A Supplemental Executive Retirement plan (SERP) is a non-qualified retirement plan that permits a corporation to provide additional retirement benefits to a select group of executives who may have their pension benefits limited because of government restrictions on qualified retirement plans.
For many businesses, their most important assets are their key employees and executives. One way your company can retain and attract top people is to reward them with additional executive compensation. A supplemental executive retirement plan (SERP) is a viable option to provide for these coveted key executives.
The acceptance of Supplemental Executive Retirement Plans (SERPs) has increased significantly in the last several years as corporations have come to realize that traditional pension plans and 401(k) plans do not replace an adequate percentage of the highly compensated executive’s pre-retirement income.
A SERP is a deferred compensation agreement between the company and the key executive whereby the company agrees to provide supplemental retirement income to the executive and his family if certain pre-agreed upon conditions are met by the executive. The plan is funded by the company out of cash flows, investment funds or cash value life insurance. Any deferred benefits are not currently taxable to the key executive. When paid, the benefits become taxable to the executive as income and tax deductible to the company.
Because of its many advantages, most companies use cash value life insurance to fund SERPs. The company purchases a life insurance policy on the key employee’s life that is sufficient to provide the future benefits outlined in the agreement. The company pays the premiums, owns the policy and is the policy beneficiary. The policy cash values grow tax deferred and can be used at any time by the company at its discretion.
At retirement, the key executive receives supplemental income, paid by the company, based upon the terms of the agreement. In the event of the key employee’s death, the policy’s death benefit is payable to the company which can be used to provide continued supplemental benefits or to provide a lump sum benefit to the executive’s named beneficiary.
For more info on SERP Plans call 760-208-2506.