For many businesses, their most important assets are their key employees and executives. One way your company can retain and attract top people is to reward them with additional executive compensation. A supplemental executive retirement plan (SERP) is a viable option to provide these coveted key executive benefits.
Is A Supplemental Executive Retirement Plan (SERP) Right For You?
A supplemental executive retirement plan (sample) 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:
- SERPs are relatively easy to implement and require no IRS approval or involved administration.
- The company can select the executives it wants to reward with supplemental benefits.
- The company controls the plan, owns the policy and has access to the policy cash value.
- Cash value within the life insurance policy accumulates tax-deferred.
- When the supplemental income benefits are paid to the key employee, the company gets a tax deduction.
- The life insurance policy can be structured to allow the company to recover its cost.
Executive Advantages with SERPs
SERP plans using life insurance also have several advantages to the key executive:
- The plan can be custom designed to meet the key employee’s specific needs.
- Supplemental retirement income can be accumulated without incurring any upfront taxes.
- 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
- 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 the participant.
- 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.