For many business owners, there is a lot of investment that goes into key executives. As an incentive to encourage the executive to stay long-term with your company, many business owners enhance executive benefits with a supplemental executive retirement plan (SERP).
A SERP lets the executive know they are a valuable part of your team while also encouraging them to stay with your company.
How does a SERP work?
You promise to pay the employee a retirement income stream or lump sum benefit if he or she stays with the company until retirement. You also may provide disability and/or death benefits under the plan.
A SERP is often called a “golden handcuff” plan. When structured as a forfeitable plan, the employee generally forfeits all business if he or she leaves your business early.
Funding a SERP
For many business owners, life insurance is the ideal informal funding mechanism for many SERP agreements.
As a business-owned policy, the company has total control over the policy and flexible, tax-advantaged1 access to its cash value and income tax-free2 death benefit. The company can then use the policy to help meet its obligations under the SERP.
Flexible and selective
SERPs are flexible and allow you to pick and choose participants. A SERP has only minimal reporting requirements, and there are no contribution limits.
Comparison of SERPs vs. qualified plans
|Contributions are currently deductible by employer
|Contributions are currently taxable to executive
|Employer deducts payment of retirement income
|Executive taxed on retirement income
|ERISA reporting requirements
|Employer cost recovery
|Ability to select participants
If you have key executives you hope to retain long-term, a SERP is a very useful method of doing so. For more information, contact your financial professional.
1If tax-free loans are taken and the policy lapses, a taxable event may occur. Withdrawals (partial surrenders) and loans from life insurance policies classified as modified endowment contracts may be subject to tax at the time the withdrawal or loan is taken and, if taken prior to age 59½, a 10% federal tax penalty may apply. Withdrawals and loans reduce the death benefit and cash surrender value.
2Assuming compliance with IRS rules, including applicable notice and consent requirements under Internal Revenue Code Section 101(j).
This material provides general information that is designed to be educational in nature and is not intended as specific tax or legal advice to any particular individual nor the law of any particular state. Please seek the advice of a qualified tax or legal professional for your specific situation.
Products are issued by AuguStar Life Insurance Company and AuguStar Life Assurance Corporation. Product, product features and rider availability vary by state. Issuer not licensed to conduct business in NY.