plans, among other tax strategies you might employ. Moreover, it is important to monitor what the release of additional UPS shares means to your overall concentration in UPS stock.
Component #2 – Deferred Compensation
If you meet the eligibility requirements to participate in this non-qualified plan, you have the option to defer up to 35% of your annual base salary and 100% of the cash portion of your MIP award each year. This can be a powerful way to save for future goals and significantly reduce your current tax bill.
Deferral elections are made during the open enrollment period at which time you also must decide when you would like the money distributed back out to you. It is important to have a cash flow plan in place to know whether it makes sense to receive your distribution in a lump sum or installments. For example, after retirement you may have several years of stock award lapses that can produce needed cash flow and you may not need significant distributions from your deferred compensation plan.
Your deferred compensation account can be invested in various investment options in much the same way that your Savings Plan is invested. Again, it is important that your investment allocation be coordinated with your other investments and overall financial plan.
Note that deferred compensation plans are non-qualified retirement plans that are not subject to ERISA law. Assets you defer to the plan technically remain assets of the company until you receive them and pay the applicable tax. Consequently, these assets remain subject to the claims of creditors of the company.
Component #3 – Investment Portfolio
The cornerstone to your long-term financial success is a well-designed and constructed investment portfolio. Your investment portfolio is critical to building and preserving wealth and should be designed to fit your cash flow needs, time horizon, risk tolerance, and tax objectives. Successful investing requires a long-term perspective and disciplined approach in order to avoid 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.
Brightworth offers investment management services to our clients using sound investment disciplines carefully coordinated with customized, innovative financial planning. Our ultimate objective is to enhance clients’ wealth while protecting their capital over the long-term. Through ongoing monitoring and evaluation, periodic tactical shifts, and flexible managers, we are able to take advantage of opportunities and manage risks in the near terms for our clients.
Component #4 – The Other Considerations
In addition to the items listed above that have significant impacts on your cash flow, taxes, and long-term wealth accumulation, there are other considerations related to your overall financial plan to keep in mind. Regardless of financial or family situation, everyone should have an estate plan that includes, at least, a will, financial power of attorney, and healthcare power of attorney/directive. In addition, many people are surprised to learn that assets such as 401(k)s, deferred compensation plans, and life insurance proceeds are not distributed at your death according to your will. Instead, distribution is based solely on the beneficiary designation you have placed on each account. Therefore, it is critical that you periodically check the beneficiary designations on each account to ensure that they are in keeping with your wishes.
Life and disability insurance may play an important role in your overall financial plan. UPS offers MIP-eligible employees the opportunity to purchase individual long-term disability coverage at group rates from UNUM. This coverage can insure an employee’s equity compensation in the event they are disabled (after a 1 year waiting period) and is for both MIP and LTIP (when applicable). Moreover, if held until retirement, this group disability policy is convertible to long-term care insurance. Coverage for life or disability provided through UPS may not be sufficient to adequately cover a need should something happen to you or a spouse. The purchase of an outside policy may be necessary in order to increase your coverage to the appropriate amount, re-structure your coverage to fit your circumstances, or add additional protection such as long-term care insurance. Brightworth does not sell insurance, but does provide objective guidance to clients on how to structure an appropriate risk management program.
If you are enrolled in a high-deductible health insurance plan, you are eligible to contribute to a Health Savings Account (HSA) which is a tax-advantaged savings account that can be used for qualified medical expenses. In fact, an HSA is the only type of account that enjoys a “triple tax advantage” as contributions to the account are made on a pre-tax basis, earnings grow tax-deferred, and future withdrawals for qualified expenses are tax free. We encourage our clients to resist the temptation to use this account for immediate medical needs, and instead let this account enjoy compound growth over a long period of time for future use. This is achieved by investing the account in investment options similar to the way in which your savings plan is invested. We provide our clients with an appropriate investment recommendation for their situation.
The annual contribution limit to an HSA in 2020 is $3,550 for an individual, or $7,100 for a family. In addition, those 55 years and older can contribute an additional $1,000.
We often see executives with gaps in their property and casualty insurance for things like homeowners’ policies, auto policies, and liability coverage. It is important to have your entire property and casualty insurance program reviewed periodically to eliminate any gaps in coverage. This is particularly important as it relates to liability coverage where a judgment against you as a result of a lawsuit could not only wipe out a significant amount of your assets, but also put your paycheck at risk.
Understanding the various components of your compensation package is critical to developing a well-coordinated financial plan that helps you meet your financial objectives. Working with a financial advisor who understands UPS compensation and benefit packages should provide you peace of mind and reassurance that you are on the right path to achieving your 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.
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This information is based on information deemed to be factual and reliable. Please also refer to the UPS company plan documents and your benefits department.