Non-Q Deferred Compensation | SERP’s

September 20, 2022

3 minute read – talk to most employers and you’ll hear within a minute or two how they’re working hard at attracting, retaining, and hiring great employees. Learn more about why a “SERP” is a great fit for this great race to building the employee team at hand.

A supplemental executive retirement plan (SERP) can be a highly effective way to provide additional compensation for a handful of key employees and persuade them to remain with the company longer. A SERP has numerous advantages both for the business and its key employees.

Although SERPs could be paid out of cash flows or investment funds, most are funded through a cash value life insurance plan. The employer buys the insurance policy, pays the premiums, and has access to its cash value. The employee receives supplemental retirement income paid for through the insurance policy. Once the employee receives income in retirement, that benefit is taxable. At that point, the employer receives a tax deduction.

SERPs are attractive to employers and employees. Here’s why – They’re easy to implement, they don’t require IRS approval, and organizations can decide which employees will receive this benefit. The employer can structure the life insurance policy in a way that allows the company to recover its cost. Typically, this is above and beyond what is already offered to the key-employee (retirement plan, group life insurance, and related benefits).

Employees benefit from receiving a supplemental retirement benefit that is only taxable when they receive income in retirement. At that point, most executives will be in a lower tax bracket than when working. The plan can be tailored to meet the specific needs of individual employees.

There are a variety of possible non-qualified deferred compensation plans to consider, SERP designs using a cash value life insurance policy is one. Remember the benefit to the employer and the employee when designing your NQ Deferred Comp plan is that it can be tailored to each employees incentive-desire.