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A supplemental executive retirement plan (SERP) is an additional retirement plan for key corporate executives, funded by the employer with no contributions from the employee. It can be financed through cash value life insurance coverage and is considered a nonqualified retirement program. Some criticize the approach for potentially overpaying mediocre employees.
Sometimes called a top hat plan, a supplemental executive retirement plan is a type of additional retirement preparation that is beyond any other current plan, such as an individual retirement account, individual savings account, or 401(k). ) plan. Sometimes referred to simply as the SERP, these plans are typically reserved for key corporate executives. The idea behind this additional retirement planning is to ensure that the executive can maintain the same standard of living even after leaving the workforce.
One of the hallmarks of a supplemental executive retirement plan is that the employee doesn’t actually make any contributions. With this type of program, the employer is responsible for making regular contributions based on the terms of the contract that exists between the employee and the employer. For example, the contract may require the employer to contribute a fixed amount each calendar year the executive remains with the company. In other situations, the annual contribution may be based on a percentage of the employee’s annual salary and is influenced by the cash flow enjoyed by the company during the period considered. Many companies also finance the plan through the use of an insurance plan.
One of the most common ways to fund a supplemental executive retirement plan is in the form of cash value life insurance coverage. With this model, the employer is the owner of the policy, pays the monthly premiums and can make use of the asset as it sees fit. Once the employee retires, the employer pays monthly installment payments to the retired employee, while remaining the beneficiary of the policy. In the event of the employee’s death, the company collects the full cash value of the policy and uses the proceeds to settle benefits owed to survivors or other beneficiaries of the deceased.
There is some difference of opinion on the use of supplemental executive retirement plan strategies. Many labor groups are highly critical of the approach, as it increases the potential for overpaying mediocre employees. For this same reason, shareholders are also sometimes uncomfortable with this type of retirement plan strategy, preferring to opt for some type of arrangement based more on merit.
In most countries, a supplemental executive retirement plan is considered a nonqualified retirement program. This means that the employee is responsible for paying taxes on funds received from the plan. At the same time, those disbursements generally count as a tax deduction to the employer at the time they are issued, a fact that helps offset the inability to claim a tax deduction at the time the premium payments were made. life insurance. policy.
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