A supplemental executive retirement plan (SERP) is a deferred compensation plan provided to executives or other highly paid employees by a company. It is intended to supplement retirement benefits, and because it is a non-qualified plan, it functions outside IRS rules for qualified plans like 401(k)s.
Since it is also a deferred status plan, it involves an agreement to pay the employee at some point in the future. Thus, when a SERP is funded, an employer places assets in escrow, thereby protecting those assets from creditors. By contrast, an unfunded SERP involves a situation where the employer agrees to pay a certain amount of compensation in the future. However, there is no firm security associated with the promise. In other words, the SERP is a promise, and funding it ensures the promise can be fulfilled. Here are 3 Things You Didn’t know about Supplemental Executive Retirement Plans.
SERPs Are Exclusive
Unlike qualified retirement plans, employers are not obliged to offer a SERP to all their employees. These plans are usually only made available to upper echelon personnel such as CEOs and CFOs, in other words, highly compensated employees. That means that only veteran employees who are well paid will generally be eligible to receive a SERP. There are no contribution limits or benefit limits associated with a non-qualified plan like a SERP, making them dramatically different from typical qualified retirement plans.
The advantage here is that an employer can make a decision for a given employee that’s best for that employee and their relationship with the company. It’s a very personal offer to the key person, and therefore highly effective at keeping them on board for the long haul.
SERPs Are Customizable
A SERP is far from a “cookie-cutter” pension plan. An employer can write into the agreement nearly any reasonable terms. For example, say an employer really wants to incentivize that key person to stay on through age 67, the agreement could state a higher rate of payout at 67 than say age 65. Or, rather than a higher monthly payout, it could reflect a longer payout. 20 years instead of 15 years, for example.
As mentioned above, since they’re exclusive, an employer could have two different SERP agreements with two different employees with two different sets of circumstances. That’s the value of an employee retention vehicle like this.
SERPs Can Help You Retain Your Best People
Today’s employees are looking for lots of things to keep them loyal to a company. One of those things is long-term financial security. A SERP can allow an employer to contractually guarantee that employee a certain amount of income they’re going to receive just by staying with the company.
In, a world where employees come and go, and recruiters are looking for talent to steal for your competitors this is just one more arrow in your quiver to ensure employees stay with you for the long haul.