Close

SERPs – What Are Supplemental Executive Retirement Plans?

Kevin Wenke

Kevin Wenke

Owner at Decision Tree Financial. CFP. CLU

A Supplemental Executive Retirement Plan (SERP) is a non-qualified retirement plan allowing a business to provide additional (supplemental) retirement benefits to select key employees in order to recruit, retain and reward them.

Here is how they work. A business has an employee (or group of employees typically key executives) they want to recruit, retain and/or reward.

They want to provide these key employees with a benefit that ties them to the company over a long period of time.

Something that just increasing their normal compensation won’t do because once additional normal compensation is paid the employee has nothing left to stay around for if the competition is offering them a raise or they are thinking of starting something on their own.

Enter the Supplemental Executive Retirement Plan (SERP) which has the ability to put “golden handcuffs” on the employees.

The employer can use several different types of vehicles to hold these assets and the employee who participates in the plan has no rights to those assets used to informally fund the benefits of the plan until they have reached a preset time frame.

When benefits are informally funded by the employer using insurance, the employer agrees to provide the participant with supplemental retirement benefits, survivor benefits, and, sometimes, disability benefits paid from its assets.

Upon the death of the participant and the payment of the policy’s proceeds to the employer, the employer typically recovers its plan costs.

A Supplemental Executive Retirement Plan is a nonqualified retirement plan. Nonqualified plans offer the sponsoring employer no income tax deduction for contributions to the plan, but they do permit the employer to tailor the plan to meet its particular objectives and they can be tax deductible to the business when they are paid to the employee in the future.

Because of the flexibility of such plans, an employer may offer participation to a single employee without having to include other employees. Or, it may offer one level of benefits under the plan to one employee and a different level of benefits to another.

This type of “discrimination” is not allowed under qualified plans but is characteristic of nonqualified plans such as SERPs.

Although no tax deduction is given to the employer for contributions to a SERP, the long-term benefits enjoyed by the employer are likely to be substantially greater than the forgone tax-deduction.

When benefits are paid to the plan participant, the amounts paid—amounts that are usually much larger in the aggregate than the total contributions—are then tax-deductible to the employer as business expenses.

Furthermore, the employer may structure the plan to recover its plan costs.

Sometimes SERPs are referred to as “golden handcuffs” because the participating employee’s promised benefits may be forfeited if he or she leaves the employer’s service before retirement or before a period of time specified in the Supplemental Executive Retirement Plan agreement.

Thus, the SERP acts as a restraint, inhibiting the participant from leaving the employer before retirement or the period recited in the agreement.

SERP Suitability

Supplemental executive retirement plans offer substantial benefits to both employers that establish them and to the employees chosen to be plan participants. Despite those significant benefits, SERPs are not appropriate in all situations.

For a SERP to be suitable, the employer must be able to continue in existence beyond the retirement of the plan participant. 

In addition, even if the employer can be expected to outlive the participant, a SERP is generally unsuitable as a benefit plan for the following:

  • A 5 percent or greater owner of an S corporation
  • A sole proprietor
  • A controlling shareholder of a regular corporation

Interested in learning more about Supplemental Executive Retirement Plans and other ways to recruit, retain and reward key employees?

Read more about the advantages and disadvantages of SERPs here or contact us and speak to one of our financial planners to ask specific questions and learn how our comprehensive financial planning service could benefit you and your organization.

Share this post

Share on facebook
Share on twitter
Share on linkedin
0 0 votes
Article Rating
Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments
0
Would love your thoughts, please comment.x
()
x