Supplemental Executive Retirement Plan (SERP)

Defining Supplemental Executive Retirement Plan (SERP) A supplemental executive retirement plan is a non-qualified retirement plan tailored for key company employees, such as executives, providing additional benefits beyond those offered in standard retirement plans. Companies can choose from a variety of SERPs to ensure their key employees can maintain their current lifestyle in retirement.

Understanding Supplemental Executive Retirement Plan (SERP) A SERP serves as a deferred compensation plan that corporations frequently use to reward and retain essential executives. Since SERPs are non-qualified, they can be selectively provided to high-earning executives whose qualified plan contributions are restricted by top-heavy rules. The company and executive establish a formal agreement promising the executive a specific amount of supplemental retirement income, contingent on meeting vesting and other eligibility conditions. The company funds the plan from current cash flows or by financing a cash-value life insurance policy, and the deferred benefits are not immediately taxable to the executive. Upon retirement, the executive receives the income taxed as ordinary income by the IRS and state.

Advantages of a Supplemental Executive Retirement Plan Supplemental executive retirement plans are attractive options for companies aiming to optimize key executives’ retirement income. These non-qualified plans require minimal reporting and no IRS approval. The company manages the plan and can record an annual expense equivalent to the present value of future benefit payments.

When the benefits are disbursed, the company can deduct them as an expense. If a cash-value life insurance policy funds the benefits, the company benefits from tax-deferred accumulation within the policy. In most instances, the policy can be structured to allow the company to recover its expenses.

For executives, the plan can be customized to address their specific needs. The benefits accumulate for the executive without immediate tax implications. If funded with a cash-value life insurance policy, the death benefits can be utilized to provide continued supplemental payments or a lump-sum payment to the executive’s beneficiaries in case of premature death.

Key Takeaways

• A SERP is a non-qualified retirement plan offered to executives as a long-term incentive to remain with the company.
• SERPs provide tax advantages for companies and enable executives to earn benefits of up to 70 percent of their pre-retirement income. However, the tax benefits for the company and employee are not immediate.