Supplemental Executive Retirement Plan (SERP)
What Is a Supplemental Executive Retirement Plan (SERP)?
A supplemental executive retirement plan (SERP) is a set of benefits that might be made available to high even out employees notwithstanding those covered in the company's standard retirement savings plan.
A SERP is a form of a deferred-pay plan. It's anything but a qualified plan. That is, there is no special tax treatment for the company or the employee, for example, is available through a 401(k) plan.
Grasping SERP
Companies utilize a SERP plan as a method for rewarding and hold key executives. Since these plans are non-qualified, they can be offered specifically to key executives, whose contributions to the company's qualified plan, for example, a 401(k), are limited by the maximum annual contributions or the income qualification limits, or both.
Regularly, the company and the executive consent to an arrangement that guarantees the executive a certain amount of supplemental retirement income in light of different qualification conditions that the executive must meet. The company funds the plan out of its current cash flows or through the funding of a cash-value life insurance policy. The money, and the taxes on it, are deferred. In the wake of resigning, the executive can pull out the money and must pay state and federal taxes on it as ordinary income.
Benefits of a SERP
Supplemental executive retirement plans are possibilities for companies seeking to boost key executives. As they are non-qualified, they require no IRS endorsement and insignificant reporting.
The company controls the plan and can book an annual expense equivalent to the current value of the surge of future benefit payments. At the point when the benefits are paid, the company can deduct them as an expense.
At the point when a cash-value life insurance policy is utilized to fund the benefits, the company benefits from tax-deferred accumulation inside the policy. Much of the time, the policy can be structured in a way that permits the company to recuperate its costs.
For executives, the plan can be tailored to address specific issues. The benefits accrue to the executive with no current tax results. When funded with a cash-value life insurance policy, death benefits are available to give a proceeded with supplemental payment or a lump-sum payment to the family in the event of the executive's premature death.
Inconveniences of a SERP
While funding a SERP, the company doesn't receive an immediate tax deduction. The funds that gather for a SERP inside a life insurance policy are not protected from creditor claims against the company in case of the company's insolvency.
Illustration of a SERP
A SERP generally assumes the form of a cash value life insurance policy. Companies buy an insurance policy of a settled upon amount for the employee. The company gets tax benefits since it pays the installments on the insurance. Even on the off chance that the employee quits, the company actually approaches the insurance's cash value. In the event that the employee dies, the company is a beneficiary of the payout and furthermore gets tax benefits.
Features
- Dissimilar to in a 401(k) or other qualified plan, SERPs offer no immediate tax benefits to the company or the executive.
- At the point when the benefits are paid, the company deducts them as a business expense.
- A SERP is a non-qualified retirement plan offered to executives as a long term incentive.
