Because of restrictions of benefits available to businessowners and highly compensated employees, participation in qualified retirement plans has been sharply curtailed. For many businesses, non-qualified supplemental executive retirement plans are an ideal alternative to pension or profit sharing plans.

Unlike qualified retirement plans, which must be made available on a non-selective basis to certain classes of employees, non-qualified SERPs enable employers to offer these benefits selectively, and participants may be limited to the shareholder/employees.

This is an attractive advantage to employers who may not be able to afford the cost of qualified plans, who don't want to deal with plan administration, or who simply wish to provide additional retirement benefits for themselves or a select group of employees.

Two basic types of plans are available. Under a "true" deferred compensation plan, the employer agrees to pay an employee a guaranteed income at a future date in lieu of current salary or annual bonuses. Under a "salary continuation" plan, a benefit is provided in addition to current compensation.

• "True" deferred compensation plans use the employee's money to create the benefit, and are favored by highly compensated shareholder/employees who can afford to defer current income.
• Salary continuation plans use the corporation's money to create the benefit.

In either type of plan, the employer selects the participants and determines the benefit amount. The plan, which must be established by a written agreement drafted by an attorney, may be set up so that shareholder/employees are the only participants. Under a typical plan...

• Benefits begin when the employee retires.
• Pre-retirement and post-retirement death benefits can be paid to the employee's surviving family.
• Pre-retirement disability benefits can be paid to the employee under the terms of the agreement. The benefit amount may be based on the number of years the agreement was in effect before the disability occurred.
• The agreement may also include a provision stating that participating employees must stay with the firm for a certain period and may not compete with the employer after that period.

Technically, SERPs should be unfunded in order to receive favorable tax treatment for the participating employee. That is, the employee should not be secured in the benefit.

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