There are several advantages of using a Supplemental Executive Retirement Plan to recruit, retain and reward key executives.
In this post, I am going to discuss the advantages of of using a Supplemental Executive Retirement Plan (SERP) and then discuss the disadvantages of using a SERP.
The advantages of Using a Supplemental Executive Retirement Plan (SERP.)
Both employer and participant can derive significant benefits from a supplemental executive retirement plan.
The advantages to an employer of establishing and using a Supplemental Executive Retirement Plan include the following:
- The plan provides “golden handcuffs” because benefits are forfeitable by the employee in the event of voluntary termination of service.
- The plan can be used as a substitute for a qualified plan or equity ownership for designated employees.
- The plan is flexible, allowing the employer to:
- discriminate in favor of one or more employees it wishes to reward
- design the plan to attract and retain important executives
- Benefits are normally deductible by the employer when they are paid to the participating executive.
- The employer has complete control over the following:
- selection of benefits
- timing of benefit payments
- plan values
- Benefits paid under insurance policies used to secure the promised benefits are generally tax-free to the employer.
- The employer may be able to recover some or all of the costs to provide the plan through life insurance proceeds.
- The plan is easy to administer.
The participating employee advantages of using a Supplemental Executive Retirement Plan are obvious and include the following:
- Plan costs are paid entirely by the employer—the participating employee has no out-of-pocket cost for the benefits he or she receives.
- No income is imputed to the participating employee during the period of employment; consequently, there is no current income tax liability for the employee.
- The plan provides various benefits, including:
- supplemental retirement income
- survivor benefits
- disability benefits
Though these are the advantages of using a Supplemental Executive Retirement Plan, there are also some disadvantages a business should consider.