With a SERP, your top performers can worry less about their financial future

Government-imposed caps on qualified plan contributions can make it difficult for your top performers to save enough for retirement. And that can cause them to worry about the future. By implementing a Supplemental Executive Retirement Plan (SERP), your business can remove that concern, while helping to ensure your top performers’ loyalty for the long term.

A Supplemental Executive Retirement Plan is a type of executive benefit program that can enable your business to recruit, retain, reward, and retire a select group of key employees. Your company can design a SERP to provide pre-retirement death benefits, post-retirement income, or both. For participating employees, a SERP can be used along with, or in lieu of, a qualified retirement plan.

With a SERP, the promise to pay benefits is required to be unsecured and unfunded. “Unfunded” means that a business may not isolate assets to be used solely for payment of the benefit. However, many businesses choose to “informally” fund their commitment through the use of business-owned permanent life insurance, which may be used for other business purposes besides funding this benefit. The business will be the applicant, owner, beneficiary, and premium payor of the policy on the participating employee’s life.

A Supplemental Executive Retirement Plan offers various benefits — for both the business and the participating employees.

For your business:

• Flexibility: Your company can select the key employees who will participate — and can offer different participants different benefit levels.

• You can customize the benefit: Your business can tailor the plan to meet your executives’ needs, and vary benefits and timing based on what is most appealing to each participating executive.

• Financial benefits: The life insurance policy grows tax-deferred and is listed as an asset in your company’s books, and the income tax-free death benefit can be used to help recover plan costs.

• Tax advantages: Your business gets a tax deduction when it ultimately pays the benefit.

For your participating employees:

• Their retirement benefits are supplemented: Your participating employee will receive an additional retirement benefit.

• Tax advantages: No income tax is payable by the key employee on the benefit until it is actually paid out.

1. Your company enters into an agreement with the key employee, where your business agrees to provide specified retirement and
death benefits.

2. Your company provides the employee with the proper notice required by law, and obtains consent that the business can and will take out a life insurance policy on the key employee. Your business also provides notice of the plan to the U.S. Department of Labor, Employee Benefit Security Administration.

3. Your business has a choice of how to cover the cost of paying your participating employee’s retirement benefits. Policy cash values can be used through loans and/or withdrawals to make the required payments.1, 2 Alternatively, your business can pay the benefits from current cash flow and cost recover the benefit payments through the eventual receipt of the death proceeds from the life insurance policy.

4. If your key employee dies before reaching retirement, your business receives the policy’s death benefit income tax free and pays
survivor benefits to the employee’s designated beneficiaries. These payments are deductible by your business and reportable as taxable income to the beneficiaries.

5. Upon your key employee’s retirement, your business makes retirement income payments according to the terms of the agreement.
These payments are taxable income to your retired employee and tax deductible by your business. There are some IRS reporting requirements.