An Overview of Nike’s Deferred Compensation Plan

Nike’s Deferred Compensation plan offers tax advantages and retirement benefits, helping to attract and retain top talent. Participant contributions primarily fund this plan, which may also include profit-sharing to make up employer contributions. By deferring salary, bonuses, and long-term incentive payments, employees can postpone income tax liability to future years.

Eligible high earners can elect their contribution percentage for the upcoming year and establish a payout schedule each year, typically in early November. Contributions can range from 1% to 100% of eligible compensation, and participants can choose from various distribution options, including a lump sum or quarterly disbursements over 5, 10, or 15 years. Additionally, participants can select a different distribution method with each new deferral election.

Under certain circumstances, you can change the distribution election to a lump sum, 5 or 10 years. Note that a 15-year distribution is only available as an initial election.

Why use the Nike deferred compensation plan?

Many who qualify for the plan are in a higher tax bracket. By having an option that allows deferral of income, participants may be able to reduce their tax liability over time. In the best-case scenario, an individual contributes a percentage of their income to reduce their effective tax rate, and they experience retirement after their time at Nike. The goal is to be in a lower tax bracket for the foreseeable future. Having deferred compensation income may allow an individual to delay Social Security or retirement plan benefits. Let’s consider an example:

Jennifer is 40 years old and working at Nike as a senior director. She earns $275,000 annually. Her goal is to retire at age 55 and delay taking Social Security and retirement plan distributions until age 70. Jennifer is deferring 32 percent of her income ($88,000) contributed over 15 years, with a 15-year distribution schedule.

At the time of retirement, and for illustrative purposes, let’s assume 7 percent annual growth, Jennifer’s plan has grown to roughly $2.2 million. When distributed over 15 years, the funds will replace most of the income she received in her working years.

In Jennifer’s scenario, as shown below, $275,000 of ordinary income would put an individual in the 35 percent tax bracket. By contributing 32 percent to Nike’s DC plan and maxing out contributions to Nike’s 401(k), Jennifer can quickly reduce her tax bracket to 24 percent, evening out her tax liability over time.

Risks of the Nike deferred compensation plan

Sometimes, a deferred compensation plan may not be the best option and can increase a participant’s effective tax liability if the strategy doesn’t unfold as expected. Consider:

• Overcontributing can lead to unintended tax consequences. Imagine Jennifer, who chose to defer half of her salary for 20 years before retiring at age 60. Her deferred compensation plan had grown to approximately $5.6 million when she began receiving distributions. Since the funds were distributed over 10 years, she ended up in the highest tax bracket, negating much of the tax benefit she initially sought.
• Employment changes can create issues. If a participant switches jobs, the deferred compensation distribution schedule is triggered. If they earn the same or more at a new company while receiving deferred compensation payouts, the tax advantage can quickly become a burden, pushing them into a higher tax bracket.
• Deferred compensation can concentrate your wealth in place. As these plans are exempt from many retirement plan regulations, they function as an unsecured promise from the employer to pay in the future. Unlike traditional retirement accounts, the participant does not own the assets, creating additional risk if the company faces financial instability. In short, deferred compensation participants may not receive payouts if Nike faces financial issues.

Future tax rates add another layer of uncertainty. Over the past three decades, tax rates have been at historically low levels. Deferring income today might mean paying taxes at a higher rate later due to changes in tax laws or personal financial circumstances.

Key questions to ask about Nike’s deferred compensation

• How long do you plan to stay at Nike?
• When can you retire, and when do you want to retire?
• What income tax bracket are you currently in?
• Which part of your income might make the most sense to defer?
• What income will you have in retirement? Don’t forget the required minimum distributions from tax-deferred plans (i.e., 401(k) or IRA).
• How do you feel about a portion of your assets at risk and dependent on Nike’s financial stability?

Getting help

Brighton Jones is ready to help Nike team members think about these questions. We have CPA tax professionals who are qualified to provide tax advice. We are happy to discuss your current situation, goals, and any additional questions you have. Schedule time with our team to better understand the full costs and benefits of the Nike deferred compensation plan so you can leverage your portfolio options and avoid tax surprises.

This content is provided for informational purposes only and should not be construed as individualized advice. For individualized advice, please consult with your adviser.