Deferred compensation planning for executives, from Scotia Wealth Management

When does deferred compensation planning start to pay off?

It pays off once your income sits above the top federal rate threshold (the IRS sets 37 percent above $640,600 single or $768,700 married filing jointly for 2026) and you already defer the $24,500 IRS limit into your 401(k).

At that point the nonqualified plan is the only place left to move wage income into the years after the paychecks stop. The balance is an unsecured promise of your employer and can't be rolled into an IRA. Each year's election fixes the amount, the payment trigger and the payout form before you earn the money, and a single executive supporting a parent feels every one of those choices in her monthly cash once she retires.

Five answers to get before anyone reworks your deferral elections

Put these questions to any reviewer before you share your plan document. The last two count most if someone has already pitched you a full rebuild: a careful reviewer names the deferral years that stay exactly as they are. If the answer to the third question is a list of changes with nothing left alone, that tells you something.

• Will you read the plan document and every year's election confirmation, not just the balance statement? The statement rarely shows the payout form chosen for each deferral year.
• Can you show what each year deposits, from the last paycheck to the final installment, and how much of the balance the employer owes in each year?
• If I might move, will you price the state-tax effect of payout length, and tell me which elections to leave exactly as they are?
• Will every fee be shown to me and agreed in a signed document before you do any work, and will you send your numbers to my CPA?

What happens if the payout looks tidy but the old state still taxes it?

A state can keep taxing your payout after you move unless it is paid in substantially equal installments over at least ten years, under the federal rule for nonqualified deferred pay. An executive with $1.4 million deferred and a seven-year stream misses that shield, so at an illustrative 5 percent state rate she faces $10,000 annually, $70,000 in all.

Shorter installments feel cleaner, and that's the trap. Meera, 44, a single general counsel at a public payments company who supports her widowed mother, elected seven annual payments of $200,000 so the money ends at 62 (hypothetical, round numbers). That works out to about $16,667 a month from 55. She plans to move to a state with no income tax, and she holds $900,000 in vested shares with about $300,000 more vesting annually under a three-times-salary ownership guideline.

The arithmetic: $200,000 times 5 percent is $10,000 annually, and seven payments make $70,000. Ten installments of about $140,000 annually (about $11,667 a month) fall under the shield, so that tax drops to zero. The fix has two parts. Every new deferral year elects ten installments at the next enrollment window. For money already deferred, a 409A change doesn't count until 12 months have passed, and it moves the first payment back at least five years, from 55 to 60. We weigh that delay against the $70,000. It's a judgment call, and we'd lean toward changing only if the move is likely and other cash covers 55 to 60.

Timing can sink the change. A 409A change to ten-year installments, filed nine months before an executive's last day, comes back in the administrator's letter as never effective, because the 12-month wait hadn't run before she separated. The seven-year schedule stands, and her old state keeps its claim: $70,000 at the illustrative 5 percent rate on $1.4 million.

To check yours, open the administrator's election confirmation, which lists the payout form for each deferral year. The $5,000 monthly gap between the two streams can come from share sales once Meera has left and her company's ownership guideline (check the policy) no longer binds her. Markets go down as well as up, so we wouldn't count on the shares to the dollar.

When should your deferral elections get an extra look?

Elections get a full review every year before the plan's enrollment cutoff, and an extra one follows a planned move to another state, news about the employer's credit or a pending acquisition, a change in a parent's care costs, a plan amendment letter, or any thought of leaving within 12 months. Don't wait on that last one. A 409A change filed less than 12 months before separation never takes effect.

How Scotia Wealth Management checks each deferral year, in five steps

Our habit is to mark what works before we propose anything. Before Scotia Wealth Management suggests a change to a deferral year, it lists the years that stay as they are and says why. Many clients already have a sound schedule for most years, and the review often touches one or two.

• Step 1: you send the plan document, every election confirmation, the latest statement, your W-2 (box 5 shows Medicare wages that include deferrals) and last year's return.
• Step 2: we sort the balance by deferral year (amount, trigger and payout form) and mark the years that already work, which stay untouched.
• Step 3: we build the roadmap of deposits by year from the last paycheck onward, with installments, share sales and 401(k) money shown as monthly amounts.
• Steps 4 and 5: we test the state-tax shield, the 409A five-year push and the employer's credit, then write the recommended election for next year. The draft goes to your CPA, and after you file before the cutoff we check that the administrator's confirmation matches what you chose.

From the first call to a confirmed election

In week one, at the first call, you decide whether to share the plan document and confirmations. In weeks two and three we sort the deferral years, and you pick a target retirement age (55 in the example) and where you might live afterward. Week four is the review meeting: you choose next year's installment length and whether to file a 409A change. In weeks five and six you submit elections before the cutoff, we check the confirmation letter against the roadmap, and the next review date goes on the calendar.

Where this service stops

Deferred compensation planning can't make the balance safer, because it stays an unsecured promise of your employer. If the company's finances look shaky, or you'll need the cash within a few years for something like a parent's care, deferring less beats any payout schedule. State-specific questions still go to a CPA in the states where you work and plan to live. If you want it, Scotia Wealth Management serves clients anywhere in the country, with reviews by phone or online, and the shortcut we give most executives is this: if you might retire to a state with lower or no income tax, choose installments of at least ten years for each new deferral year, unless you need the larger early payments more than the state tax they can cost.