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