Supplemental Executive Retirement Plan (SERP)

By Robert McGowan

April 10, 2023

As a business owner, it’s important to understand the value of a Supplemental Executive Retirement Plan (SERP) and how it can benefit both your company and your key employees. A SERP is a non-qualified deferred compensation agreement that provides supplemental retirement income to select executives based on certain eligibility and vesting conditions. This type of plan can be an effective tool for recruiting and retaining top talent, as well as incentivizing their long-term commitment to your organization.

One of the main advantages of a SERP is its flexibility. Unlike qualified plans, such as 401(k)s, there are no strict IRS regulations or reporting requirements for SERPs. This allows you to tailor the plan to meet the specific needs of your key employees, including CEOs, CFOs, and other high-ranking officials. Additionally, SERPs require less administration and funding compared to traditional qualified plans.

To fund a SERP, your company can either use its current cash flow or purchase a cash-value life insurance policy in the employee’s name. The premiums paid by the company for the insurance policy are tax-deductible, and the cash value of the policy can be accessed by the company if needed. When the executive retires and begins receiving the supplemental retirement income, they will be taxed on the benefits received, at which point your company can claim a tax deduction.

A well-designed SERP can provide several benefits for your business. First, it can help attract and retain top talent by offering a competitive compensation package that goes beyond standard retirement savings plans. Second, it can increase employee engagement and loyalty, as key executives will be more likely to stay with your company if they have a substantial retirement benefit waiting for them upon meeting the specified conditions. Finally, the death benefit proceeds from the life insurance policy may help your business recover plan costs, further enhancing the financial benefits of implementing a SERP.

However, it’s essential to carefully consider the funding mechanism for your SERP to ensure its cost-effectiveness. While prefunding the plan may make sense from a tax and accounting perspective, it’s crucial to weigh the potential tax consequences of maintaining an investment portfolio to fund the SERP over the long term.

In summary, a Supplemental Executive Retirement Plan can be a valuable addition to your company’s compensation strategy, offering significant benefits for both your business and your key employees. By understanding the intricacies of SERPs and working with financial professionals to design and implement a plan tailored to your organization’s needs, you can enhance your ability to attract, retain, and reward top talent in a competitive marketplace.