If you're an M7+ executive at RTX or legacy Raytheon, you have access to non-qualified deferred compensation plans that most other employees don't. These plans allow you to defer significant portions of your compensation, reduce current taxes, and create a flexible retirement income stream.
But the decisions you make during enrollment have permanent consequences. This guide walks you through the mechanics, the decisions, and how to coordinate deferred comp with your pension, 401(k), and complete retirement plan.
Two Active NQDC Plans at RTX
RTX maintains two separate non-qualified deferred compensation plans for eligible executives:
- RTX Compensation Deferral Plan (DCP): Allows deferral of base salary and cash bonuses before taxes. This is the primary tool for most executives.
- Performance Share Units Deferral Plan (PSU Deferral): Allows deferral of receipt of PSU shares beyond normal vesting. Used strategically to optimize income timing.
We'll focus primarily on the DCP, the more powerful and flexible of the two.
How the RTX Compensation Deferral Plan Works
The mechanics are straightforward:
- Enrollment: Enrollment closes in June each year for deferrals in the following calendar year.
- Deferral Election: You specify what percentage of base salary and/or bonus you want deferred. The deferred amount is withheld before federal and state income taxes are calculated.
- Account Growth: Your deferred balance accumulates in an unsecured account. RTX credits your account with returns tied to investment options you select (similar to a 401(k) menu).
- Distribution: You select when distributions begin: separation from service, a specified date in the future, or a change of control event.
- Payment Form: Lump-sum or installments (e.g., 5 or 10 years). This election is largely irrevocable under IRC 409A.
Critical point: These funds are an unsecured obligation of RTX. In bankruptcy, they would be treated as unsecured claims. The investment options within the plan - including company stock - don't change the underlying risk.
Key Election Decisions
Three major decisions require careful analysis during enrollment:
1. How Much to Defer?
Common deferral amounts for executives range from 10% to 40% of total compensation. The decision depends on:
- Tax Bracket: Higher tax brackets = larger deferred comp benefit.
- Expected Retirement Income: If you expect retirement income to be lower, deferring into lower-tax-bracket years creates arbitrage.
- Liquidity Needs: NQDC is locked away until distribution. Don't defer if you need cash flow today.
2. When Should Distributions Begin?
Three primary options:
- Separation from Service: Distributions begin within 6 months of leaving RTX. Flexible but can create tax clustering.
- Specified Date: Example: “January 1, 2035.” The plan distributes on that date regardless of employment status. Good for targeted retirement income timing.
- Change of Control: Distributions triggered by acquisition or merger. Less common election but relevant if RTX faces acquisition risk.
3. Lump-Sum vs. Installments?
Once distributions begin, you receive your deferred balance as either a single payment or in installments (5-year, 10-year, life expectancy, etc.). IRC 409A limits changes to this election, so choose carefully.
If you expect income-heavy years in early retirement, installments let you spread recognition. If you expect lower income early, a lump-sum into a lower-tax-bracket year is valuable.
Coordinating With Pension and 401(k)
Here's where coordination becomes critical. Most RTX executives have three income sources in retirement:
- Pension: Fixed monthly annuity (or lump sum, if elected).
- 401(k) Distributions: Taxable withdrawals from your RTX 401(k) balance.
- DCP Distributions: Deferred compensation received in specified years.
All three stack on top of each other for tax purposes. If your pension is $5,000/month and your DCP distributions begin in year two of retirement, you have two income sources competing for favorable tax brackets.
Model all three simultaneously. Map when each source begins, how much each generates, and what that means for your combined tax bracket. Often, staggering DCP distributions 2-3 years after retirement (once 401(k) withdrawals are optimized) makes tax sense.
The PSU Deferral Plan
Performance Share Units vest based on achievement of company or business unit metrics. Normally, PSU shares settle (tax is recognized) at vesting. The PSU Deferral Plan lets you defer receipt of shares beyond normal vesting - useful if you expect income to be lower in a future year.
Two considerations:
- Share Price Risk: Between vesting and deferral settlement, you bear RTX stock price risk. In a down market, your deferred PSUs are worth less at distribution.
- RTX Credit Risk: Like the DCP, PSU deferrals are unsecured company obligations. Extended deferral periods increase your exposure to RTX bankruptcy risk.
PSU deferral is most valuable if your income is expected to be significantly lower in the deferral year (e.g., year of retirement). Otherwise, the stock price and credit risks outweigh the tax benefits.
What Jay Does
When helping RTX executives with NQDC elections, I build a comprehensive model:
- Complete Compensation Model: Map salary, bonus, RSUs, PSUs, and potential NQDC deferrals across your career through retirement.
- Tax Scenario Analysis: Model different deferral amounts and distribution timings under various federal and state tax scenarios.
- Retirement Income Projection: Layer pension, 401(k), DCP, and Social Security to build a cohesive retirement income plan and identify optimal distribution sequencing.
- IRC 409A Compliance: Ensure all elections meet IRC 409A requirements and avoid distribution delays or penalties.
- Credit Risk Assessment: Evaluate RTX's financial health and consider concentration risk if you're deferring significant amounts.