If you're not a baseball fan, you might not recognize the name. Bobby Bonilla was an all-star third baseman and outfielder for the Pirates and the Mets mostly in the late 1980s and 1990s. He retired from Major League Baseball after the 2001 season. Bonilla was a six time all-star but my general recollection was that he was overrated and overpaid. Maybe its my inherent anti New York bias.
In any event, by the 2000 season, Bonilla had a $5.9 million salary while with the Mets, and they clearly didn't want him (nor did anyone else at that point really). The Mets worked with Bonilla's agent to make a buyout deal. They calculated the future value of an annuity with an internal rate of return of 8% over 35 years based on the initial salary of $5.9 million. So on July 1 of every year until the year 2035, Bobby Bonilla gets a check from the New York Mets in the amount of $1,193,248.20.
So...whats the tax issue?
If Bonilla had originally signed a contract that paid him $1,193,248.20 every year for 35 years, he'd subject to FICA on every single dollar over the years as he received it. Its difficult to predict the FICA wage base to 2035 but assuming $125,000 on average, he would have paid about $875,000 in total FICA over the life of the contract. Thats a lot of money.
However, because his contract called for $5.9 million, he paid FICA in 2000 in the amount of $91,750. He paid that FICA despite the fact that he didn't actually receive the money. It is what is known as non-qualified deferred compensation. In the years 2001-2035? His FICA is a big fat ZERO.
As it turns out, once FICA is paid on the original non-qualified deferred compensation for services (or in Bonilla's case lack thereof), no FICA is paid on any amounts received from that non-qualified compensation later on.
One other thing to keep in mind. The money is only taxed as income in the year he receives it. Not only that, but originally he would have been taxed in New York and New York City. Now? He lives in Florida, a state with no income tax. I doubt his agent thought that far ahead but I'd say this really worked out for his client.