What is a 'Supplemental Executive Retirement Plan - SERP'

A supplemental executive retirement plan (SERP) is a nonqualified retirement plan for key company employees, such as executives, that provides benefits above and beyond those covered in other retirement plans such as IRA, 401(k) or nonqualified deferred compensation NQDC plans. There are many different kinds of SERPs available to companies wishing to ensure their key employees are able to maintain their current standards of living in retirement.

BREAKING DOWN 'Supplemental Executive Retirement Plan - SERP'

A SERP is a form of executive deferred compensation often used by corporations as a way to reward and retain key executives. Because SERPs are nonqualified, they may be offered selectively to high-earning executives whose qualified plan contributions are limited by top-heavy rules. The company and the executive enter into a formal agreement that promises the executive a certain amount of supplemental retirement income based on vesting and other eligibility conditions to be met by the executive. The company funds the plan out of current cash flows or through the funding of a cash value life insurance policy, and the deferred benefits are not currently taxable to the executive. Upon retirement, the executive receives the income, which is taxed as ordinary income.

See: The Retirement Divide: CEOs Versus the Rest of Us

Advantages of a SERP

SERPs are a viable option for companies seeking to maximize their key executive’s retirement income. They are nonqualified and require no IRS approval and minimal reporting. The company controls the plan and is able to book an annual expense equal to the present value of the stream of future benefit payments. When the benefits are paid, the company is able to deduct them as an expense. When a cash value life insurance policy is used to fund the benefits, the company benefits from tax deferred accumulation inside the policy. In most cases, the policy can be structured in a way that allows the company to recover its cost.

For executives, the plan can be tailored to meet their specific needs. The benefits accrue to the executive without any current tax consequence. When funded with a cash value life insurance policy, the death benefits are available to provide a continued supplemental payments or a lump sum payment to the executive’s beneficiaries in the event of a premature death.

Disadvantages of a SERP

When funding a SERP, the company does not receive an immediate tax deduction on any payments. The funds that accumulate for a SERP inside a life insurance policy are not protected from creditor claims against the company or company insolvency.

RELATED TERMS
  1. Deferred Compensation

    A portion of an employee's compensation that is set aside to ...
  2. Accounting-Based Incentive

    A method for compensating corporate executives based on whether ...
  3. Key Person Insurance

    A life insurance policy that a company purchases on a key executive's ...
  4. Non-Qualified Deferred Compensation ...

    Compensation that has been earned by an employee, but not yet ...
  5. Target-Benefit Plan

    A benefit plan that is similar to a defined benefit plan since ...
  6. Retirement Planning

    The process of determining retirement income goals and the actions ...
Related Articles
  1. Retirement

    Should You Have a Supplemental Retirement Plan?

    A supplemental retirement plan can enhance your ability to set aside money for retirement when you've exhausted other savings avenues.
  2. Managing Wealth

    Deferred Compensation Plans for Nonprofits

    Learn about the two types of deferred compensation plans that nonprofit companies can use to allow high-ranking employees to increase their retirement savings.
  3. Financial Advisor

    Life Insurance Plans to Help Your Small Business Retain Employees

    How to use and design cash value life insurance plans as an incentive to help attract and retain key employees.
  4. Insurance

    How Life Insurance Can Be a Benefit for Executive Employees

    Providing life insurance to key executives may help reduce turnover.
  5. Personal Finance

    What to Know About Non-Qualified Deferred Compensation Plans

    There are pros and cons to employer non-qualified deferred compensation plans.
  6. Financial Advisor

    4 Compensation Plans for Wealthy Earners

    Here's what advisors need to know about non-qualified deferred compensation plans.
  7. Retirement

    Why Own Life Insurance in a Qualified Retirement Plan?

    What are the pros and cons of owning cash value life insurance in a qualified retirement plan?
  8. Managing Wealth

    Benefits of Deferred Compensation Plans

    Understand the difference between a qualifying or nonqualifying deferred compensation plan. Learn about the benefits of a deferred compensation plan.
  9. Managing Wealth

    Pros and Cons of Deferred Compensation Plans

    Learn about the pros and cons of non-qualified deferred compensation (NQDC) plans, including the flexibility of non-ERISA plans and the potential for forfeiture.
  10. Insurance

    Life Insurance as a Bonus Plan for Key Employees

    A Section 162 plan is a life insurance plan provided by an employer to key employees.
RELATED FAQS
  1. What are the best ways to pay less income tax?

    Learn about reducing your income tax burden by contributing to an employer-sponsored retirement plan or IRA, and see what ... Read Answer >>
  2. How do deferred tax assets help in meeting retirement goals?

    Learn how tax deferred assets can help individuals achieve long-term financial goals such as retirement and how they differ ... Read Answer >>
  3. Are annuities qualified or nonqualified retirement instruments?

    Learn the basics of annuity investments and the tax-deferral they offer, and discover the differences between qualified and ... Read Answer >>
Hot Definitions
  1. North American Free Trade Agreement - NAFTA

    A regulation implemented on Jan. 1, 1994, that eventually eliminated tariffs to encourage economic activity between the United ...
  2. Agency Theory

    A supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving ...
  3. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations ...
  4. Index

    A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is a hypothetical ...
  5. Return on Market Value of Equity - ROME

    Return on market value of equity (ROME) is a comparative measure typically used by analysts to identify companies that generate ...
  6. Majority Shareholder

    A person or entity that owns more than 50% of a company's outstanding shares. The majority shareholder is often the founder ...
Trading Center