Understanding the Rules, Risks and Special Tax Incentives

As a Nike employee, it is common to have a desire to participate in the success of the company.  For many, this opportunity exists within the Nike 401(k) by investing retirement funds in Nike stock.  Even though it is available, is it a good idea and if so, how much is appropriate?  We will explore the rules, risks, and special tax incentives that exist within the plan.

The Nike Plan Rules and Limitations

1. Future Investments in the Nike Stock Fund are limited to a maximum of 10%, which includes Employee Contributions, Nike Matching, and Rollovers.

2. Existing Investments in the Nike Stock Fund:

   1. You can fully diversify out of Nike stock at any time by moving the dollars to a different available investment fund(s).

   2. If you want to increase your amount in the Nike Stock Fund from other existing investment funds, Nike will only allow it if the Nike Stock will be 20% or less of your overall account balance.

   3. Even though Nike places the 20% limit on transfers, there is no limit on the total amount of stock you can accumulate in the Nike Stock Fund. If you accumulate more than 20%, you can still contribute up to 10% to the Stock Fund.

Why the limitations on Nike Stock Fund within the RSP 401(k)?

You can see by the rules and limitations that Nike wants to encourage participation in the stock but in a responsible manner. It allows you to regularly contribute small amounts over time but with a cap of 10% at that time. It wants to discourage employees from making quick short-term decisions to move a large portion of their retirement savings into the Stock Fund by limiting that to 20%. To balance all of this out, it leaves an unlimited upside for the stock to grow in the 401(k) by having no overall limit in the value. Nike created guardrails to limit the risk and make sure that investment in Nike Stock is a long-term decision.

Understanding the Risks

Risk #1: Concentrated Stock Risk

Any stock or portfolio of stocks is subject to one type of risk known as Market Risk, which affects the entire stock market. Examples of factors that can create Market Risk are changes in interest rates, government regulations, taxes, and wars.

There is an additional risk that can affect you when you hold a large amount in a single stock. This risk is known as Company Risk, and it is related to the financial viability of that specific company. The emergence of new trends, technology, or even a scandal can decimate or take down an entire company. Examples of companies that have experienced this type of risk are Enron, Sears, Blockbuster, and AOL. This type of risk can be mitigated by diversifying and owning multiple stocks or investing in a diversified stock mutual fund or exchange-traded fund (ETF).

Risk #2: Employment Risk

If a company ever begins to struggle financially, the ramifications can likely be seen in the elimination of jobs and lower bonus’ for employees since they are tied to company performance. At the same time, the stock price of the company will typically drop, impacting the personal savings of anyone owning that stock. The effect of a stock price drop in your personal savings can become magnified if it happens simultaneously with losing your job or the elimination of your bonus.

How much Nike stock is too much?

The first step is to assess your overall exposure to Nike stock. Depending on the level at Nike, employees have access to different forms of Nike stock as part of the benefits package. It is common for Nike employees to accumulate a significant amount of Nike stock through benefits in the form of ESPP, Stock Options or Restricted Stock Units (RSUs). If you incorporate any Nike stock owned in your 401(k) and compare that to any other investments (retirement accounts, cash, real estate), what percentage of your assets are in Nike stock? So once you know the percentage, what is the right percentage for you?

Diversification and the “Rule of Thumb”

In the financial services industry, there is a rule of thumb that states that you should not own more than 5% or 10% of your overall investment portfolio in one single stock since it can create a significant amount of risk related to that Company Risk described earlier in this article. There definitely is prudence to this rule of thumb, but it can be challenging for employees to follow this “rule of thumb” strictly because of the stock benefits provided by Nike.

When It Can Make Sense to Exceed the Rule of Thumb

Part of maximizing your time at Nike is to take advantage of the benefits that are provided. Nike stock benefits all include a special incentive when compared to normal Nike stock. Whenever you consider risk, it should be evaluated in relation to the potential reward, so the higher the risk, the higher the reward should be for it to be a worthwhile investment. These incentives from the Nike benefits increase the reward so it can justify taking the additional risk of owning a concentrated amount of one stock.

The GAME-CHANGING Incentive for Owning Nike Stock in Your 401(K)

Net Unrealized Appreciation (NUA)

There is a unique tax strategy that exists within the Nike 401(k) that can make owning Nike stock more advantageous. The strategy is known as “Net Unrealized Appreciation” or “NUA” and applies to qualified retirement plans where you own company stock within the plan.

Net Unrealized Appreciation is the difference between what you have contributed (average cost basis) to the Nike Stock Fund and what it is worth today. Essentially, it is the growth above your contributions to the Nike Stock Fund.

The IRS has a provision that allows you to potentially receive a preferential tax rate on the NUA amount when you distribute Nike Stock from your 401(k) if you follow very specific rules. This preferential tax rate can save you between 13-37% in income taxes on the NUA amount depending on your specific situation.

When you make pre-tax contributions to your 401(k), future distributions will be taxed as Income when you take withdrawals from that account. If you follow the NUA Strategy steps, you would distribute all or part of the Stock Nike Fund as Nike Stock, pay taxes as Income on the contribution (Average Cost Basis) portion only. All growth of the Nike Stock (NUA) would be subject to a lower preferential tax rate of Capital Gains, which you can delay until you want to sell the Nike stock.

How to take advantage of the NUA strategy:

1. Nike stock must be transferred out of the 401(k) in-kind and cannot be sold before transfer.

2. The entire Nike 401(k) balance must be distributed in a single tax year. This could mean that the Non-Nike stock portion could be rolled into an IRA.

3. The distribution of the entire account can only be made after a “triggering event,” which are Death, Disability, Separation from Service, or Reaching age 59 ½.

As a future tax planning strategy, you could wait to sell the NUA Nike stock until you were in a low enough tax bracket and potentially have No Federal Capital Gains tax on the NUA amount.  The most common timeframe for this opportunity is after retirement and before age 73, when Social Security income and required minimum distributions from your IRAs can force you into a higher tax bracket.

The final and most important consideration is how your Nike stock exposure fits into your overall financial plan.  If you have a financial plan to show you how dependent your financial future is on Nike stock, this can help you make the most well-informed decision on your overall Nike stock exposure.

If you want to know more about incorporating Nike stock within your 401(k), please get in touch.

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

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For many years, Stock Options have been a foundational part of compensation for Nike leaders.  They have provided a unique opportunity to build significant wealth by participating in the success of Nike.  While Stock Options can have a great impact on your financial landscape, they can also create considerable confusion. In our experience working with Nike leaders, we have found that there are often misunderstandings about Stock Options and how they differ from actual shares of Nike stock. While we are responsible for the financial planning intricacies for our Nike clients, we wanted to provide a background on Stock Options and share the most important factors to fully maximize them.  

What are Nike Stock Options and how do they work?

Nike Stock options are the right to purchase shares of Nike at a set price (exercise or strike price) that lasts for up to 10 years.  I like to think of them as “coupons”, where you can use your coupon to buy an item for a price that is lower than it is currently worth.  Once you have used your coupon, you could proceed to immediately sell that item for the current price, capitalizing on the difference between the coupon price and the current market value.

Value of Stock Option = # of Options x (Current Stock Price - Exercise Price

To illustrate the difference between stock and Stock Options, it only seemed appropriate to use a shoe analogy.  Imagine you are given access to Limited Release Jordan shoes, and you have two different choices to select from:

So which choice is better for you?  It depends on what happens to the value of those Jordans in the future.  Will the value increase or decrease and by how much?  Do you need another pair of Jordans today? Or can you wait until the future to use them? To better understand how it can all play out, we put the 2 Choices against each other in three head-to-head matchups to determine the winner in each situation.

ROUND #1: Value of SHOES drops -10% to $900. 

Shoe Choice: you are still left with shoes that you could sell for $900 or keep if you think the value could recover and grow further.

Coupon Choice: your 10 coupons are worthless since there is no value in purchasing shoes for more than they are worth at $1,000 per pair.

WINNER: Shoe Choice

ROUND #2: Value of shoes increases +10% to $1,100

Shoe Choice: your shoes are now worth $1,100 and the value has increased by $100.  You can sell them or keep them if you think the value could continue to increase further.

Coupon Choice: your coupons would allow you to purchase 10 pairs of shoes for $10,000 (10 coupons x $1,000 per pair).  You could them resell them for $11,000 (10 pairs x $1,100 per pair) and earn a profit of $1,000 ($11,000 value - $10,000 purchase cost).

WINNER: Shoe Choice

ROUND #3: Value of the shoes increases +50% to $1,500

Shoe Choice: your shoes are now worth $1,500 and the value has increased by $500.  You can sell them or keep them if you think the value could continue to increase further.

Coupon Choice: your coupons would allow you to purchase 10 pairs of shoes for $10,000 (10 coupons x $100 per pair).  You could them resell them for $15,000 (10 pairs x $1,500 per pair) and earn a profit of $5,000 ($15,000 value - $10,000 purchase cost).

WINNER: Coupon Choice

THE POST MATCH ANALYSIS

Round #1: Shoe Choice (Nike Stock) won and underscores the risk of Stock Options and how the value can become $0 if the stock price does not increase. 

Round #2: Shoe Choice (Nike Stock) won but only by a small amount.  Even if the stock grows, low growth still favors Nike Stock over Stock Options. This is common if Stock Options are held for a short period of time. 

Round #3: Coupon Choice (Stock Options) won by a significant amount.  Substantial growth in Nike stock will favor Stock Options by a wide margin. 

UNDERSTANDING THE OPPORTUNITY AND RISK

The Shoe & Coupon Choices shows how the Stock Options can perform from the beginning, but what about Stock Options that you already own and have existing value?  At Human Investing, we created a Stock Option Volatility Analysis to show what the upside and downside volatility can be like for existing Stock Options.

If you examine the outlined bars, you will note that a 15% increase in Nike Stock price would result in a 101% increase in the value of that Stock Option. At the same time, a 15% decrease would drop this Stock Option value by -101%.  The owner of Nike Stock Options should be prepared and ready to experience significant short-term declines like the ones shown in the chart above.

The key to capturing the upside potential of Nike Stock Options is having a long enough time horizon.  Stock prices can quickly move up and down in the short-term but have a history of growth over the long-term (10+ years).  If you own Stock Options and can wait long enough before you exercise and sell them, that will give you the best probability of maximizing the value.

WHAT HAPPENS WHEN YOU LEAVE NIKE?

Since a longer time horizon is one of the most important components for success with Stock Options, what can disrupt that opportunity?

If you leave (voluntarily or involuntarily) Nike, you typically have up to 90 days to exercise your vested stock options and all unvested stock options are forfeited.  While it is uncommon, there have been some exceptions where the 90-day time period is extended.

In addition, if you meet specific “retirement” criteria, you can receive more favorable vesting for your unvested options.  There are two “retirement” benefits that are unique to Nike stock options:

1) Early Retirement: Age 55-59 with 5 years of Service

• Unvested Stock Options (less than one year prior to separation) will be forfeited. 

• All other unvested Stock Options will continue per the original vesting schedule.

• After your retirement date, you will have up to 4 years to exercise your options. 

2) Normal Retirement: Age 60+ with 5 years of Service

• Unvested Stock Options (less than one year prior to separation) will be forfeited. 

• All other unvested Stock Options will become fully vested as of the retirement date.

• After your retirement date, you will have up to 4 years to exercise your options.

The special retirement vesting options described above can be an extremely valuable benefit to plan for and take advantage of if you are close to or at age 55+.

HOW ARE STOCK OPTIONS TAXED?

As Stock Options vest and grow in value, there is no tax along the way.  Tax is only recognized when you exercise your options.  The dollars are taxed in the same way as your salary, at ordinary income tax rates, which can be as high as 55.45% since it includes federal, state, Social Security, and Medicare taxes.  This can push you into a higher income tax bracket and often disrupts your tax liability if not adequately planned for throughout the year. 

TAX & PLANNING STRATEGIES

Strategy #1 – Spread Option Exercises Over Multiple Years

Since exercising Stock Options creates additional taxable income, carefully exercising the right amount and dividing it over more than one year can help you lower your overall taxes. 

For example, assume you have taxable income is $450,000 and have $350,000 of Stock Options that you want to exercise. Your current income of $450,000 would be in the 35% tax bracket (2021) and you will not move up to the 37% tax bracket until your income exceeds $628,301 (2021).  That leaves room for $178,301 worth of stock exercises that would be taxed at 35% before it reaches the 37% bracket.  If you spread the $350,000 of exercises over two years ($175,000 per year) instead of exercising the entire amount in one year, you could avoid the 37% bracket and save about $3,500 in Federal taxes.

Strategy #2 – Coordinate Option Exercises with the Nike Deferred Compensation Plan

Another strategy is to coordinate the timing of your Stock Option exercise with the contribution of a similar amount of salary and/or bonus into the Nike Deferred Compensation plan.  This strategy requires the following steps:

• Step 1: Determine the amount of Stock Options you wish to exercise. As an example, we picked $300,000 of stock options to exercise.

• Step 2: Elect to defer the same amount ($300,000) into the Nike Deferred Compensation plan from your salary during Open Enrollment.

• Step 3: Exercise and sell $300,000 of Stock Options in the same tax year as you are contributing $300,000 to the Nike Deferred Compensation Plan

• Step 4: Use the proceeds from the $300,000 of Stock Option exercises to replace your salary and support your living needs.
  In the end, you would have essentially funneled your Stock Option proceeds into the Deferred Compensation plan and avoided paying any additional taxes. 

Learn more about the Nike Deferred Compensation Plan.   

Nike stock options are an incredible opportunity

Although Nike Stock Options are often misunderstood, they can provide an incredible opportunity to generate wealth.  To really maximize of the opportunity, we recommend that you are prepared to navigate the volatility, complexities, and tax strategy. 

If you have any questions or want to know more about how to handle your Nike Stock Options, please get in touch.

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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