What Is a Supplemental Executive Retirement Plan (SERP)?
A supplemental paperwork retirement plot (SERP) is a set of minister to that may be made comprehensible to depth-level employees in add together to those covered in the company’s occurring to traditional retirement savings aspire.
A SERP is a form of a deferred-compensation plot. It is not a attributed plot. That is, there is no special tax treatment for the company or the employee, such as is comprehensible through a 401(k) mean.
Companies use a SERP aspire as a habit to compensation and preserve key executives. Because these plans are non-attributed, they can be offered selectively to key executives, whose contributions to the company’s attributed plot, such as a 401(k), are limited by the maximum annual contributions or the allowance eligibility limits, or both.
Typically, the company and the dealing out sign an succession that promises the meting out a certain amount of supplemental retirement allowance based going concerning for various eligibility conditions that the doling out must meet. The company funds the intend out of its current cash flows or through the funding of a cash-value life insurance policy. The child maintenance, and the taxes about it, are deferred. After retiring, the admin can desist the portion and must pay confess and federal taxes virtually it as mysterious income.
Advantages of a SERP
Supplemental paperwork retirement plans are options for companies seeking to incentivize key executives. As they are non-credited, they require no IRS reply and minimal reporting.
The company controls the slope and is dexterous to wedding album an annual expense equal to the offer value of the stream of higher lessening payments. When the sustain are paid, the company is practiced to deduce them as an expense.
When a cash-value cartoon insurance policy is used to fund the promote, the company assistance from tax-deferred gathering inside the policy. In most cases, the policy can be structured in a habit that allows the company to recover its costs.
For executives, the viewpoint can be tailored to meet specific needs. The sustain hoard to the incline of view without any current tax upshot. When funded by now a cash-value sparkle insurance policy, death encourage are handy in front occurring as soon as the money for a continued supplemental payment or a grow-quantity payment to the relatives in the matter of the government’s premature death.
Disadvantages of a SERP
When funding a SERP, the company does not get your hands on an quick tax exclusion. The funds that grow for a SERP inside a energy insurance policy are not protected from creditor claims adjoining the company in suit of the company’s insolvency.
Example of a SERP
A SERP generally takes on the form of a cash value vibrancy insurance policy. Companies get an insurance policy of an certainly-upon amount for the employee. The company gets tax assist because it pays the premiums upon the insurance. Even if the employee quits, the company nevertheless has admission to the insurance’s cash value. If the employee passes away, the company is a heir of the payout and with gets tax help.