Posted: May 22, 2020
Executives seeking to maximize their benefit packages should investigate the value of obtaining a Supplemental Executive Retirement Plan (SERP) as part of their compensation package. In essence, a SERP is a type of deferred compensation agreement by which the executive earns a supplemental retirement income assuming certain prerequisites are fulfilled. A SERP is typically funded by the profits of the organization, investment funds, and often by cash value life insurance. These benefits are not taxable until they are paid to the recipient as income. An organization may benefit from issuing this type of benefit to its executive because the payouts of these compensation packages are typically tax deductible to the company. A typical SERP plan might equal three-quarters of an executive’s average annual compensation. A SERP is desirable because it can be designed or tailored to meet certain needs of the employee or executive. Furthermore, supplemental retirement funds can accumulate as part of the plan without incurring taxes up front. A SERP that is financed by a cash value life insurance policy can be used to pay a lump sum benefit to an employee’s beneficiary in the event of his death. In order to effectively negotiate a Supplemental Executive Retirement Plan as part of an executive compensation benefit package, an executive should be well-educated about how SERP agreements are typically financed. The most advantageous method for financing a SERP is by way of investing in cash value life insurance policies. By this method, the organization assumes ownership of an insurance policy on the life of the executive. This policy must be sufficient to cover the costs of the future benefits that are anticipated to be paid to the executive upon retirement. Because the organization is the owner and beneficiary of the policy, the company may use the tax-deferred cash value of the policy at its discretion at any time. In the event of the employee’s death, the company may receive the death benefit in order to recover the cost of the SERP package. Another advantage to the company is that SERPs do not require IRS approval to administer and are straightforward in their scope and implementation. When the supplemental retirement benefits are paid to the executive or employee, the company receives a tax deduction for this payout. Unlike a qualified (i.e. 401(k)) plan, a Supplemental Executive Retirement Plan does not offer an immediate tax advantage to the beneficiary or the employer. However, companies often leverage SERP packages to incentivize their executives. Whereas qualified plans usually have maximum annual contribution limits, SERPs are not subject to these types of limitations. According to Thomas O’Shaughnessy, senior director of Marcum Financial Services in Chicago, contributions to SERP plans may amount to or exceed millions of dollars per individual. A SERP can be promising if certain requirements are met by both parties. For example, an employer may dictate that payout of the SERP upon retirement is predicated upon a specified length of commitment to the organization. One aspect of a SERP that executives should be wary of is that the anticipated payout of the benefit package could be subject to the performance of the organization. Before agreeing to sign any SERP agreement, an executive should be aware of the risks involved, such as whether the funds would be depleted in the event of a lawsuit. An executive compensation consultant can help to maximize the advantages outlined in a SERP agreement and can provide sound advice about how to negotiate an optimal SERP package. To learn more about SERPs, visit our Contact Page, or contact us directly by email at email@example.com or by phone at 415-618-6060.