The recognized supplemental executive plans are options offered only to the “elite” of each company. They are a non-qualified deferred compensation plan offered to high-ranking employees in companies.
The plans above usually include executive, functional and financial directors. It is a widely used alternative to keep the talents of each company in their jobs and is generally offered from the moment they join a company.
How supplemental retirement plans work
Although all company employees are important, some are more complex to replace because of the knowledge or performance they have in their work. SERPs change depending on the company and the employees they have. The details of each benefit change over time.
Companies almost always offer a different retirement plan for their executives. The employer chooses the benefit amount with the standard plan by stipulating a fixed dollar amount or a percentage of each employee’s average final salary.
The standard plan is the most common in companies. The company will make the benefit payment over several years and will begin to offer the payment when the employee reaches the corresponding retirement age.
Defined Contribution SERP
The company could agree to a benefit equivalent to 70% of the average salary of the operations manager. The benefit will begin to be paid during the last three years when they retire at the age stipulated by law.
The payment after retirement will be made for an estimated time. It is almost always for the next 20 years.
Other SERP alternatives
Employers may invest the funds to be paid in annuities, securities, or life insurance policies. The mission is for qualifying employees to enjoy these assets in the future.
In almost all cases, life insurance policies are taken out on executives, thereby protecting the company from taxes due on investment earnings from securities.
Basic Explanation of the Supplemental Executive Retirement Plan
Its acronym is “SERP” to indicate the additional compensation offered to qualified company personnel that is part of the benefits they receive while performing their duties. It is almost always used with health insurance, stock options, or life insurance.
The value of these plans varies depending on the company where the services are rendered. Still, in most cases, it is a percentage of the selected employees’ three-year average compensation.
Some situations that can affect the amount of SERP earned are metrics, performance reviews, and the length of time the employee has been with the company.
The funding of the SERP is through cash flow or by taking out a life insurance policy in the employee’s name. When an employee is eligible, they can make the withdrawal of the funds in a lump sum or with monthly disbursements.
Why are these plans offered to employees?
The purpose of SERPs in companies is simple; they seek to retain talent in each department by offering the best monetary benefits. As mentioned above, they are an additional compensation to keep and attract valuable high-level employees.
Ith today’s complexities in the world of work, it is important to have different strategies to keep employees interested in staying with the company.
Advantages of SERPs
One of the most notable advantages for employers is that it is the best method to incentivize executives in different departments. In addition, they do not have to seek IRS approval to offer to employees because they are not certified plans.
The control of the plan is entirely for the company; they are responsible for deciding how the benefits will be distributed. It is also a benefit capable of accounting for an annual expense with the same present value in the stream of future benefit payments.
On the other hand, when benefit payments are made, the company can deduct them as expenses. If a cash value insurance policy is used to fund the SERP, the company will have the advantage of accruing the tax deferral on the policy.
As for employees, the plan is easy to adjust to meet their specific needs. They can access the benefit without having to conform to any tax consequences.
Are there any disadvantages?
There may be some disadvantages for the company. For example, the tax deduction is not received immediately. The funds accumulated within the life insurance policy are not protected from the claims of creditors who initiate legal proceedings against the company.
However, there are more benefits to both the employer and the employee than the inconvenience of starting this retirement plan. Employees are eligible when they have the right profile or an annual income of approximately $135,000.