There a several disadvantages of using a Supplemental Executive Retirement Plan that need to be considered before establishing a SERP.
The disadvantages of using a Supplemental Executive Retirement Plan include:
- Employer contributions to purchase an asset used to informally fund the promised SERP benefits—including life and disability insurance policies—are not tax-deductible to the employer. (An exception applies to a disability income insurance policy owned by the executive and paid for by the employer.)
- The employer assumes a contractual liability to provide the benefits promised under the SERP agreement.
Although the participating employee has no cost, either direct or indirect, for the plan benefits until they are distributed, the following are generally seen as SERP participant disadvantages:
- Benefits are normally forfeited if the employee leaves the employer’s service for any reason other than retirement or if he or she competes with the employer before retirement.
Unlike the assets that are set aside in qualified retirement plans like a 401(k) or profit sharing plan, the assets securing the promised benefits when using a SERP are attachable by the employer’s creditors.
Before saying “NO!” to establishing a SERP because of the disadvantages of using a Supplemental Executive Retirement Plan, consider their benefits. Learn more about the benefits of a SERP by clicking here.