Supplemental Executive Retirement Plan (SERP)

The value of offering customized benefits to business owners and selected key employees can be important. Since there are limitations on contributions or benefits received from qualified plans, a SERP can be an attractive benefit.

A SERP is an employer paid deferred compensation agreement that provides supplemental retirement income to a participant, based on the employee meeting certain vesting or other specified conditions.

Because it’s designed to supplement the company’s basic retirement benefits package, a SERP plan can help address an executive’s retirement income shortfall.

How a SERP works

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1
  • The business enters into a SERP agreement with selected participants. The business purchases a life insurance policy on the life of the participant with their written consent as an informal funding mechanism that the company may use to provide benefits outlined in the SERP agreement.
  • The business owns the life insurance policy, pays a non-deductible premium, and is named the policy beneficiary.
2
  • Upon a specified triggering event such as retirement, the business pays the promised benefit. This payment is generally tax-deductible to the business, and taxable to the participant. Payments may be made from policy loans and/or withdrawals1, corporate investments or cash flow.
  • If a survivor benefit is specified in the agreement, proceeds may be used to pay the taxable survivor benefits to the participant's family, creating a tax deduction for the business.
  • If the participant dies, the business receives the death benefits income tax - free.2
Considerations for the business
  • Cash values accumulate tax-deferred.3
  • A SERP can help businesses recruit and retain valuable employees.
  • Unlike qualified plans, the business decides which employees participate.
  • A SERP requires less administration and funding requirements than traditional qualified plans.4
  • The death benefit proceeds may help the business recover plan costs.
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1Policy loans and withdrawals will reduce death benefit and policy values.
2 If certain requirements under IRC section 101(j) are not met, the death benefits of an employer-owned life insurance contract entered into after August 17, 2006, will generally be taxable income to the employer to the extent the death benefit proceeds exceed the premiums paid.
3This type of plan will need to comply with IRC Sec. 409(a).