Supplemental Executive Retirement Plans

Offering a competitive benefit program for top executives can give a company an advantage in recruiting, motivating and retaining the talented people who are the driving force behind a business.

An executive benefit plan does not have to be complicated to be effective. The Supplemental Executive Retirement Plan (SERP) offers meaningful benefits and effective features through a simple plan design. The U.S. government imposes monetary limits on the amount that employees and employers may contribute toward tax-favored qualified plans such as an IRA, 401(k) or 403(b). These limits leave many highly compensated executives who rely primarily on qualified plans for their retirement without enough savings to sustain their current standard of living.

While most of the rank-and-file employees can achieve full income replacement with qualified plans, caps on these plans and Social Security benefits often leave top key executives retiring at only 30 to 50 percent of their salary. These limitations amount to substantial reverse discrimination and create a retirement gap for your top executives. A SERP, like other non-qualified plans, is merely an agreement between the executive and employer to pay future benefits. To avoid the restrictive requirements of a qualified ERISA plan, a non-qualified plan may only be “informally” funded. The company can choose to informally fund the future obligation or leave the obligation unfinanced. We believe the best funding method is dependent on the company’s financial characteristics and the degree of risk that is acceptable to the company and plan participants.

Company Advantages with SERPs

Supplemental executive retirement plans using life insurance have several advantages to the company:

  • SERPs are relatively easy to implement and require no IRS approval or involved administration.
  • The company can select the executives it wants to reward with supplemental benefits.
  • The company controls the plan, owns the policy and has book income from policy cash value growth.
  • Cash value within the life insurance policy accumulates tax deferred.
  • When the supplemental income benefits are paid to the key employee, the company gets a tax deduction.
  • The life insurance policy can be structured to allow the company to recover its cost.

Executive Advantages with SERPs

Supplemental executive retirement plans using life insurance also have several advantages to the key executive:

  • The plan can be custom designed to meet the key employee’s specific needs.
  • Supplemental retirement income can be accumulated without incurring any up front taxes.
  • In the event the executive dies, the life insurance policy death benefits are available to fund the plan and provide a lump sum benefit to the executive’s beneficiary subject to the terms of the agreement.

Disadvantages of SERPs

  • The company does not get an immediate tax deduction on the premium payments. The deductions come for the business when plan benefits are paid to participant.
  • The cash value build up that accumulates inside the life insurance policy used to fund the SERP is subject to the creditors of the company and is not protected if the company becomes insolvent.
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