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SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS
Supplemental Executive Retirement Plans abbreviated as SERP’s are used to provide extra retirement income or restore benefits that executives lose due to qualified pension plan limits. About SERPs Qualified pension plans provide most employee retirement benefits. Although these plans have tax and benefit security advantages they also have restrictions like benefit maximums. Benefits are capped when executive compensation exceeds those limits. That could mean executive pensions fall short of the income replacement ratios that the company intended - and the executive needs. Supplemental Executive Retirement Plans (SERPs) are normally designed to overcome the basic pension plan limitations. They can provide extra benefits for things that the qualified pension plan doesn't cover including:
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Early retirement Income over the IRS maximum Ineligible income (bonuses and deferred compensation) Short service that's not vested
Also, SERPs can be used to simply provide extra retirement income over and above what the basic qualified plan provides. The same tax and benefit security advantages as qualified plans cannot be offered by SERPs. To protect both benefit security for participants and the company's bottom line – it is important to finance wisely. Benefit Security If funded with designated assets that are set aside exclusively for executive benefits, assets would be considered immediate taxable income. Two basic security measures can protect SERPs. Actually setting aside assets to meet SERP benefit liabilities and protecting those assets from reversals such as change of heart, ownership, or control is the first step. A reliable safeguard is a Rabbi Trust, a trust fund that can only be used to pay benefits, with one exception. In the event of bankruptcy, trust assets could be used to satisfy general creditor claims. Since SERP liabilities cannot be formally funded, Trust assets must be held as general company assets.
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SERP Financing If Supplemental Executive Retirement Plans (SERPs) were formally funded, those assets would be considered immediate taxable income of SERP participants. That means SERP assets can't be deposited in a designated fund that offers executives preferred rights. Most organizations do earmark assets to pay SERP liabilities, because the alternative - paying those liabilities from general assets as they are due can lead to serious problems down the road. Unfunded liabilities can put financial pressure on future management that weakens their commitment to SERP promises. When the promise to repay isn't backed by specific means, a business slow down can mean a benefits slowdown as well. Plus, the pay-as-you-go approach doesn't offer the earning power of long-term investment products, so it usually ends up costing more. To avoid the pitfalls of pay-as-you-go, most organizations choose to informally finance SERPs with taxable investments such as equities or tax favored Corporate-Owned Life Insurance (COLI). Both offer attractive, growth-oriented investment opportunities including mutual funds and similar investments. COLI, though, can offer an extra advantage; tax-free gains on investment "events" such as stock sales and dividends as long as those earnings remain in the policy. Plus, COLI can be designed to eventually recover all SERP costs including SERP benefit payments plus policy premiums. Plan Design During the design process, there are several SERP plan arrangements to consider. Keep in mind that, for any plan, benefit vesting schedules can be tailored to encourage and reward executive loyalty.
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Restoration Plan - Defined Benefit. The SERP can "mirror" the qualified base pension plan – without the benefit limits and eligible compensation restrictions. The retirement income that this formula generates is offset by the income provided by the base pension plan. Replacement Ratio Offset Plan - Defined Benefit. The SERP can provide a life income based on a targeted compensation replacement ratio. For example, the plan could be designed to replace 60 percent of the executive's pre-retirement pay (offset by other company-provided sources of retirement income). Mid-Career Hire Plan - Defined Benefit. The SERP can compensate for limitations in the basic pension plan like vesting requirements and retirement rules. Thus, benefits for otherwise ineligible short service or early retirement can be provided. Defined Contribution Plan. The SERP can be set up as a defined contribution plan. That is, a plan with a specified annual contribution during active employment, say 10 percent of compensation, which grows with interest to retirement.
Plan Administration Complete Supplemental Executive Retirement Plan (SERP) design, communication, installation, administration and support for plan sponsors and executives is offered by CCi.
S TRATEGIC BENEFITS G ROUP, LLC
Executive & Employee Benefits
a founding member of
Los Angeles Albuquerque
San Francisco Milwaukee
San Diego Atlanta
Torrance Boise Reno Portland Seattle