Supplementary Executive Retirement Plan (SERP)
A Supplementary Executive Retirement Plan (SERP) is an employer-sponsored compensation plan that incentivizes high-performing and talented employees to continue working for a business long-term. Essentially, it is a talent-retention incentive.
What is a SERP?
A SERP (Supplementary Executive Retirement Plan) is an employer-sponsored, non-qualified, deferred compensation plan. Typically, a SERP is offered in addition to a qualified retirement plan (401(k)'s) to reward the top high-performers in the company.
An employer may want to offer a SERP to high-performing employees as a way to keep employees on during an acquisition, which may make the overall deal more attractive.
As with other employer-sponsored plans, there is a timetable associated with the payout of a plan. After an employee has worked through the duration of the SERP agreement, then they will receive the full amount.
There are both advantages and disadvantages to using a SERP. For example, one advantage may be that no taxes are paid on the amounts contributed to the account until the benefits are received by the employee.
On the other hand, SERP's are not a guaranteed payout, and are therefore not protected if the company becomes insolvent.
Important SERP Terms
Employer-sponsored Retirement Plan
An employer-sponsored retirement plan is any kind of retirement plan that is initially owned and offered by the employer and becomes the property of an employee after a certain amount of time, usually a number of years. The time period before full employee ownership is called a vesting period.
Non-qualified Retirement Plan
A non-qualified retirement plan is different than more traditional retirement plans like 401(k)'s. A non-qualified retirement plan has the characteristics of a taxable account (individual or joint account), and taxes on earnings are paid only when withdrawing money from an account.
Deferred Compensation Plan
A deferred compensation plan is a payment plan that offers a set amount of money or bonus incentives that are disbursed to an employee after previously agreed-upon terms are completed.
Characteristics of a SERP
An employer choosing to use SERPs as an incentive and retirement benefit has complete freedom to choose which employees can participate in a SERP.
No Income Limitations
Traditional qualified retirement accounts are notorious for their income contribution limits. A SERP can provide as large of a benefit as they like to the employee without any consideration of income restrictions.
At the time the SERP is paid out to employee, either at retirement or at the end of the contracted period, the company receives a tax deduction for the completion of a SERP.
Advantages of a SERP
- SERPs are non-qualified and require no IRS approval, and have minimal reporting requirements
- Companies can use a cash-value insurance policy to fund benefits, which affords the company tax-deferred accumulation inside the policy
- Death benefits are available to provide a continued supplemental payout to executive beneficiaries
Disadvantages of a SERP
- When funding an SERP, the company does not receive any immediate deduction on payments
- SERPs are not guaranteed, and the payout is not protected if the company becomes insolvent
- If there is no risk of forfiture, the IRS may label an SERP as fully funded, and immediately tax the employee