How Does Escrow Work?
Escrow is a word you’d like never to hear again if you’re an NHL player, and I don’t blame you. However, it can substantially affect your income, so it is important to understand how it works and plan accordingly. Here is a summary of how the NHL escrow system functions:
The NHL and NHLPA have an agreement to split all hockey-related revenues 50-50 between the players and the owners each season. Because the players earn fixed salaries and the hockey-related revenues generated by the league are not fixed (they vary based on ticket sales, ad revenue, etc.), the escrow system ensures that the 50-50 split occurs for the owners.
How Escrow Works
At the beginning of every year, the NHL predicts the hockey-related revenues for the upcoming season. Based on these predictions, they will withhold a percentage of the players’ paychecks. Why do they do this? Because sometimes (more often than not) the combined salaries of all players exceed their 50% share of the revenue for that season. Instead of chasing the players down in the summer and requesting a cheque, it is easier to withhold it at the source. At the end of the season, once hockey-related revenues are known with certainty, the NHL can determine if the players will get a refund or not.
How Escrow Effects Cash-Flow
It is essential to understand how escrow works because it will drastically affect how much money you have to spend compared to your stated contract. Escrow withholding varies annually, but it is typically safe to plan on having 10-15% taken off each cheque. It is also crucial to understand that you may or may not get this money back. For example, in the 2018-19 season, approximately 13% was withheld for escrow during the season, and only 3% was returned to players once revenues were realized.
Escrow is a frustrating and complicated topic for players. It’s even more nuanced in the current Covid-19 pandemic era, where hockey-related revenues will be drastically affected with no fans allowed at games.
Escrow is another piece in the complex cash-flow puzzle of a professional hockey player, and it is crucial to organize your spending and saving accordingly.
If you’d like to discuss escrow further or take a look at your financial picture overall, book a meeting below or give me a call now at 204-223-2166.
Adam Henry is a Winnipeg based Financial Advisor with Harbourfront Wealth Management. His practice is tailored towards working with Professional Hockey Players who are looking for investment, cash-flow management, & tax advice.
Disclaimer: The views expressed are those of Adam Henry, Investment Advisor and not necessarily those of Harbourfront Wealth Management Inc., member of the Canadian Investor Protection Fund