 What
is a Supplemental Executive Retirement Plan (SERP)?
How
do Supplemental Executive Retirement Plans Work?
Company
Advantages of a SERP
Key
Executive Advantages of a SERP
Disadvantages
of SERPs
What is a Supplemental Executive Retirement Plan (SERP)?
A supplemental executive retirement plan is a deferred compensation
agreement between the company and the key executive whereby
the company agrees to provide supplemental retirement income
to the executive and his family if certain pre-agreed upon
conditions are met by the executive. The plan is funded by
the company out of cash flows, investment funds or cash value
life insurance. Any deferred benefits are not currently taxable
to the key executive. When paid, the benefits become taxable
to the executive as income and tax deductible to the company.
How do Supplemental Executive Retirement Plans Work?
Because of its many advantages, most companies use cash
value life insurance to fund SERPs. The company purchases
a life insurance policy on the key employee’s life
that is sufficient to provide the future benefits outlined
in the agreement. The company pays the premiums, owns the
policy and is the policy beneficiary. The policy cash values
grow tax deferred and can be used at any time by the company
at its discretion.
At retirement, the key executive receives supplemental income,
paid by the company, based upon the terms of the agreement.
In the event of the key employee’s death, the policy’s
death benefit is payable to the company which can be used
to provide continued supplemental benefits or to provide
a lump sum benefit to the executive’s named beneficiary.
Company Advantages with SERPs
Supplemental executive retirement plans using life insurance
have several advantages to the company:
| 1. |
SERPs are relatively easy
to implement and require no IRS approval or involved
administration. |
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| 2. |
The company can select the executives
it wants to reward with supplemental benefits. |
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| 3. |
The company controls the plan, owns the policy and
has access to policy cash value.
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| 4. |
Cash value within the life insurance
policy accumulates tax deferred. |
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| 5. |
When the supplemental income benefits
are paid to the key employee, the company gets a tax
deduction. |
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| 6. |
The life insurance policy can be structured
to allow the company to recover its cost. |
Executive Advantages with SERPs
Supplemental executive retirement plans using life insurance
also have several advantages to the key executive:
| 1. |
The plan can be custom
designed to meet the key employee’s specific needs. |
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| 2. |
Supplemental retirement income can
be accumulated without incurring any up front taxes. |
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| 3. |
In the event the executive dies, the
life insurance policy death benefits are available to
fund the plan and provide a lump sum benefit to the executive’s
beneficiary subject to the terms of the agreement. |
Disadvantages of SERPs
| 1. |
The company does not get
an immediate tax deduction on the premium payments. The
deductions come for the business when plan benefits are
paid to participant. |
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| 2. |
The cash value build up that accumulates
inside the life insurance policy used to fund the SERP
is subject to the creditors of the company and is not
protected if the company becomes insolvent. |
Other Executive Compensation
Strategies:
For additional information
on key executive compensation options, please call MEG
Financial today at (877)
583-3955. One of our licensed insurance professionals will assist you
with any questions and provide a custom quote.
This information is for illustrative purposes only. MEG Financial
and its representatives are in no way providing tax or
legal advice. Please consult your CPA or tax attorney for
any questions on taxation as it relates to your specific
circumstances.
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