Supplement Executive Retirement Plans – Advantages and Disadvantages

Kevin Wenke

Kevin Wenke

Owner at Decision Tree Financial. CFP. CLU

Supplemental Executive Retirement Plans (SERPs) have advantages and disadvantages to consider when determining if they are the right solution for an organization.

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.

The disadvantages of using a Supplemental Executive Retirement Plan include:

Employer contributions to purchase an asset used to informally fund the promised SERP benefits—including life and disability insurance policies—are not tax-deductible to the employer.

An exception applies to a disability income insurance policy owned by the executive and paid for by the employer.

  • The employer assumes a contractual liability to provide the benefits promised under the SERP agreement.

Although the participating employee has no cost, either direct or indirect, for the plan benefits until they are distributed, the following are generally seen as SERP participant disadvantages:

  • Benefits are normally forfeited if the employee leaves the employer’s service for any reason other than retirement or if he or she competes with the employer before retirement.
  • Unlike the assets that are set aside in qualified retirement plans like a 401(k) or profit sharing plan, the assets securing the promised benefits when using a SERP are attachable by the employer’s creditors.

Before saying “NO!” to establishing a SERP because of the disadvantages of using a Supplemental Executive Retirement Plan, consider their benefits.

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