Can I Withdraw Funds From my Account, or Freeze Deferrals?

We have all learned a few lessons in recent months as we struggle to cope with the sudden and dramatic changes to our personal lifestyles, and to the pursuit of our business interests.  Among the most important is the need for liquidity.

While we have always known that maintaining a liquid asset reserve is a fundamental principle of prudent financial management, we have just received a very clear reminder.

COVID-19 Triggers a Search for Cash

Over the last few months, our firm has received a number of calls from participants in NQDC plans asking if it is possible to either cancel deferral elections for the current year, and/or withdraw cash from their account. They may have read that the CARES Act included certain relief provisions for participants in a Section 401(k) plan that permit loans and withdrawals on a favorable basis. Unfortunately, there are no such relief provisions in the Act for NQDC plans.

Liquidity Options with NQDC Plans

Non-qualified deferred compensation plans have long been, and continue to be, a fundamental component of the total rewards package for executives and other key employees.  They provide an opportunity for supplemental tax-advantaged savings for participants and an effective incentive and retention tool for the employer/plan sponsor.

While non-qualified plans offer significant flexibility of plan design, the liquidity of a participant’s account is limited. In response to a few high-profile corporate scandals, Congress substantially re-wrote the tax law covering non-qualified deferred compensation programs in 2005. Under new Section 409A, withdrawals and distributions from a participant’s deferred compensation account are restricted to specific events, the timing of distributions and withdrawals must be elected up-front at the time of deferral, and the acceleration of benefits is generally prohibited.

However, there are some options available to a participant in a NQDC plan in search of cash.

  • “Hardship” Withdrawal and Suspension of Deferrals: May be permitted under Section 409A, but it is subject to significant restrictions as discussed below.
  • Distribution of Pre-Section 409A portion of account balance:  If the plan includes pre-Section 409A grandfathered accounts from years prior to 2005, there may be more flexibility to access that portion of a participant’s account under the old tax rules.
  • Plan Termination:  It is possible for an employer/plan sponsor to terminate a NQDC plan on a discretionary basis and liquidate all participants’ accounts.  However, it may not be effective in meeting an immediate need for liquidity.
  • Cash-out of a Small Account Balance: Finally, many NQDC plans have a provision that permits the employer/plan sponsor to cash-out a small balance in a participant’s account. However, once again, this provision is of relatively little value to satisfy a significant cash need.

Hardship Withdrawal for an Unforeseeable Emergency

A NQDC plan may allow distributions, based on a “severe financial hardship” resulting from:

  • Illness or accident to the participant or his or her spouse or dependent,
  • Property loss caused by casualty not covered by insurance,
  • Funeral expenses and,
  • Other extraordinary and unforeseeable circumstances resulting from events beyond the control of the participant.

While it may seem counterintuitive, suffering a reduction in pay or being furloughed from your job as a result of COVID-19 may not qualify as an “unforeseeable emergency” under the strict rules of Section 409A.  Note that these rules are different from, and more restrictive than, the requirements for a hardship withdrawal from a Section 401(k) plan.

Furthermore, to obtain a hardship distribution from your account, you must show that the need for cash could not otherwise be met by insurance, or the liquidation of other assets; and, the amount of the hardship distribution is limited to the amount needed to satisfy the emergency, plus applicable taxes.

Cancellation of Current Year Deferrals

Deferral elections under a NQDC plan made for the current year are generally irrevocable. A different election could be made for the following year; but the election for the current year cannot be changed. However, if you can establish that an “unforeseeable emergency” has occurred, and your employer approves the request, then the plan may permit the suspension of deferrals under an exception to the general anti-acceleration rule.

In one recent case among the companies with which we work, the employer approved requests by participants for a hardship distribution and/or the suspension of deferrals based on their representations and warranties that the COVID-19 crisis has caused them to suffer a severe financial hardship due to an unforeseeable emergency (as defined under the plan and applicable tax law), and that the amount of the requested distribution did not exceed the amount necessary to satisfy the financial emergency (plus taxes) after taking into account insurance and/or the liquidation of other assets.

A second narrow exception to the general rule prohibiting the cancellation of a deferral election is the disability of the participant. Note, once again, that the definition of “disability” for this purpose is different from other definitions.

Access to Pre-409A, “Grandfathered” Accounts

Some NQDC plans that were implemented prior to the January 1, 2005 effective date of Section 409A have a segregated component of participants’ accounts related to compensation deferred and vested before December 31, 2004 (“grandfathered accounts”).  In that case, distributions and withdrawals may be subject to the generally more favorable tax law in effect prior to Section 409A. For example, the pre-409A plan might provide for a discretionary 10% “haircut” withdrawal.

Small Balance Cash Out

Many NQDC plans have a provision that permits a lump sum distribution of a participant’s account if the balance is below the Section 402(g)(1)(B) limit (the maximum amount of elective deferrals for a Section 401(k) plan).

This liquidity option is of limited or no value to most participants; but is an alternative the employer/plan sponsor should be aware of.

Termination and Liquidation of a NQDC Plan

As noted above, several of the key provisions of Section 409A were written from an anti-abuse perspective; that is, to prevent some of the perceived abuses of NQDC plans that may have occurred in the past. One of those provisions prohibits the acceleration of benefits under the plan.  However, there are certain exceptions, for example, in the case of a change-in-control.  Another exception to the anti-acceleration rule is for the discretionary termination and liquidation of the plan, subject to strict guidelines:

  • The termination must not be related to a downturn in the financial health of the company,
  • All NQDC plans of similar design sponsored by the employer must also be terminated,
  • No new non-qualified replacement plan may be implemented for 3 years and,
  • The payments to participants in liquidation of their accounts must not begin until 12 months after the date of the termination and must be completed within 24 months.

As a result, a discretionary termination of a NQDC plan is not a simple solution to an immediate need for liquidity among the participants and has a number of other implications.

Financial Planning Lessons Learned from COVID 19

  1. It’s time to re-think your strategy: To re-consider the allocation of savings and retirement assets to maximize growth potential while minimizing risk by taking into consideration the timing of cash needs, appropriate asset class diversification and the creation of a non-taxable “bucket” of retirement savings.
  2. A NQDC plan is a long-term savings vehicle. While a NQDC plan is a powerful, tax-advantaged savings vehicle, it is long-term in nature that provides limited options for short-term liquidity. And unfortunately, unlike 401(k) plans, there are no relief provisions in the CARES Act for NQDC plans.
  3. Actively manage NQDC plan distributions. To provide a degree of liquidity and maximum flexibility, take advantage of the short term “in-service” distributions and re-deferral provisions under the plan:
    • For example, you could defer compensation earned in 2020 for the minimum deferral period under the plan (say to 2022), and then in 2021, 12 months prior to specified 2022 distribution date, re-defer the distribution until 2027 (five years out or later). You could cascade these short-term deferrals year after year.
    • In 2021, if you expect a need for cash in 2022, you could stick with the original 2022 in-service distribution election.
  4. Consider tax-qualified plans. While the savings benefits of a 401(k) or other tax-qualified plan are limited for highly compensated employees and professionals, they may have greater flexibility to meet an immediate need for liquidity. You should always consider maximizing qualified plan savings first before electing to participate in a NQDC plan.
  5. Contribute to a Roth IRA, too. After you fill your 401(k) bucket, consider using a Roth IRA to diversify the tax treatment of retirement income. You can contribute up to $6,000 to a Roth IRA in 2020 in addition to your 401(k).
  6. Consider a life insurance-based supplemental savings plan.  Contemporary programs, using significantly improved products in recent years, offer “Roth-like” tax characteristics, competitive investment options (including some with downside protection), liquidity, freedom from contribution and distribution restrictions, portability and cost-effective life insurance coverage.

Work with Unbiased Financial Advisors

In light of the lessons learned from the 2008 financial crisis and from COVID-19, we recommend that you consider working with a financial and tax advisor to obtain a clear picture of the role that non-qualified deferred compensation all other savings and retirement options should play in achieving your financial goals.

  • Executive Benefit Solutions, LLC is an independent consulting firm that specializes in the design and management of supplemental compensation and benefit plans structured to meet the specific needs of highly compensated executives and professionals. More information about the firm can be found at: www.executivebenefitsolutions.com/about-us/
  • My Financial Coach, LLC offers a precision financial planning platform to model investment and savings and retirement options on a coordinated basis with your personal assets and corporate benefits. My Financial Coach will match you with a Certified Financial Planner® (CFP) with the knowledge and tools to help you in the planning process. More information about My Financial Coach can be found at: www.myfinancialcoach.com.

Executive Stock Compensation: Rethinking LTIP Design for Greater Flexibility, Effectiveness, and Value.

In the first of our four-part series on Executive Stock Compensation we noted the trend in Long-Term Incentive Plan design from a significant reliance on stock options to a portfolio approach using a mix of equity incentives including Restricted Stock Awards (RSAs), Restricted Stock Units (RSUs), Performance Shares and Performance Stock Units (PSUs).

In this second blog in the series, we highlight the advantages of RSUs and PSUs, and focus on one of the most important— the opportunity for tax deferral.

A Meaningful Trend

Stock compensation issued under a Long-Term Incentive Plan typically represents the most significant portion of the total rewards package for senior corporate executives. Ayco, a Goldman Sachs company, recently surveyed 375 client companies, in an update to earlier surveys, to understand the extent to which employers rely on LTIP awards.

In the chart below, notice the trend to an increasing emphasis on RSUs and PSUs over the last ten years as the prevalence of the use of stock options declined.

Source: Ayco Compensation and Benefits Digest, March 15, 2019

Why did this happen? As you may know, fifteen years ago, the Financial Accounting Standards Board began requiring companies to recognize an accounting expense for stock options issued which, in effect, leveled the equity playing field. As a result of the issuance of FASB Statement 123R (later incorporated into ASC Topic 718), many publicly-traded companies shifted from a concentration on the use of stock options to a portfolio approach to executive compensation planning including a range of equity incentives.  Today, the use of RSUs and PSUs dominate many executive total rewards packages because of the flexibility of plan design, the tax advantages and the relative ease of administration.

The Advantages of RSUs / PSUs

In comparison to other forms of equity LTIP awards, the use of RSUs and PSUs provide a number of advantages, including:

  • Greater flexibility of plan design:
    • For example, PSUs offer a greater range of potential value. Subject to the achievement of specific performance criteria, grants often range from 0% to 200% of target, which may provide a more appropriate balance of retention and performance.
    • Secondly, it is possible to separately determine the timing of vesting and of distribution. This action could avoid the triggering of taxation upon eligibility for retirement rather than at actual retirement, if there is accelerated vesting upon eligibility for retirement.
  • Potential tax benefits: If the LTIP is coordinated with a deferred compensation plan, executive participants may be able to:
    • Regain control over the timing of taxation they once had with stock options
    • Elect to defer certain grants after the date of grant (explained more fully below)
    • Manage the timing of distributions to meets savings needs
    • Possibly realize state income tax savings, if they were to move in retirement to a state with a lower tax rate than the state in which the compensation was earned
    • Meet share ownership requirements more easily
    • Diversify net worth, from an over-weighted concentration of assets linked to share price
  • Simplified stock administration: Since no shares are issued at the time of grant, share administration is simplified if performance targets or time vesting requirements are not met.

In summary, the use of RSUs and PSUs offers greater flexibility for the plan sponsor to design an equity incentive program with an appropriate mix of performance and retention incentives, and greater perceived value to participants.

The Advantage of Tax Deferral – A Hypothetical Example

EBS has developed an RSU Modeler to quickly estimate the potential advantage of tax deferral.  The example below illustrates the potential increase in value at retirement, and the projected increase in after-tax retirement income with and without tax deferral. The analysis reflects the following assumptions for one sample executive participant in an RSU plan:

  • Current age: 55
  • Expected age at retirement: 65
  • Grant: 50,000 RSUs on 3/1/2020
  • Vesting: 12,500 units per year for 4 years on the anniversary of the date of grant
  • Elected distribution of benefits: 10 annual installments beginning at retirement
  • Share price at the date of grant: $20.00
  • Expected annual appreciation: 6.0%
  • Annual dividend: 3.00%
  • Executive combined federal and state income tax rate: 45% / Capital Gains tax rate: 28%
  • Medicare tax upon vesting: 2.35%

Projected Value at Retirement

Based on the above assumptions, the projected value of the RSUs at retirement with and without deferral is illustrated below. In the no-deferral case, the key differentiating factor comes from the sale of 45% of RSUs at vesting to cover taxes which, in turn, reduces the dividends received.

However, note that without deferral, while nearly one-half of the shares are sold to pay taxes, the subsequent sale of the remaining units at retirement would be subject to lower capital gains taxes.

Projected Retirement Income

Based on the projected value of the RSUs at retirement above, the projected after-tax retirement income over 10 years is illustrated in the bar graph below:

In summary, this hypothetic analysis illustrates the structural advantage of tax-deferred accumulation. The executive can control the timing of taxation through management of distributions from the Deferred Compensation Plan and may even be able to avoid or reduce state income taxes, in the event that he/she moves in retirement to a state with a lower income tax rate (that potential tax savings is not included in the above projections). 

Management of Distributions from the Deferred Compensation Plan

One of the more flexible features of a deferred compensation plan (briefly mentioned above), is the ability to re-defer a scheduled distribution. For example, assume an executive has established an In-Service Distribution Account scheduled to be paid out on January 1, 2023. The executive can change the payment date of that In-Service Distribution account, as long as:

  • The election to change is made at least 12 months prior to the current distribution date,
  • The new distribution date is at least 5 years later than the current distribution date and,
  • The change election does not take effect for at least 12 months.

By using this “subsequent deferral” rule under Section 409A, a participant can actively manage distributions to meet his or her savings needs and, at the same time, mitigate creditor risk.

The following series of graphics illustrate the ability to allocate deferred compensation to multiple In-Service Distribution “buckets,” and then re-defer (or extend the period of deferral) from one In-Service Distribution bucket to another with a later distribution date (as long as the distribution change rules outlined above are closely followed). 


Allocate compensation deferred to an In-Service Distribution bucket three years out (the minimum deferral period under the plan)

2021 Grant

2022 Grant

2023 Grant


At any time more than 12 months prior to the originally-scheduled 2025 distribution date, make a subsequent deferral election to re-defer the balance in that bucket to a 2030 in-service distribution bucket.

In summary, through active management of the distributions from the Deferred Compensation Plan, you have the flexibility to meet both your long-term and short-term savings needs while mitigating the exposure to creditor risk.

Electing to Defer an RSU / PSU Grant Made in a Previous Year

The general rule for the timing of an election to defer compensation under Section 409A is referred to as the “year before the year” rule. In the case of RSUs and PSUs, this means that an election to defer must be made in the year before the year of grant.

However, as is always the case, there are exceptions to the general rule.  One of those exceptions permits an election to defer a grant of RSUs and/or PSUs anytime more than 12 months prior to the vesting date. For example, if a grant of 10,000 RSUs is made in March 2020 and the grant will vest ratably over four years, an election to defer the second, third and fourth vesting tranches could be made in December 2020, since those tranches are scheduled to vest March 2022, 2023 and 2024. This option can be extremely valuable.

Our firm has occasionally been asked for assistance with the implementation of a Deferred Compensation Plan after the hiring of a new senior executive who has received a significant grant of RSUs at the time of hire. Conventional thinking states that it is too late to elect to defer a grant already made. However, conventional thinking may be incorrect.     


The many advantages of the use of RSUs and PSUs in comparison to other forms of equity awards do not come without some important considerations:

  • Creditor risk inherent in a non-qualified deferred compensation plan,
  • Loss of the opportunity for capital gain treatment for post-vesting appreciation,
  • Loss of the opportunity to make a Section 83(b) election (which may be good news or bad news),
  • Lack of shareholder voting rights and,
  • No actual payment of dividends (although dividend equivalents are often credited on vested and deferred shares).

However, in most cases, the enhancement in value of the LTIP though coordination with a state-of-the-art deferred compensation plan, far outweighs any potential disadvantages.

Upcoming Blogs in the, Add Flexibility and Value to Long-Term Incentive Plans Through Deferral and Diversification of RSUs, series:

Part III

In Part III of our Add Flexibility and Value to Long-Term Incentive Plans Through Deferral and Diversification of RSUs Series of blogs, we will address the issue of diversification; that is, the ability of a participant to reallocate some or all of his or her deferred compensation account balance denominated in RSUs and PSUs to other notional investment choices offered under the plan (such as an S&P 500 fund).

Notwithstanding the potential benefit to participants, diversification is rarely offered because of a presumption that it will lead to negative accounting treatment and/or because it conflicts with a fundamental LTIP design principle to align the interests of senior management with shareholders. However, it may be possible to implement a plan that permits diversification in a manner that addresses both the accounting and plan design issues.

Part IV

In Part IV, we will discuss the steps involved in the implementation and administration of a deferred compensation plan that offers the deferral and diversification of RSUs and PSUs.

We look forward to continuing the dialogue,

The Managing Directors of EBS