Supplemental Executive Retirement Plan Business owners should consider a Supplemental Executive Retirement Plan (SERP) as one option in their Selective Employee Benefits Plan. A SERP is a non-qualified deferred compensation agreement between a company and select key employees in which the company agrees to provide a specified benefit amount at retirement, or should the employee die, become disabled or terminate employment. Benefits of a SERP For the company: Simple • No IRS restrictions or approval. • No government forms or reports. • No burdensome administration. Cost-Effective • You can recover the cost of the plan. • Enhances financial statements. • Minimal administration costs. Selective • No mandatory eligibility and participation rules. • You select which key employees participate. Flexible • No required plan provisions. • Custom tailored to each participant. "Golden Handcuff" Incentives • Recruit, reward and retain key employees. For key employees: Income-Tax Savings • Reduction of current income taxes. • Deferral of tax on investment earnings. Supplemental Income • Additional income at retirement, disability or termination of employment. Survivors' Benefits • Benefits are paid to surviving family members at death. When is a Nonqualified Plan Indicated? Restore Lost Benefits Many executives face the prospect of retiring on an income significantly lower, as a percentage of compensation, than that of the average employee. In part, this happens because the regulations governing qualified retirement plans often favor non-highly compensated employees. An NQDP would be an appropriate tool to restore the lost benefits due to the statutory limitations of a qualified 401(k) plan, to use a common example. Consider the following comparison between a manager with a current salary of $50,000 and a senior executive with a current salary of $250,000. Both are expected to work 20 more years until retirement at age 65; both are making maximum contributions to their company's 401(k) plan each year. The company matches the deferral at $.50 on the dollar, up to 6% of salary. Income Source Manager, age 45 Senior Executive, age 45 Current Salary $50,000 $250,000 Final Salary at 65 $126,348 $631,738 401(k) Account Value at Retirement (assumes an 8% annual rate of growth) $743,290 $952,315 Annual Post-Retirement Income from 401(k) Plan $74,390 $95,231 Post-Retirement Annual Income as Percentage of Final Salary 59% 15% As you can see there is quite a disparity in the results. In summary, one could state that qualified plans by themselves appear to be inadequate as a retirement planning tool for highly compensated executives. Reward or Recruit Key Executives A nonqualified plan is often used to reward a key executive with a special benefit which is not available to other employees. It may also be effectively used as a recruiting tool to attract talented executives to the company, without offering company equity.