Supplemental Executive Retirement Plan or SERP is a non-qualified deferred agreement between an organization and the key employee, where the organization agrees to offer supplemental retirement income to the employee and his/her family upon the fulfillment of certain pre-defined conditions from employee’s end. These are the benefits that the organizations offer to its key executives above and beyond their usual retirement benefits like IRA, 401(k) or NQDC etc. Supplemental Executive Retirement Plan is financed by the organization out of cash flows, cash value life insurance or investment funds and is not taxable as well to the employee. However, the benefits become taxable to the employee as income. These also become tax deductible to the organization at the same time.
Goal of Supplemental Executive Retirement Plan
The main goal of Supplemental Executive Retirement Plan is to offer some added benefits to the key employees of an organization who play pivotal roles in the success of the organization. As a result, organizations always try to keep these key players and provide themselves some added benefits in return of their good works.
How Does it Work?
Most organizations often use cash value life insurance to finance Supplemental Executive Retirement Plans. The organization chooses and purchases the life insurance for the employee, which is good enough to provide future benefits as per the agreement. The organization itself is the owner of the policy; it also pays the premium for it. The organization can also use the cash values at its discretion anytime.
Upon retirement, on the basis of the agreement, the key employee gets supplemental income. In the event of death of the employee, the benefit would be payable to the organization, which again is used to provide continued supplemental benefits or a lump sum benefit to the beneficiary nominated by the employee.
Benefits of SERP – Organization Perspective
Following are the benefits that organization enjoy while opting for SERPs:
Benefits of SERP – Employee Perspective
These are quite easy to implement. In fact, organizations can implement these without taking too much of pain.
- IRS approval is not required.
- Involvement of administration is not required as well.
- Organization can choose the employee at their own discretion.
- The organization is the owner of the policy, has the access to its cash value, and controls the plan as well.
- Organization gets a tax deduction when it pays supplemental income benefits to the key employee.
- The organization can also structure the life insurance policy in such a way that it can recover its cost.
Following are the advantages of SERP that the employees can enjoy:
- The plan can be modified to meet the specific needs of the employee.
- Supplemental retirement income can be accrued sans incurring any upfront taxes.
- In the event of employee’s death, the beneficiary of the employee would get the benefits of the plan.