Advantages of Using a Supplemental Executive Retirement Plan

Advantages of Using a Supplemental Executive Retirement Plan

There are several advantages of using a Supplemental Executive Retirement Plan to recruit, retain and reward key executives.

In this post, I am going to discuss the advantages of of using a Supplemental Executive Retirement Plan (SERP) and then discuss the disadvantages of using a  SERP.

The advantages of Using a Supplemental Executive Retirement Plan (SERP.)

Both employer and participant can derive significant benefits from a supplemental executive retirement plan.

The advantages to an employer of establishing and using a Supplemental Executive Retirement Plan include the following:

  • The plan provides “golden handcuffs” because benefits are forfeitable by the employee in the event of voluntary termination of service.
  • The plan can be used as a substitute for a qualified plan or equity ownership for designated employees.
  • The plan is flexible, allowing the employer to:
    • discriminate in favor of one or more employees it wishes to reward
    • design the plan to attract and retain important executives
  • Benefits are normally deductible by the employer when they are paid to the participating executive.
  • The employer has complete control over the following:
    • selection of benefits
    • timing of benefit payments
    • plan values
  • Benefits paid under insurance policies used to secure the promised benefits are generally tax-free to the employer.
  • The employer may be able to recover some or all of the costs to provide the plan through life insurance proceeds.
  • The plan is easy to administer.

The participating employee advantages of using a Supplemental Executive Retirement Plan are obvious and include the following:

  • Plan costs are paid entirely by the employer—the participating employee has no out-of-pocket cost for the benefits he or she receives.
  • No income is imputed to the participating employee during the period of employment; consequently, there is no current income tax liability for the employee.
  • The plan provides various benefits, including:
    • supplemental retirement income
    • survivor benefits
    • disability benefits

Though these are the advantages of using a Supplemental Executive Retirement Plan, there are also some disadvantages a business should consider.

Click here to learn about the disadvantages of using a SERP.

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