Written by: Leon C. LaBrecque, JD, CPA, CFP®, CFA
Ford is offering a buyout to select salaried employees in an effort to reduce its workforce. The terms are a lump-sum payment of 9 months’ pay and half-time work (50%) for full time pay (100%) for 6 months. Those selected must retire on 12/1/18 or 1/1/19. For example, a salaried employee with 20 years of service, making $120,000 a year would be offered 9 months’ pay ($90,000) to leave employment. They’d also receive six months of their regular pay, about $60,000, for half-time work, and receive the normal benefits for a Ford salaried employee such as: pension, TESP/SSIP, and health care, as eligible. There are moving parts to analyzing such an offer, so we thought we’d highlight some points that should be considered in evaluating an offer.
About us: We’re not writing this for Ford, so if we and Ford disagree, they’re probably right. We’re an independent, full-service Registered Investment Advisor that has been operating since 1989. I’m an attorney, CPA, Certified Financial Planner, and Chartered Financial Analyst. I’ve worked in the CPA profession, and in higher education (as a graduate professor of tax and finance) before I started LJPR Financial Advisors. We don’t sell any products, and we are a full-service shop. The purpose of this overview is to help people make a good decision. Read on, consult your advisors, and if you want a second opinion, or a first opinion, we’re here.
Work here or don’t? I’ve been working with Ford folks since 1985, ranging from writing retirement programs to videos to individual planning. The first thing that strikes me is how we personify Ford in a way quite different than other companies. We work at ‘Fords’, like we work directly for Edsel or Bill. It has a different feel. The second thing is that everyone jumbles up this decision on ‘retirement’ offers or buyouts. We hear “I’m not ready to retire,” or “I don’t know enough about retirement.”
This offer presents a question that I think is simple: “Work at Ford, or don’t work at Ford?” Another way to look at it is “Ford will pay you not to work here.” When you frame the offer that way, then you can decide what course of action you want to take, and decide if you want to be paid to not work at Ford, then what should you consider. What happens with the pension? Should I take a buyout from the GRP? What about my TESP/SSIP? What about taxes? What about new taxes?
The bundle. To make the read easy, for our example I’m putting your salary at $120,000, or $10,000 a month: your mileage will vary (like my F150 when I drive it versus when my 23 year old son drives it). So, we’ve already had someone like that come in and these were the pieces of the pie:
Taxes: the top layer of the cake is not the sweetest. Our first point is that a buyout is not a pension enhancement or qualified plan money: it’s taxable salary income. So if Ford pays $90,000 in January of 2019 for you to leave, you have $90,000 more income. So if you have $50,000 of pension and $90,000 of lump-sum, that’s $140,000. Congratulations, you get to taste the higher brackets. Taxes are like a layered cake: You get the greater of your standard deduction or itemized deductions, and certain expenses, like pre-tax TESP or HSA, then you apply taxable income to one of 7 tax brackets. In our example, the employee with the $120,000 salary, (if that was the family’s only income), they would be using up the lower brackets of 10% and 12% and be in the 22% (if married) or 24% (single) brackets. We have a tax estimator that will let you get a handle on the federal taxes.
FICA. When my oldest daughter got her first paycheck, she was as mad as a wet hen. “Who’s this FICA and why did they take money from me?” Earned income is subject to payroll taxes in addition to income taxes. There are two forms: Social Security taxes of 6.2% of the first $128,400 (for 2018, likely higher in 2019) of earned income and Medicare taxes of 1.45% of all earned income. There is an additional 0.9% high income Medicare tax (HI tax) on earned income over $200,000 (single) or $250,000 (married). For most people taking the buyout, all or a portion of it will be subject to the Social Security taxes, and all of the buyout will be subject to Medicare taxes, and maybe the additional HI tax.
State. The buyout will be subject to state income taxes, most likely in the state you work in. California and New York have high individual income tax rates and a progressive tax system. States like Michigan have a flat tax rate of 4.25%. Seven states have no income taxes.
No roll. The buyout is income in the year received and not pension money. You can’t defer it or roll it over to a retirement plan. Your total freight on the buyout will be federal taxes at probably 22-37%, maybe some Social Security taxes at 6.2% of your total earned income (regular salary plus buyout) over $128,400, Medicare taxes of 1.45% plus 0.9% if your earned income is over the HI level, plus state income taxes. Simple, right? If you are roughing it in, use about 40%.
Pension: taking LSD and other questions. Of course, if you decide to leave Ford, you probably have some vested money in the pension plan, including a frozen General Retirement Plan benefit. If you are eligible for SERP (you’d know if you are), recognize there is a special rule on Social Security taxes and Medicare for the year you terminate. On the Ford pension, you’ll have to decide whether to take LSD (Lump-Sum Distribution – what did you think I meant?) or a monthly pension. If you intend to continue working or won’t need the monthly income, you might consider the lump-sum. We wrote a whole white paper on the topic. If you take a lump-sum, you can roll it tax-free into an IRA. If you’ve been contributing to the GRP, which most Ford Salaried employees have, the after-tax contributions can be rolled to a Roth IRA.
Recognize that if you are retirement eligible and take the monthly pension, it will add to your taxable income. If you are eligible for Social Security benefits, those will be partially taxable in the year you begin taking benefits. Since Social Security benefits increase for every year you delay, you may want to consider holding off collecting Social Security until 2019 or 2020, when your income will likely be lower. There are other things to consider in Social Security, like earnings limitations and spousal benefits. Too much for here. We run a simulation on Social Security collecting strategies. For example, I intend to delay mine until I’m age 70, but have my wife take hers at age 62.
Take it or leave it? The pension decision will likely come down to taking it in a lump-sum or monthly payment if you are eligible, or leave it at Ford until you are eligible to receive it.
TESP/SSIP: max and mad max. When you leave Ford, you have a similar decision on ‘take it or leave it.’ We’ll get into that. First thing is if you take the offer, maximize your TESP. Tax-Efficient Savings is the pre-tax 401(k) portion of the SSIP which you can contribute up to $18,500 per year (if you are under 50) or $24,500 per year (50 or older). That comes off your taxable income before any deductions, so you are saving federal and state taxes for 2018 at your higher tax rate. There is the possibility of after-tax savings as well, which leads us to the ‘mad max.’ The IRS has ruled that after-tax savings can be rolled into a Roth IRA. So if you know you are leaving Ford in 2019, and you want to stash a whole bunch, you can max the TESP at $18,500 or $24,500 in 2018 and put more in after-tax. When you leave Ford, you can roll the pre-tax monies (your pre-tax contributions, Ford’s matching contributions and all investment earnings) into a regular IRA and roll the after-tax portion into a Roth IRA. How much can you max? It is subject to something called the IRC §415 limit, which is the total amount that can go into a qualified plan in a given year. This is a combination of all additions to your SSIP account, but the overall §415 limit for 2018 is $55,000 per year if you are under age 50 and $61,000 per year if you 50 or over. This and a bunch of (OK, 49) other good 401(k) ideas are in our book, 50 Good 401(k) Ideas. Drop us an e-mail or a call and we’ll send you a copy of the book.
Ford stock and NUA. There is an important special rule about employer stock held in your retirement account called Net Unrealized Appreciation, or NUA. Many Ford folks we know have Ford stock in their SSIP. This special rule says you can take your employer stock out of the SSIP at the lower of cost or market. Cost is your basis in Ford stock, which you get from the plan custodian. So if you bought Ford stock in your SSIP back in the spring of 2009 at $2 a share and Ford is $11 today, you have $9 of NUA. You can take the Ford stock out in-kind, and your taxes will be on the $2 a share. When you sell the Ford stock, regardless of how long you hold it, the gain is long-term capital gain. This can be a great planning tool if you have appreciated Ford stock in your SSIP. This only works if the stock has appreciated, so if your basis is $12 a share, and it’s worth $11, the rule doesn’t apply. Also note that the NUA rule only works if you have not taken any distributions from the SSIP, so you need to apply NUA before any rollovers. Complicated stuff, so talk to someone knowledgeable if you are considering it.
Age 70½ or older. There are Required Minimum Distribution (RMD) rules on SSIP and the pension lump-sum once you leave Ford if you are over age 70½. In the pension, Ford uses an annuitization method, so they force a distribution to you of the amount of pension you would have taken during the year. This can cause a lot of tax liability if you took a buyout, got paid and had an RMD in 2019.
If you take it, what do you do with it? If you do take the buyout, what do you do with the after-tax proceeds? In our example, a Ford employee receiving a $90,000 buyout may net about $68,000. What to do with the $68,000?
- Knock off some debt. I’m a big fan of getting rid of debt, but only if you erase it and don’t replenish it. Paying off $20K of nondeductible debts like credit cards, unsecured lines of credit, or car loans, saves you the payment and the interest. So if the choice is to pay off a $20,000 car loan with 4.9% interest and a $450 payment or pay down a 4.9% mortgage, pay the car loan off. You gain the $450 a month, which you can pay on the mortgage, or, use for living, or save. Knocking off debt is like making an investment: you keep the interest you save.
- Bridge a gap. Some, probably many folks who take the buyout will not kick back and retire, but will go look for another job. In this case, stash the money in a nice safe place (bank, credit union, or maybe Ford Interest Advantage) and draw it as your reserve.
- If you already have a job or a retirement lined up, save and invest it. You’d probably want to set up an investment account and buy some tax-advantaged investments. These may include municipal bonds (which generate tax-free interest), dividend-paying stocks, or index funds. Watch the loads and fees. Be sure that you title the investment correctly. Use a ‘Pay on Death’ (POD) beneficiary designation or title the account in the name of your Revocable Living Trust. (We have a free book on estate planning here. You can request one in print through email or phone, or download with the link.) There are also opportunities to maximize your spouse’s savings plans, or even a ‘side-door’ Roth, which is a nondeductible IRA that is converted to a Roth. It allows you to make Roth contributions even if you are over the Roth income limits. We cover this in our book 50 Good IRA ideas, which like everything else I’ve offered, can be obtained from us for free.
Bottom line: The bottom line of this buyout discussion is that this is an important and complicated decision. There are lots of things to consider and a good plan is important. If you receive an offer, you have a significant opportunity to make some important decisions. Make a plan, and evaluate all the options. If you want to talk to one of our advisors, please contact us (firstname.lastname@example.org, web form, or call 248-641-7400). We can have a live or virtual meeting. We offer a one-hour complementary consultation. We’d need some information before our conference to give you the best possible advice. I hope you enjoyed this paper and hope it gave you food for thought. Best wishes on your journey.
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