I was recently working with a Shell executive client, let’s call her Lynn, who had been putting in long hours on a challenging assignment and was ready to retire by September 30, 2023. I worked with her to optimize a number of items in her financial plan, but the election that made the biggest difference to her—a difference of more than $40,000 in tax savings—was persuading Lynn to retire on October 15th, only 15 days later than her original September 30th retirement date.
Lynn came to see me for a second opinion. She wanted to be sure that her finances were properly set up for success and that she had everything in place to be financially independent in retirement. She told me how she planned to enjoy the Thanksgiving holiday with her family at her mother’s house on the East Coast, and take her husband and grown children to Prague for Christmas.
She had been with Shell for the entirety of her career, working her way up to an executive role, but had not been able to spend as much time with her family as she would have liked, for a number of years.
Our goal in assisting Lynn was twofold:
After many years at Shell, Lynn had a number of retirement benefit plans at her disposal. Not only was Lynn an exceptional saver throughout her career where she contributed to her Shell Provident Fund and qualified for her pension, but in doing so, Shell set aside additional funds for her retirement through the Shell 80 Point Pension BRP and Shell Provident Fund BRP non-qualified plans, which put her in great financial shape for retirement.
For many of its high-income employees, Shell offers two non-qualified retirement plans to circumvent various rules the IRS has implemented regarding income and defined benefit plans. One of these we often discuss with clients is the IRS Section 415 income limitations. Per these income limitations, after an employee makes $330,000 of eligible income in 2023, Shell is prohibited from contributing to the qualified defined contribution plan the employee qualifies for, the Shell Provident Fund.
By offering these non-qualified benefit plans, Shell is able to set aside the excess contributions for high-income earning employees into a non-qualified, or excess benefit, plan for both the 401(k) and the pension. These funds can be invested and grow until the employee’s retirement or departure from the company.
As an employee at Shell, you can receive up to a 10% contribution from Shell into your Provident Fund 401(k). The IRS limits both you and your employer’s contribution to your 401(k) to only the first $330,000 of income for 2023. This means that you and your employer can only make contributions to your 401(k) before you make $330,000 of eligible income. When your income exceeds the $330,000 limit, neither you nor your employer can contribute any more money to your 401(k).
Shell’s Provident Fund Benefit Restoration Plan (or BRP, for short) acts as an additional bucket for Shell to deposit any of the contributions they would’ve made on your behalf to. Let’s consider an example:
Let’s say Shell contributes the full 10% to your retirement plans. You are an employee making $450,000 a year in salary with a $50,000 bonus in February, which makes your total eligible compensation $500,000.
Shell’s 10% contribution amount of $50,000 to your retirement plans would be split as such:
|
Month |
Monthly Income |
Total Income Sum |
Total Sum of Provident Fund Contributions from Shell |
Total Sum of Provident Fund BRP Contributions from Shell |
|
Jan.
|
$37,500
|
$37,500
|
$3,750
|
-
|
|
Feb.
|
$37,500
+ $50,000 |
$125,000
|
$12,500
|
-
|
|
Mar.
|
$37,500
|
$162,500
|
$16,250
|
-
|
|
Apr.
|
$37,500
|
$200,000
|
$20,000
|
-
|
|
May
|
$37,500
|
$237,500
|
$23,750
|
-
|
|
Jun.
|
$37,500
|
$275,000
|
$27,500
|
-
|
|
Jul.
|
$37,500
|
$312,500
|
$31,250
|
- |
|
Aug.
|
$37,500
|
$350,000
|
$33,000
|
$2,000
|
|
Sept.
|
$37,500
|
$387,500
|
-
|
$5,750
|
|
Oct.
|
$37,500
|
$425,000
|
-
|
$9,500
|
|
Nov.
|
$37,500
|
$462,500
|
-
|
$13,250
|
|
Dec.
|
$37,500
|
$500,000
|
-
|
$17,000
|
As you can see, when you’ve reached the income limit in August, Shell is prohibited from contributing more than 10% of that income limit to your Provident Fund. This triggers the Provident Fund BRP contributions which allow Shell to contribute the true 10% of your full income ($50,000) towards retirement plans for you — $33,000 in the Provident Fund and $17,000 in the Provident Fund BRP.
In the same way as the Provident Fund BRP, Shell also offers a Pension BRP. After reaching the IRS income limits, Shell is also prohibited from contributing to your pension so they have a non-qualified excess benefit plan called the Shell 80 Point Pension BRP where they place those excess contributions on your behalf.
The Shell Provident Fund Benefit Restoration Plan (BRP) and the Shell 80 Point Pension Benefit Restoration Plan (BRP) are two types of non-qualified excess benefit plans that contain all pre-tax money.
At Shell, both of these benefit restoration plans payout 90 days after retirement. There is an exception if you are designated a key executive at Shell. If that is the case, the BRPs are distributed six months after termination.
If you retire 90 days or more from December 31st of any given year, each of your BRP’s funds will be paid out that same year (the tax year in which you retired). However, by retiring less than 90 days from December 31st, you can retire one year, and have all of your BRP funds paid out the following tax year to space out the taxes.
In the year the BRPs are distributed, they are taxed at earned income tax rates. Thus, the higher your taxable annual income when your BRPs are paid out, the higher the marginal tax bracket you will fall into for that year, and the higher percentage of taxes you will pay on the Benefit Restoration Plan funds you receive as well as on whatever other income you may have for the year.
Let’s go back to Lynn’s scenario. If Lynn retired on September 30th, her annual income would be $600,000 (base salary + bonus + Shell Performance Shares that vested earlier in 2023).
Between her Shell Provident Fund BRP and her Shell 80 Point Pension BRP, Lynn had an excess of $1,000,000 in Benefit Restoration Plan funds (BRPs). While this is a great form of additional savings, having these funds payout in 2023 would incur a huge amount of taxes at the highest marginal tax rate.
If Lynn would have received the $1,000,000 of compensation at the end of the year, the funds would have been stacked on top of the $600,000 of compensation she had already received. The entirety of the $1,600,000 funds would have been taxed at the max ordinary income bracket of 37% for 2023, in addition to the 0.9% Additional Medicare Tax stacked on top of the Medicare Rate of 1.45%.
Since Lynn’s income is over the Social Security Wage Base of $160,200, in this scenario her $1,000,000 BRP distribution would not be subject to social security tax rates as the 6.2% tax is only applied to the first $160,200 of earned income.
If Lynn decided to retire on September 30, 2023, her Shell BRP funds would be subject to the 37% ordinary income tax rate when distributed in 2023, as her total taxable annual income would exceed the $693,750 limit for married couples filing a joint tax return. Lynn’s Shell Provident Fund and Shell Pension BRP would be paid out in the 2023 year, given that Lynn’s retirement date is more than 90 days before the year’s end.
Remember, at Shell, the BRPs payout 90 days after retirement.*
As a result, her annual income would be a summation of her $600,000 in existing compensation for 2023 and her $1,000,000 Shell Provident Fund BRP and 80 Point Pension BRP payout, totaling $1,600,000 in annual taxable income. Thus, Lynn’s total annual income tax for 2023 calculated on this income would be approximately $567,646.40 ($521,914 in federal income tax plus $23,200 in medicare tax, $12,600 in additional medicare tax, and $9,932.40 in social security tax).
However, Lynn’s decision to wait until October 15th to retire enabled her to push her Shell Provident Fund BRP and Pension BRP distributions from 2023 to the 2024 tax year.
Postponing her retirement only 15 days allowed Lynn to utilize lower marginal rates for the first $693,750 of her Provident Fund BRP & Pension BRP distributions and save a substantial amount in taxes as a result.
One consideration for Lynn is Social Security taxes. She was required to pay Social Security taxes of 6.2% up to the Social Security Wage Base, which is $160,200 for 2023 on her earned income of $633,000*. Similarly, she had to also pay those taxes on her 2024 BRP payouts totaling $1,000,000.
Despite paying the additional Social Security tax on her BRP distribution, pushing the Provident Fund BRP and Pension BRP payout out to the following tax year would result in substantial tax savings for Lynn—totaling an excess of $47,753.10.
By choosing to retire just 15 days after her original preferred date, on October 15th rather than September 30th, Lynn’s Shell BRP payout distributions pushed into early 2024 and the funds will be taxed at a lower marginal rate.
Lynn’s income for 2023 totaled at $633,000* – the extra $33,000 due to the fact she worked one more pay period than she would if she retired in September. For 2024, Lynn’s taxable income will only be the $1,000,000 payout from her Shell Provident Fund and Pension BRP. Thus, her federal income tax for 2023 will be approximately $188,346.90 and her federal income tax for 2024 will be approximately $331,546.40, totaling $519,893.30 of income tax across the 2023 and 2024 tax years ($14,500 medicare tax, additional medicare tax of $7,200 and $9,932.40 of social security tax respectively would also apply).
By choosing to retire just 15 days later, Lynn’s taxes were reduced by approximately $47,753.10, and she can still enjoy the holiday vacations she planned for her family.
While it’s important to understand your company’s compensation plans and benefits, it’s also important to understand how your retirement savings options can be utilized in the most tax-efficient way. As we have demonstrated using Lynn’s situation, something as simple as the date you retire can open the door to tax-advantaged saving opportunities.
If you’re uneasy and think you may be missing something in your current plan, consult with your financial advisor, or contact a member of the Willis Johnson & Associates team to learn more about how to create a financial road-map that maximizes your retirement savings by strategically aligning your company benefits with your long-term financial plan.