Problem: Because of the increasingly limited benefits available to highly paid employees under qualified retirement plans, the owners of many closely held corporations have cut back drastically on contributions to their company pensions. However, retirement planning is still a pressing personal concern for employers and employees. Moreover, competitors offering a retirement plan may be able to lure away the best recruits and even some experienced employees with this valuable perk.
Solution: A Supplemental Executive Retirement Plan (SERP) is a formal, legally binding obligation, which an employer makes to provide retirement benefits to an executive or selective group of employees. Under an "informally" funded SERP arrangement, permanent life insurance is purchased to assist the employer in meeting future financial obligations under the plan.
The employer owns and is beneficiary of the policy. Cash accumulates in the policy during the lifetime of the insured. Death proceeds are received tax-free. The corporation receives a tax deduction at the time benefits are paid under the plan.
In a "true" deferred compensation plan, the employee postpones receipt of current salary or bonus to some future date. A "salary continuation" arrangement provides a fringe benefit beyond the employee's regular compensation.
Reference: SERP Adviser Guide (Form 1488), SERP Client Guide (Form 2303), Executive Fringe Benefits (Form 2416), Side By Side Business Insurance Plan Comparisons (Form 2415), SERP Client PowerPoint Presentation (ON-Net)
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