Corporate Executives and SERPs
Corporate executives and upper management have very important decisions to make to plan for a successful retirement. Corporate executives are typically highly compensated and are exposed to different company employee benefits to retain these most valuable employees. A Supplemental Executive Retirement Plan or SERP is a deferred compensation agreement, a way for a company to retain key personnel since their exit will have a highly disruptive impact on the company.
What is a SERP?
SERPs allow at a future date that compensation will be paid out to the corporate executive. SERP plans are a way to reward and retain key company employees. Typically, SERPs are used since qualified plans such as your 401(k) is limited to maximum annual contributions. SERPs operate outside of IRS rules that regulate qualified plans such as 401(k)s or pension plans. Unlike qualified plans, employers do not have to offer them to all employees.1
SERPs don't follow IRS tax laws such as penalties for withdrawing from them before age 59 ½. With SERPs, there are no required minimum distributions or RMDs at age 72. Think of a SERP like a private retirement plan for selected key executives.2
How they are funded?
The key to a SERP plan is that the executive must sign an agreement and meet certain performance milestones. The company funds the SERP through its current cash flows. There are typically two choices a lump sum upon retirement, or taking the compensation over one’s lifetime in an annuity. A SERP is most commonly funded by a life insurance policy.
The lump-sum distribution from a SERP might be a good option if you are in a lower tax bracket at retirement. As a result, one should talk to a financial planner to see what the best option is for tax planning. The main advantage of the SERP is that the benefits accrue without current taxation to the employee.
What are the risks?
Since the money is in the company’s general fund, it is not protected from creditors if the company goes bankrupt. This can be a very real risk for an employee since you are dependent upon the company’s performance, unlike a 401(k) and pension plans which are protected from company insolvency.
Another risk is that with a SERP there are specific requirements that need to be met by the employee such as being with the company a certain number of years. If the employee does not meet these requirements they may forgo the deferred compensation.
Are they right for me?
For highly compensated employees, a SERP could become part of your negotiating package with a new employer or a renegotiation of your compensation package at your current employer.3 A SERP can be a smart choice to fund your retirement. You should talk to a financial advisor to make the right decision of whether this deferred compensation plan is right for you and your retirement goals.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.