As we approach the end of 2019, a common topic for discussion with our Nike clients is around planning for charitable contributions.  Nike employees have many factors to consider if they are hoping to maximize both the Nike Donation Match program and the tax benefits of charitable contributions.

MAXIMIZING THE NIKE DONATION MATCH PROGRAM

In order to maximize the impact to your chosen charity, the first step is to find out if it is qualified for a match.  To check the qualified donation match list, simply log into the Nike Give Your Best website: https://nike.benevity.org/user/login.

Next, consider the matching rules and limitations outlined below.

Nike Donation Match Details:

• Dollar-for-dollar match for charities on the qualifying list

• Double match for donations to charities aimed at youth sports 

• Maximum donation match of $10,000 per calendar year

• Grant of $10/hour for volunteer hours up to a maximum of $1,000/year

Additionally, Nike has participated in Giving Tuesday, which was Tuesday, December 3rd this year.  If you make donations on Giving Tuesday, Nike will make a double match on all qualifying charities.  Thus, planning to make your donations on Giving Tuesday could be a great way to maximize the benefit to your charity.

Once you determine that your charity qualifies for the donation match and the amount you want to give, the next step is to decide how to fund the donation.

WAYS TO FUND THE DONATION

The most common method of funding a donation to charity is by contributing cash.  However, a frequently overlooked opportunity is to make contributions from appreciated investments.  For Nike employees this is typically some form of Nike stock.

There is an additional tax benefit to using appreciated investments for your donation.  All appreciated investments would normally be subject to taxes upon selling the investment, but this can be avoided/minimized if it is first transferred to and then sold by the charity.   The charity receives the investment, sells it immediately and the cash proceeds are used for the charitable cause without tax consequences. 

Since Nike employees and executives typically own many different types of stock, we will explore the advantages and disadvantages of each type in addition to outside options.

1. Nike Stock - This is Nike stock purchased individually, outside a Nike employee benefit.  This can be a good option depending on how long you have held the stock.   The entire market value of the stock can be tax-deductible if considered long term gains (i.e. held for longer than one year).  If the stock is held less than one year you only receive a tax deduction on the “cost basis,” which is the original amount you invested.  If this stock has the most growth (largest gain) of all your investments, then it could be one of the most tax-advantageous options for a donation.

2. Nike ESPP – Nike stock purchased through ESPP has a different set of tax implications and considerations.  Nike allows you to purchase the stock at a 15% discount and that discount is taxed as income whenever you sell the stock.  The discount is also taxable upon donating the shares to charity.  Additionally, the holding period to get the best tax treatment and receive a full deduction for the full market value is longer than normal Nike stock as described in the first scenario.  ESPP shares need to be held for at least 2 years from the grant date and at least 1 year from the purchase date to receive the optimal tax benefits.  Depending on the amount of growth in this stock, it may not be the best stock to utilize since the 15% discount will still be taxable upon the sale and the holding period rules may be challenging to track.

3. Nike Vested Restricted Stock Units (RSUs) and Restricted Stock Awards (RSAs) – RSUs and RSAs generally vest over a 3 or 4-year period.  Once this stock is vested, the stock becomes just like normal Nike stock (see option #1) and therefore should be held for longer than one year before donating it to a charity.  Since the vested shares become the same as option #1, the benefit in donating these shares depends on how much it has grown.  As with other stock, the larger the gain the better as you will avoid higher taxes if used as a donation.  Unvested RSUs and RSAs are not available for donation to charity.     

4. Nike Stock Options – Stock Options are non-transferable and not available to donate to charities.  You may, however, exercise the option and either transfer the exercised stock or cash proceeds to the charity.  This method does not offer a significant tax benefit since income tax is paid on the option exercise.  If you exercised stock options and held them as stock for a long period of time with significant growth, then it could become a beneficial method.

5. Stock in a Different Company (i.e. Amazon, Google, etc.) – Nike employees that have worked for a publicly-traded company in the past typically own sizable amount of stock from their previous employer.  This can be a good way to divest of that stock and diversify without having to pay additional taxes when sold.

6. Other Stock/Mutual Funds/ETFs – If you have other outside investments those can be also be an effective gifting option. These follow the same holding period rules as option #1.  Again, comparing the amount of gain in these investments versus other types of Nike stock is important in evaluating the optimal gifting and tax benefit option.

Once you have made the donation with one of the options above, make sure that you receive a receipt and submit it through the Give Your Best platform within 90 days of the donation.

Other Considerations

• Be mindful of the Nike Blackout period.  If you are an executive that is subject to this restriction, when selling Nike stock during certain times of the year you will want to make sure that you do not donate Nike stock during the Blackout Period.

• Tax Deductibility of Charitable Contributions: Charitable tax deductions changed significantly in 2018 with the recent tax law change from the Tax Cut and Jobs Act of 2017.  Be sure to check with your CPA or Financial Planner to see if your charitable contributions are tax-deductible for this year.  If they are not currently tax-deductible, you still may be able to take advantage of the tax deduction using a strategy known as “bunching.”  See the Human Investing blog post for details on the “bunching” strategy HERE.

• In addition, based on your total income, there may be limitations to the amount of your deductions in any given year.  Limitations are determined by your Adjusted Gross Income on your tax return. If you cannot take the full tax deductions now due to this limit, those deductions can be carried forward for up to 5 years in the future.

As we have outlined above, there are many options for Nike employees to consider when marking charitable gifts to the organizations that are important to them while at the same time maximizing the tax benefits.  These strategies can also be an effective way to diversify your exposure to one stock without having to pay a significant tax bill in the process. 

If you have questions or want to know more about how to plan your charitable giving as a Nike employee, you can schedule time with me on Calendly below, e-mail me at marc@humanvesting.com, or call or text me at (503) 608-2968.

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We wanted to explore a common question that we hear from our Nike clients: “Is the life insurance benefit offered through Nike a good deal?”  We will explore the hidden costs that exist within this benefit and compare it to alternatives to evaluate whether or not it is a good deal.

The Benefit

Nike provides a basic life insurance death benefit of half your annual salary up to a maximum of $500,000, paid by the company. 

Nike also provides employees with the opportunity to purchase additional supplemental life insurance in an amount up to 5½ of your salary up to a maximum of $3.5 million. 

If you combine basic life insurance and supplemental life insurance, the maximum amount you will receive is 6 six times your salary up to a maximum of $4 million of death benefit.

Nike does provide employees with a benefit credit to purchase up to 1½ times your salary of supplemental life insurance.  The benefit credit is, however, subject to income taxes.

On the surface, the Nike supplemental life insurance sounds like a good deal, right?  Before we can make that determination, we need to look at hidden costs as part of this equation.

Hidden Cost #1 - Imputed Income

Life insurance through your employer with a death benefit above $50,000 is considered a taxable fringe benefit.  The IRS puts a dollar value on this benefit called “imputed income," and the Imputed Income is taxed as wages, making it subject to federal, state, Social Security, and Medicare taxes in the same way that your salary is taxed. 

If you look at your Nike paystub, this item will show up under the category of “Add’l Taxable Other Compensation.” Within that category, you will see a line item called “Imputed Income -Life.”

The taxes that are created from the imputed income create an additional cost to the life insurance coverage that is typically missed and not considered.  The higher your income tax bracket, the more punitive the imputed income becomes.  

Hidden Cost #2 - Premium Age Bands

It is also essential to understand that the premium you are currently paying for your supplemental life insurance will not stay the same and will likely increase over time.  The primary reason for the increase is that premiums are subject to “age bands.”  Age bands provide a set cost for anyone within a 5-year age increment.  For example, there is an age band for ages 30-34, another for ages 35-39, another for 40-44, and continues up to age 70+.  The older you are, the higher the cost in that age band.  The premium cost that you thought was good may quickly become expensive as you reach new age bands. 

The back-up plan

Given the “Hidden Costs” that we shared, how do you know when the supplemental life insurance is a good deal or not?  To determine that, we need to compare it to the possible alternatives.  At Human Investing, we believe that the only appropriate option is inexpensive individual term life insurance. 

Individual term life insurance is typically purchased for a set number of years (10, 15, 20, 30 years), and the premium during that time is locked in and guaranteed not to change.  Before you are approved for the policy and the premium cost is determined, you will typically be required to go through a medical underwriting process, including a 20-minute medical exam, blood and urine samples, and possibly medical records from your doctor.

When the Nike Supplemental Life Insurance Benefit is a Favorable Deal

1. Simplicity and Time Savings are More Important than Lower Cost - The supplemental life insurance is easier to obtain than individual term life insurance.  During open enrollment, you can elect up to $500,000 of death benefit just by clicking “yes.”  An amount above $500,000 requires you to fill out a health statement, but that is still much easier than going through the medical underwriting needed for individual term life insurance.

2. Current Medical Issues - If you have any pre-existing medical issues that would either cause you to be declined from individual term life insurance or create cost-prohibitive rates, the supplemental plan may be the best way for you to obtain affordable life insurance coverage since you can avoid the medical underwriting.

3. Coverage Only Needed for a Short Time (Less than 5 Years) – If you think you only need life insurance coverage for a short time, supplemental life insurance can be the right choice since the cost is low for the short-term.  In our analysis, coverage becomes expensive in the intermediate to long-term due to the ongoing drag from hidden fees we discussed.  So how long do you need life insurance coverage?  Generally, income earners need life insurance to replace future income for their family for as long as they were planning to work.  The one exception is if they have saved enough funds to replace that future income for their family adequately.  The best way to determine this is to examine this within personalized financial planning projections.

When the Supplemental Life Insurance Benefit is an Unfavorable Deal

1. You Have Average Health or Better – With individual term life insurance, one benefit of medical underwriting is that you can reap the benefits of being healthy.  The better your health), the lower your cost may be.  Company-sponsored group plans, like the Nike supplemental benefit, base their rate on a broad group that is averaged together, which includes people from excellent health to poor health.

2.  You Need Life Insurance Coverage Over an Intermediate to Long Period of Time (7+ Years) – As we mentioned earlier, our analysis has shown that the cost of individual term life insurance is often much lower than supplemental life insurance by a significant amount.  This shows most prominently when coverage is needed for about seven years or longer.

3.  You Want to Maintain Coverage When You Leave Nike – If you leave Nike, it is challenging to maintain the existing coverage, and portability options are limited.  With individual term life insurance, you can keep the policy with you wherever you go.  Additionally, you will lock in a price based on your health and age when you purchase it. Waiting later to buy it will cost you more since you will be older, and any health issues that might arise during that time may cause the cost to increase further.

It’s Not Too Late to Change

Let’s say that you just completed open enrollment, and you are having second thoughts about the supplemental life insurance coverage you just enrolled in.It’s not too late to change your mind. You can purchase individual coverage and can cancel the Nike coverage mid-year under one of the available exceptions.Simply contact Nike HR and tell them that you have a "Family Status Change," and the status change is "Employee/Spouse/Child/Other Gains Other Coverage."Please keep in mind that we always recommend waiting to cancel any coverage until the new coverage replacing it is fully in place.

Where to Get Individual Term Life Insurance

There are many conflicts of interest in firms that offer life insurance. Therefore, we would recommend that you proceed carefully.  Many firms do not shop the market for the best company that fits you. Since many are affiliated with one specific insurance company, they are motivated by commission payouts and sales targets to funnel you to their affiliates.   We would also recommend staying away from more expensive cash value life insurance products like whole life and universal life insurance.

At Human Investing, we decided to stop selling commissioned life insurance since we felt strongly that it was a conflict of interest. This decision allows us to act as a Fiduciary 100% of the time.  To continue to serve clients well, we instead decided to partner with insurance firms that specialize in the specific type of insurance we believe in and will not try to upsell you on more expensive coverage.  If you would like a reference to one of those firms, just let us know, and we would be happy to share that information with you.

We’re here if you have questions

There is nothing fundamentally wrong or bad about Nike’s supplemental life insurance offer.  In fact, the Nike benefit is a more generous plan than we have seen at other companies.  The real issue is that life insurance offered through employers has hidden costs that can make the coverage expensive. If you have questions or want to better understand how to take advantage of the Nike Life Insurance Plan, you can schedule time with me on Calendly below, e-mail me at marc@humanvesting.com, or call or text me at (503) 608-2968.

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The Nike Deferred Compensation Plan can be a powerful way to lower your income taxes and save additional pre-tax funds above and beyond any 401(k) contributions.

With open enrollment approaching, we wanted to share the 5 most common mistakes we see with Nike Executives.

1. Ignoring Profit Sharing Contributions from Nike

If you earn over $280K (2019) in combined Salary & PSP, then Nike makes profit sharing contributions on your behalf directly into the Deferred Compensation plan even if you do not contribute to the plan.  These contributions are often viewed as insignificant, but they can quickly accumulate to a sizable amount.  We commonly see these contributions ignored and left invested in the default, which is cash, and thus miss out on multiple years of potential growth.

2. Forgetting about Evergreen Provisions

Evergreen provisions mean that any elections you make in the previous year will continue to roll forward each year if you do not participate in open enrollment. For example, if you decided to defer 10% of your salary last year and do not participate in open enrollment, you will automatically be re-enrolled at 10%. Deferred Compensation plans are more rigid than 401(k) plans and you cannot change your salary deferral to the Deferred Comp Plan mid-year. The takeaway is that if you want to make any changes to deferral percentages, sources or distribution options it is important to participate in open enrollment.

3. Not Having a Strategic Plan for Distribution Option Selection

In the Nike plan you have the option to select a distribution schedule in which the funds are paid out after leaving Nike. The options range from Single Lump Sum or Installments over 5, 10 or 15 years. It is important to remember that distributions are initiated soon after you leave Nike regardless whether it is voluntary, such as retirement/job change, or involuntary, such as being laid off/fired. The distributions are subject to ordinary income tax so if you receive a large distribution in a short period of time it may push you into a high tax bracket and create an unnecessarily large tax bill.

This is where detailed financial planning and tax projections can help minimize the tax impact. Planning out year by year the combined amount of these distributions with other anticipated income sources is crucial to managing your tax bracket and maximizing this benefit. Once you have elected a distribution option you can change it, but there are very specific rules outlined by the IRS that you need to follow. All changes need to be made at least 12 months in advance of leaving Nike, so it is important to do any planning ahead of time.

4. Misunderstanding the Investment Time Horizon

Determining an appropriate mix of investments is impacted significantly by the time frame for when distributions are needed.  Investments in stocks can be volatile in the short-term but can provide a greater return than safer short-term investments like cash or bonds over a long period of time (10+ years).  Funds in a deferred compensation plan are often mis-categorized and lumped together with more aggressively invested retirement funds like 401(k)s and IRAs. 

The time horizon for Deferred Compensation Plans are very different than IRAs and 401(k)s.  For IRAs and 401(k)s, you are not required to take distributions until the year you reach age 70 ½, and those distributions can be spread out over the rest of your life.  On the other hand, Deferred Compensation plans have a much shorter time frame since they are initiated after leaving Nike and have a set distribution schedule of between 1 and 15 years.  Due to the shorter time horizon with a Deferred Compensation plan, we believe it is prudent to have a more conservative investment mix than other retirement accounts and to incorporate it into your financial planning projections to determine the best mix. 

5. Missing Out on the State Income Tax Strategy

An often-missed state income tax strategy exists with Deferred Compensation plans. If you select the lump sum or 5-year distribution option, the state of Oregon will still tax your Deferred Compensation distributions regardless of what state you live in at that time of distribution.  If you move out of Oregon to a state with no/low income tax rates (i.e. Washington), it is advantageous to select a 10 or 15-year distribution option to avoid Oregon state income taxation.  If there is a possibility that you will move out of Oregon after leaving Nike, make sure to evaluate the local taxation compared to Oregon and plan accordingly.

We’re here for you if you have questions

In summary, the Nike Deferred Compensation Plan can be a very advantageous benefit from a savings and tax perspective but due to its unique rules and IRS requirements it is most effective when incorporated within a customized financial plan.  If you have questions or want to better understand how to take advantage of the Nike Deferred Compensation Plan, you can schedule time with me on Calendly below, e-mail me at marc@humanvesting.com, or call or text me at (503) 608-2968.

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In 2018 Nike opened Restricted Stock Units to their already generous benefit line up.  Now employees have the option of choosing either Stock Options, RSUs or, a combination of the two. 

The following content provides guidance—and highlights the benefits and drawbacks of each option choice.

RSUs (Restricted Stock Units)

An RSU is a grant of stock units that, after a specified vesting period, provides an employee with a pre-determined amount of company shares.  The vesting schedule for RSUs varies by company.  At Nike, the vesting schedule is typically 3-4 years.  You do not receive the stock until you are vested, but once vested the stock is yours and will always have value unless the stock price goes to $0.  

Many consider RSUs to be a less-risky investment. However, it is essential to remember that the realized value of your vested grant may increase or decrease depending on the movement of the stock price.  Once the stock vests, you may choose to either sell the stock immediately or hold it.  RSUs are taxed as ordinary income equal to the market value of the stock at the time of vesting.  One crucial planning consideration is that the actual tax due on the RSU is often higher than the amount of tax withheld at vesting.  This leaves many RSU option owners with an unpleasant surprise at tax time. 

At Human Investing, we help our clients plan for the additional they will need to set aside for taxes, thereby avoiding end-of-year tax surprises. Tax planning and anticipating future tax liabilities are important for both RSUs and Stock Options.

Nonqualified Stock Options

Nonqualified stock options differ from RSUs as they are an option to buy Nike stock at a specified price, called the grant price.  Nonqualified stock options can provide a considerable upside if the stock grants are held during a time of substantial growth in the underlying stock.   

The downside is that if the stock price does not rise above the grant price, the options will be worth $0 at vesting.  Another piece to monitor is that stock options expire if they are not exercised within ten years, leaving the owner without benefit.  When a stock option is exercised, it is taxed on the grant price as ordinary income.  If held for a qualifying period, there will also be a tax on long-term capital gains on the difference between the grant price and market price at the time of sale.

Making Your Choice

Ultimately, considering the following questions has the potential to improve your outcome.  Questions like:  How high is your risk tolerance?  What is your confidence in how the stock will perform in 3, 5, and 10 years?  Is your portfolio diversified or highly concentrated in company stock? Are you looking to retire or leave the company? 

While RSUs can provide more predictable income and tax planning, if you separate from the company, you will lose any RSUs that are not vested.   

Stock Options must be vested upon separation and are generally required to be exercised within 90 days of separation from employment.  This is a risk depending on the stock price at the time of departure.  There is one exception to this rule when you turn 55, but additional criteria apply.

Both Stock Options and RSUs are great benefits and a great way to build wealth. At Human Investing we walk our clients through these choices with a close look at their situation.  We help our clients to determine the best course of action with all their benefits with a comprehensive financial plan we call hiPlan. 

Want Us To HELP? Let’S TALK.

You can schedule time with me on Calendly below, e-mail me at marc@humanvesting.com, or call or text me at (503) 608-2968 to take your next steps.

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