The SERPLUS plan at Intel is an incredibly powerful tool. When used correctly it offers high income families the opportunity to reduce their taxable income now, protect their investment earnings from recently increased capital gains, dividend, and interest income taxes, and can provide a lucrative income stream in retirement. Like any power-tool though, there are features and risks you want to familiarize yourself with before you go hacking away at your cash flow in a 10-minute between-meeting interlude during the open enrollment period. You know who you are…

This open enrollment window typically lasts a few weeks in November. Around the first week of the month you will get a reminder that this window will be opening soon for the following year, and to make your elections at this time. But what are you electing for, exactly? Allow me to provide you the short-and-sweet version of the “owner’s manual” for this particular tool (you can find the long version in your company’s public filings, Exhibit 99.1).

What is SERPLUS, and how does it work?

The SERPLUS plan is a non-qualified deferred compensation plan. You defer income into the plan on a pre-tax basis much in the way you would defer income into your traditional 401(k) plan, only without the annual IRS-mandated cap which qualified contributions have. Like the 401(k) plan, the idea is that you get to defer the tax now and let capital gains, dividends, and interest compound on a tax-deferred basis. Then when it comes time to distribute those deferrals and earnings you may be in a lower tax bracket than you are now. That said, just because the deferral works in a similar way, there are a few BIG differences in how SERPLUS works. Here are some highlights:

  • Unlike the qualified plan (401k for example), assets in the SERPLUS plan are on Intel’s balance sheet as an unfunded liability- not yours as an asset. This means most banks and financial institutions won’t recognize the balance for the purposes of accredited investor status or the likely future income stream to help qualify you for a mortgage. This has a lot to do with the fact that in the rare event Intel should go insolvent, you would essentially become a creditor to Intel in line behind more secure creditors. Don’t count on a divorce attorney seeing it that way, though. Put simply, in the rare event that Intel goes the way of Enron, you could lose all or a majority of what is in your SERPLUS account.

  • Not everyone can participate. Because of its non-qualified status Intel reserves the right to determine who can and who cannot participate in the plan, and they currently base this on achieving a grade level in the double-digits.

  • No borrowing from the plan is allowed.

  • Intel isn’t technically obligated to actually invest in the funds you select your SERPLUS assets to go into, and can change the method by which they determine hypothetical earnings and account values at any time.

  • The distribution schedule cannot be changed after it is declared & that year’s enrollment period has ended. Once you elect receiving the following year’s contribution in a lump-sum, a 5-year, or a 10-year payout schedule, that is how those funds will be distributed in the target year or year of, or year after, you leave, whichever you choose during the election period.

So now that you’ve gone over the concept, it’s time to start thinking about enrollment. As you start the enrollment process…

You WILL be asking yourself some variant of the following three questions:

  • How much, if anything, should I defer from bonus and salary?
  • When should I distribute these contributions?
  • How should I invest these contributions?

The problem with these questions, though, is that they are all about the cart and pay no heed to where the horse is going.

Here are three questions which I ask of all of our clients at Baehr Wealth Management at Raymond James, and a few thoughts behind each:

1. How much longer do you plan on working at Intel, and if you left would it likely be for another job or for retirement?
My business travels take me from Chandler to Santa Clara, Hillsboro to Folsom, on a fairly regular basis. I’ve sat down with executives in Hillsboro who spend their weekends backpacking the lush Columbia River Gorge and pulling up Dungeness crab from Tillamook Bay who wouldn’t dream of working anywhere else (not a whole lot going on in Hillsboro besides Intel and the great outdoors, folks). That said in Santa Clara I’ve met those who would rather surrender 39.6% to the Feds, be pillaged another 13.3% from California, and get squeezed through the grinder of “surcharges” and the loss of exemptions than put a dime into SERPLUS as they know they could be across the street at Google or Oracle next week if the offer is sweet enough. In either case, if you know you’re only a year or two from leaving Intel, the tax deferral benefit is less valuable on a relative basis than it would be for someone who is further off from retirement and plans on staying for the long-haul. This concept of time horizon comes into particular relevance as to how those funds should be invested as well, as sequence of returns risk becomes a powerful force during the distribution phase of retirement.

2. How does the income & asset side of your balance sheet look?
Let’s start with what’s in the bucket already; what % of your net worth is in the SERPLUS account? That one’s a bit of a trick question, as your SERPLUS balance isn’t technically part of your net worth, remember? If most of your eggs are in the SERPLUS basket, it might be time to dial it down a bit and explore other avenues. How about income- do you expect yours to remain pretty much the same next year? Do you have any large tax losses, capital gains, or other unusual income likely to hit next year? Things like stock option expirations (a big one the last few years), real estate sales, or business liquidations could make huge impacts on your tax and cash flow situation and could be opportunities to increase the contribution amount provided you aren’t too concentrated in SERPLUS already.

3. How does the spending & liability side of your balance sheet look?
Let’s look at your liabilities; any large debts eating away at your cash flow and affecting your DTI (Debt-To-Income ratio)? Any non-tax-deductible debt, or mortgage debt in excess of $1,000,000? Paying off high-interest debt now and improving your ability to save later may be a wiser move than loading up on SERPLUS, especially if you have a lot in there already or are close to leaving or retiring. What about spending- how much are you spending now, and do you expect that to be consistent next year? Are one of your kids off to the Ivy Leagues next year, are you dead-set on pulling the trigger on that sailboat you’ve always wanted, or taking a $50,000 dream vacation over your upcoming sabbatical? Breaking down your typical monthly expenses and then estimating upcoming one-off expenses is a great starting place to determine % deferral election possibilities. I have a wonderful cash flow exercise we take our clients through which helps to get the mind thinking outside the box in an effort to avoid being caught in a negative cash flow situation due to overly-optimistic contribution settings, which of course cannot be changed until the following year.

Final Thoughts

Going back to my tool analogy, if SERPLUS was literally a power tool it would be a Dremel, as a delicate touch and thorough consideration of a myriad of factors is prudent to produce best results. I hope I have helped by providing three topics for you to think about while at the same time demonstrating that your election decisions should hinge upon a number of complex factors pertaining to your individual circumstances.

We take our clients at Baehr Wealth Management at Raymond James through a personalized version of this process each year, providing guidance through multiple scenarios when appropriate.

If you are interested in finding out how Baehr Wealth Management at Raymond James can provide insight as you determine your SERPLUS elections, or creating a financial plan and investment strategy which aligns with your goals and current stock position in INTC, please send us an email at matt.baehr@raymondjames.com.