If you are an ExxonMobil employee participating in the ExxonMobil Savings Plan, you have until December 15th to take advantage this year of a little-known provision in the Plan called making a "Special Contribution."
What Is It?
The IRS imposes limits on how much can be contributed each year to defined contribution plans like the EMSP. Most people are aware that they can contribute up to $19,500 this year to the Before-Tax Account and/or to the Roth 401(k) Account.
Another $6,500 "catch up" contribution is available to participants who are at least 50 years of age as of 12/31/2020.
Another limit is imposed on the total amount of contributions going into the account from both employees and the company. That limit this year is $57,000. The "catch up" contribution is outside of these limits—no need to consider it at all in calculating whether the overall limit has been reached.
If your contributions plus the Company's contributions add up to less than $57,000, you can make a special after-tax contribution equal to or less than the difference between $57,000 and the sum of your payroll deduction contribution plus the Company's 7% match (that was suspended in October).
An example may make all this clearer. Assume Susan makes $120,000/year and contributes 10% to the EMSP Before-Tax Account by payroll deduction. Over the course of 2020, she will have contributed $12,000 to the Before-Tax account. The company matched her contribution each month from January through September, before suspending matching contributions effective October 1st. Company contributions would have been 7% of $10,000 each month, or $700, times 9 months, which would have summed to $6,300. The total of Susan's contributions plus the company's contributions is $18,300 for 2020. The difference between $57,000 and $18,300 represents the potential "Special Contribution" that Susan can make. That difference is $38,700.
Why Might You Want to Make a Special Contribution?
- After-tax contributions can be used to offset potential taxes on the distribution of low-cost NUA shares. Exercising NUA is complicated, but just know that the difference between (1) the cost basis of all shares distributed and (2) after-tax contributions "attributed" to that cost basis is considered taxable ordinary income to you. The more after-tax contributions you have, the less taxable income you'll be considered to have received when you take out shares of XOM stock and use the Net Unrealized Appreciation (NUA) strategy.
- When you finally take distribution of your EMSP account, after-tax contributions can be used to fund a Roth IRA. That's tax-free growth and tax-free distributions down the road. Putting after-tax money into your EMSP is a way to set aside dollars for eventually funding a Roth IRA.
- After-tax dollars in the EMSP generate tax-deferred earnings. You can increase the earnings that will eventually be used to fund your IRA by adding after-tax dollars through a "Special Contribution."
- If you should ever need to take a withdrawal from your After-Tax Account in the EMSP, having more after-tax money in the account offers larger withdrawal options. The more you've contributed, the more you have available for a withdrawal.
- Finally, after-tax contributions can be returned to you tax-free when you finally take a distribution of your account at retirement. Think of it as putting aside money that you'll eventually access at retirement, and which, during the time it's been in the EMSP, has generated tax-deferred earnings for you.
How Do You Make a Special Contribution?
Special contributions can only be made by check, and the Saving Plan services team at VOYA requires that checks be received no later than December 15th.
If you're inclined to make a Special Contribution for 2020, we'd encourage you to go online to the EMSP website http://xomsavings.voya.com, download a Special Contribution Form, and overnight your check to the Voya Financial office in Braintree, MA. Special Contributions received after December 15th will be returned to you. If you have questions, you can reach Savings Plan Services at 1-877-966-4015.
This opportunity is available each year under current law. But the opportunity to take advantage of it for 2020 will end on December 15th. Give us a call if we can help. We're here for you.
Investec has been working with ExxonMobil employees and retirees for over 25 years. We're happy to have a non-obligation, complimentary discussion with you about your financial situation. Give us a call.
Disclaimer: The information provided here is general and intended as educational in nature. It is not intended nor should it be considered as tax, accounting, or legal advice. Investec Wealth Strategies and its advisors do not provide tax, accounting, or legal advice. We recommend you seek the counsel of your attorney, accountant or other qualified tax advisor concerning your situation. Information about the ExxonMobil Savings Plan is believed to be accurate, but no guarantees can be made, as Plan details are subject to change by the Plan sponsor. The author is not an employee of ExxonMobil and his views are his own.