NQDC Plans When Corporate Taxes Rise

No one is surprised that corporate taxes are on their way up. The Biden administration owned this strategy even during its campaign days. As the Wall Street Journal pointed out recently, someone has to pay for the proposed $2.3 trillion infrastructure plan.

The projected tax hike could see the corporate tax rate jump from 21 percent to 28 percent; it would also increase minimum taxes on the foreign income of US companies, and for individual taxpayers, the top individual federal income tax rate would return from its current 37 percent to the pre-Trump Administration rate of 39.6 percent.

These directions, to whatever degree they occur, are a red flag to companies that they should be reviewing their nonqualified deferred compensation (NQDC) plans in view of rising corporate taxes. As corporate tax rates climb, corporate owned life insurance (COLI), mutual funds and other creative strategies to fund nonqualified deferred compensation plans can become increasingly appealing to organizations.

For individuals, interest in participation in savings opportunities with deferred tax potential is likely to increase anytime personal taxes—and/or the marginal tax rate—rises. Most workers reasonably assume that in retirement, they will be in a lower tax bracket than their current tax bracket, making them better positioned to then receive compensation they previously earned but elected to defer.

Rising Corporate Taxes

While the 2017 Tax Cuts and Jobs Act tried to make US corporate tax structure more like that of other countries, the proposed Biden plan calls for pushing/motivating other countries to raise their tax levels to be closer to US guidelines. (See: Biden’s $2 Trillion Corporate Tax Plan Tears Up Republicans’ 2017 Blueprint)

Even as Republican and some Democratic lawmakers attempt to hold the line, negotiating a compromise increase of only 2 or 3 percent, the reality is, corporate taxes will increase. The question becomes how much and more importantly, to what degree will this increase impact first, your operational costs and second, your plan liability should plan participation increase.

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