Building Your Wealth at Delta
Understanding your company's compensation and benefits plans
This article represents the views and opinions of Brightworth and has not been reviewed or endorsed by Delta or any of its employees.
© 2021 Brightworth. All Rights Reserved.
Do you know the answers to these important questions?
- What can you do now with your compensation and benefits plans at Delta 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?
- Are you taking full advantage of tax savings strategies available to you?
- Is the medical insurance plan you’ve 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, cash flow, 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.
Delta 401(k) Retirement Plan (Delta Family-Care Savings Plan)
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! It is a great way to build wealth systematically and keep your lifestyle in check.
Executives should plan to put the maximum amount into their 401(k) plan each year. For many Delta employees, their savings into the company’s 401(k), the Delta Family-Care Savings Plan, will grow to become their primary source of income in retirement. For those under age 50, in 2020 this deferral amount is $19,500. For those age 50 or above in 2020, the maximum deferral amount is $26,000 (including a $6,500 catch-up contribution). You need to make a separate election for the catch-up contribution, so don’t overlook this administrative detail when reviewing your 401(k). Once you are regularly maximum funding your 401(k) plan each year, try to never reduce your savings election.
You have the option to do either before-tax or Roth 401(k) contributions. The difference is the taxation of the money you put in now, and how it’s taxed in retirement. With the before-tax 401(k) plan, the money you contribute today lowers your taxes. When you take withdrawals in retirement, that’s when you pay tax on each withdrawal. With a Roth 401(k), your contributions are made on an after-tax basis, so it does not reduce your taxes today, however, based on current law, withdrawals after age 59 1⁄2 are tax-free as long as you’ve had the Roth 401(k) open for at least five years.
Any additional contributions over the maximum IRS allowance will go into an after-tax account. You have the ability to convert these “spillover” contributions to the Roth 401(k) in the form of a Roth In Plan Conversion. The IRS ruled in late 2014 that a person’s after-tax contributions can now be rolled directly into a Roth IRA upon leaving their company and avoid tricky tax issues. In addition, at Delta, you can elect to convert the funds in your after-tax account to the Roth 401(k) portion of your 401(k) each year. In doing so, you’ll pay tax on any earnings generated in your after-tax account before you convert it into your Roth 401(k), but this is typically minimal. You can then have all the future growth accumulated inside the Roth 401(k). In other words, you can effectively “super-fund” a Roth IRA while you are at Delta and/or once you leave Delta.
Your 401(k) plan will include both your voluntary contributions and the company’s contribution, which currently includes a 100% match on each dollar you defer up to 6%, and a discretionary profit-sharing contribution contingent upon the company’s performance called automatic contributions. For 2020, the amount is 3%. If you do not contribute to the plan, Delta will still contribute an amount equal to 3% of your eligible earnings. You are always vested in your own contributions and you become vested in the company contributions when you reach two years of service. Therefore, if you contribute 6% for 2020, then you would receive a 9% contribution from Delta.
Your 401(k) plan often offers a number of other 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 bonds, real estate or alternatives funds makes sense. Brightworth can provide our clients with specific investment recommendations for their 401(k) plan based upon their personal situation. Additionally, the plan offers a self-directed option available through Fidelity’s BrokerageLink®. This feature broadens the investment choices available to you beyond the preselected options if you desire added flexibility to pick your own investments or choose to work with an investment advisor. The BrokerageLink® choice is listed with the plan’s investment options viewable through Fidelity’s website and requires a few more steps to enroll and manage.
For highly compensated individuals whose company 401(k) contributions may be limited due to IRS guidelines, they are eligible to participate in the Restoration Program. The purpose of this plan is for Delta to provide company contributions on an after-tax basis that cannot be contributed to the 401(k) plan due to IRS code limits. Under this program, you could receive company contributions up to 9% which includes the automatic 3% contribution + 6% match.
Finally, be sure you have an updated beneficiary designation on file with your 401(k) plan administrator. Especially if your 401(k) plan administrator changes over time, be sure you’ve re-entered your beneficiary elections every time the plan administrator changes, even if you’ve been told your elections will carry over. We’ve 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 child’s names individually as the ultimate beneficiaries, none of the 401(k) money will land in the trust created in 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.
For many individuals pondering retirement, “What pension option should I elect?” is often the primary question they ask us regarding a qualified pension plan. “Should I take the lump sum?” “The monthly annuity seems stable, but what about inflation?” While the answer does depend upon each person’s particular situation, there are a number of factors to consider such as 1) your age and health at retirement, 2) whether you are married, and 3) whether you have any other pensions or stable monthly income streams you can rely on. Figure out what percentage of your retirement income is coming from “you” (i.e., your portfolio, consulting income), vs. Social Security, vs. a company pension plan.
Generally speaking, the younger you are when you leave your company, the more likely taking a lump sum payout then and rolling it tax-free to an IRA is a good move. It provides you control over the money, an investment horizon adequate to grow the funds, and more flexibility over when and what you use the money for in retirement. However, if you find money burns a hole in your pocket, you are worried you’ll spend the pension money too fast, are extremely worried about reinvesting your pension money, and/or have longevity in your family history, electing the monthly pension when you get ready to retire could be the right move. However, inflation is a major consideration, and it’s likely that your purchasing power will decline over the years if you take the monthly payment as most plans don’t increase the pension during payout years.
If you are eligible for benefits under the Delta Retirement Plan (generally if you began working prior to July 1, 2003), then your annuity options have a Social Security offset. This means that if you take the “FAE (Final Average Earnings) annuity option” your monthly pension will decrease the earlier of when you file for Social Security or at your Social Security “full retirement age.” If you take the “FAE annuity as level income option,” your monthly pension will decrease at age 62 regardless if you have filed for Social Security. Note that cost of living adjustments are not included in the calculation, so you would not be penalized for any cost of living adjustments you receive. This pension is in addition to the current cash balance plan, and you must file for both benefits at the same time. See below for your options under the cash balance plan.
For all others who are eligible for only the Cash Balance Plan (you started after July 1, 2003), your pension has the option for an annuity or lump sum. For the annuity, you can either choose the joint and survivor with your spouse or a single life annuity. If you choose the single-life annuity, then your spouse would not receive benefits if you were to pass away. If you want your spouse to receive benefits, then you could choose the joint survivorship option with a reduced benefit. You also have the option to receive a lump sum at retirement which you can roll into an IRA without incurring taxes.
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.
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), deferred compensation, and health savings account (HSA) are typical “must-do” moves.
Next, consider funding an IRA or backdoor Roth IRA strategy for additional tax-advantaged retirement savings. College savings 529 plans are a 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 big stock options or restricted stock income years.
If you’ve held company 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 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 savings purposes.
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.
Delta provides a basic level of life insurance for Delta employees Grade 13 and below. The basic level of life insurance is equal to the greater of $50,000 or 1x salary, rounded to the next higher $1,000, to a maximum of $250,000. You can also elect to buy optional supplemental and dependent life insurance; however, it may be worth exploring supplemental life insurance with an outside carrier to compare premiums and terms.
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 you word the beneficiary designation 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. Delta offers up to 60% short-term. This is paid for by you with after-tax dollars and the benefit would be tax-free. The short-term disability has an elimination period, so the benefits start paying out after that date.
Delta provides 50% company-paid long-term disability. This benefit would be taxable to you should you need it. You have the option to buy up to bring long-term disability benefits to replace 60% of your income. Because you are paying with after-tax dollars, the buy-up benefit of 10% is tax-free to you. Purchasing disability insurance with after-tax dollars is ideal, as the disability income received would be tax-free to you.
Delta also provides 66.67% on OJI (On-the-Job Injury) pay. These benefits are tax-free to you if you were to receive them.
Delta offers two different types of health care options. One type is the High Deductible Plan with a Health Savings Account. The three Health Savings Account plans are called the Gold HSA, Silver HSA, and Bronze HSA.
The Gold plan has the highest premium but the lowest deductibles, the Silver plan has lower premiums than the gold, but higher deductibles, and the Bronze plan has the lowest premiums but the highest deductibles. The Health Savings Account (HSA) is a good 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 tax-free if withdrawals are 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 during retirement. A portion of long-term care premiums is deemed a qualified medical expense based on your age, so this can be another potential use of your HSA account. Furthermore, after age 65, the money in your HSA can be withdrawn tax-free to pay for Medicare Part B, Part C, and Part D premiums (but not for Medicare Supplement or Medigap plan premiums). After age 65, withdrawals for non-medical expenses are allowed without incurring a 20% tax penalty, however, federal and state incomes will apply to those non-medical withdrawals. Note that you can no longer contribute to your Health Savings account once you are filing for any part of Medicare even if you are still on Delta’s medical coverage.
You also have the option to invest cash once your balance exceeds $2,100 in your Health Savings Account. This might make sense if you’re trying to accumulate a large balance for retirement. We provide our clients with specific investment recommendations for their HSA.
The 2020 maximum contribution for singles is $3,550 and for families, it’s $7,100. And if you are age 55 or over, you can deposit an additional $1,000. Furthermore, if your spouse is over age 55, you can open a spousal HSA for them and deposit $1,000. Don’t forget about your company contribution to your HSA each year – this can be “free” money! Delta will contribute up to $750 for both the employee and their spouse. If you have children on the plan, they will contribute up to $250 for the children. That means if you have your entire family on an HSA plan, Delta will contribute up to $1,750 plus an additional $450 in Delta Health Rewards. (The Bronze HSA does not allow for the $450 award.) It is important to note that the maximum contribution includes both the employer + the employee contribution. It is important to not exceed these maximum amounts.
The other type of medical plan is the Health Reimbursement Plan. Note that if you are on the Health Reimbursement Plan, you cannot contribute to an HSA. Delta will still contribute funds to a Health Reimbursement Account (HRA) but you are not allowed to contribute to the HRA. Also, you cannot take these funds with you when you leave Delta.
When retiring from Delta, you can stay on their health care plan until you reach age 65. However, you will have to pay the full premium for the plan which is significantly higher than what you pay as an employee.
If you are an active employee with Delta at age 65, then it may be advantageous not to file for Medicare and stay on Delta’s health plan. In order to avoid a penalty, you will need to be enrolled in either the Gold HSA or the HRA plan.
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.
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 laws 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.
Understanding the “ins and outs” of your company’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.
© 2021 Brightworth. All Rights Reserved.
This information is based on information deemed to be factual and reliable. Please also refer to the Delta company plan documents and your benefits department.