Executives and other key company employees who are hoping to expand their retirement assets beyond their 401(k) or individual retirement account (IRA) may find the answer in a supplemental executive retirement plan (SERP). This kind of non-qualified deferred compensation plan is designed to offer additional retirement benefits once you’ve reached the maximum contribution limits allowed by other qualified plans. Understanding their structure and function can help you decide whether a SERP fits with your overall retirement strategy.
Key Takeaways
- SERPs accumulate money on a tax-deferred basis.
- SERPs do not have an early withdrawal penalty.
- SERPs do not have contribution limits.
- Employers often fund a SERP by taking out a cash value life insurance policy on you.
Supplemental Executive Retirement Plan (SERP) Basics
SERPs can vary from one employer to the next, but they generally follow the same set of guidelines. The employer determines how the plan will be established, how much it will contribute, what form those contributions will take, and how distributions from the plan are paid out to participating employees.
When a SERP is set up as a defined-benefit plan, the employee receives either a lump sum or anannuity at retirement, which is equal to a set percentage of the employee’s average lifetime compensation. A defined-contributionSERP would allow for regular contributions to an individual employee account. These funds would be invested on behalf of the employee until the funds are paid out at retirement. Money can also be withdrawn in the event of a disability or by the plan participant’s beneficiary upon the participant’s death.
In terms of how SERPs are funded, life insurance is an option many companies turn to. Your employer takes out a cash value life insurance policy on you and names itself as the beneficiary. During your lifetime the employer draws on the cash value to fund your SERP account. When you reach normal retirement age, you can begin making withdrawals.
How SERPs Benefit Employees
There are a few reasons why you might want to add a SERP to your existing retirement accounts. First and foremost, you’re accumulating funds on a tax-deferred basis, and distributions before age 59½ aren’t subject to the 10% early withdrawal penalty. If your employer is using life insurance to fund your account, you don’t have to worry about whether or not enough money is being put into the plan to cover your anticipated future benefit.
Because the employer assumes responsibility for funding the plan, you’re not obligated to defer any of your salary or bonus money into it each year. The fact that SERPs fall under the heading of nonqualified deferred compensation plans also means they’re not subject to the same Internal Revenue Service (IRS) restrictions on annual contribution limits that a 401(k) or another qualified plan would be.
Finally, if something were to happen to you, your spouse or other beneficiaries would be able to draw annuity income or a lump-sum survivor benefit, so the funds don’t go to waste.
SERPs are usually only made available to company key executives who are already making a substantial salary. They are a means of ensuring that valued employees will remain with the company long term. If you decide you want a SERP, you probably need to make it a part of your negotiating strategy. One thing to remember: SERPs are not protected from a company’s creditors if it is beset by financial woes, so they can go away entirely in a bankruptcy.
SERPs are paid out as either one lump sum or as a series of set payments from an annuity, with different tax implications for each method, so choose carefully.
How SERPs Benefit Companies
SERPs are easy to put together, require little management, and are not subject to approval by the IRS. The company is in charge of deciding whom it wants to favor with a SERP, and it both controls the plan and derives income on its books from the SERP’s cash value growth, which is tax-deferred. A SERP can be set up to allow a company to recover its cost, and the company would get a tax deduction when benefits are paid out.
Taxation of SERPs
One thing to weigh carefully before enrolling in a SERP is how it may affect your taxes. SERPs are tax-deferred, meaning you won’t pay taxes on the funds until you withdraw them in retirement.
The payout you select will affect how you are taxed. Choosing a lump sum would require you to pay the taxes due all at once, leaving the remaining funds to be included in your retirement income. Opting for regular monthly annuity payments would allow you to spread out the taxation.
If you’re not sure which path is best, run the numbers in both scenarios to see how much you’d be paying in taxes. If your long-term plan includes withdrawals from tax-advantagedaccounts, spreading out the payments from a SERP over time may result in more after-tax income.
The Bottom Line
A SERP could significantly add to your savings if you’re planning to stick with your employer for the long haul. These plans may be most appealing if you’re consistently maxing out your other retirement accounts, but it’s still possible to reap some benefits even if you're not. Consider how much more you stand to save and weigh that against the impact of any added tax liability when deciding whether a SERP is right for you.
FAQs
Supplemental Retirement Plan Benefits
What is the purpose of a SERP? ›
A supplemental executive retirement plan (SERP) is a set of benefits that may be made available to top-level employees in addition to those covered in the company's standard retirement savings plan. A SERP is a form of a deferred-compensation plan. It is not a qualified plan.
What are SERP benefits for employees? ›
A SERP is a deferred compensation agreement between the company and key employees under which the employer will provide additional retirement benefits if the individual meets eligibility and vesting requirements. A SERP is funded by the employer from its general assets, investments, or the cash value of life insurance.
Is it necessary to have a retirement plan? ›
Retirement planning is important because it can help you avoid running out of money in retirement. Your plan can help you calculate the rate of return you need on your investments, how much risk you should take, and how much income you can safely withdraw from your portfolio.
What is the defined benefit supplemental executive retirement plan? ›
The Defined Benefit Supplement is a hybrid cash balance plan for Defined Benefit members that provides additional savings for retirement. Funds come from compensation earned from service in one school year in excess of one year of service credit and limited-term salary increases.
Is SERP a defined benefit plan? ›
There are a variety of possible SERP designs. Most commonly, they are designed either as defined benefit or defined contribution plans. A defined benefit SERP provides a benefit in the form of an annuity at retirement.
What are SERP features and why should you care? ›
What are SERP Features? “A SERP feature is any result on a Google Search Engine Results Page (SERP) that is not a traditional organic result” – Moz. The most common examples of SERP features that you might come across include featured snippets, knowledge panels, video carousels and image packs.
Are SERP payments reported on W-2? ›
2 The payment of the deferred compensation will be reported on a Form W-2 even if you are no longer an employee at the time. You are also taxed on the earnings you get on your deferrals when they are paid to you. The rate of return is fixed by the terms of the plan.
Can you get compensation if you opted out of SERP? ›
You'll only be eligible to make a claim for mis-sold pension SERPS compensation if you meet certain specific criteria. First, you must have been advised to contract out of SERPs between 1 July 1988 and 5 April 1997.
What is a supplemental retirement annuity? ›
Employees may elect to take out a Supplemental Retirement Annuity (SRA) or Group Supplemental Retirement Annuity (GSRA) in addition to his/her regular retirement deduction. Contributions taken directly from your salary for SRAs and GSRAs reduce your taxable income.
One example is the $1,000/month rule. Created by Wes Moss, a Certified Financial Planner, this strategy helps individuals visualize how much savings they should have in retirement. According to Moss, you should plan to have $240,000 saved for every $1,000 of disposable income in retirement.
What happens if you don't have a retirement plan? ›
Begin saving as early as possible in other tax-advantaged accounts if you don't have a 401(k). Good alternatives include traditional and Roth IRAs and health savings accounts (HSAs). A non-retirement investment account can offer higher earnings but your risk may be higher.
Why do employers not offer retirement plans? ›
The most common reason an employer doesn't offer a 401(k) is that most of their jobs are entry-level or part-time.
Can a serp be rolled over? ›
If the plan allows a lump sum at retirement, it can be rolled over on a tax-deferred basis to an Individual Retirement Account or Individual Retirement Annuity. Company XYZ has a Defined Benefit (DB) plan that provides 1% of the final average compensation multiplied by an employee's years of service.
Is a serp a 457 plan? ›
TYPES OF SERPs
This plan is for select executives of tax-exempt organizations and has loose contribution limits. It is in contrast to plans like 457(b) or 401(k) which cap contributions. While both employer and employee can contribute to a 457(f), in practice the employer normally makes 100% of the contributions.
How much can I contribute to a supplemental retirement plan? ›
The basic limit on elective deferrals is $23,000 in 2024, $22,500 in 2023, $20,500 in 2022, $19,500 in 2020 and 2021, and $19,000 in 2019, or 100% of the employee's compensation, whichever is less.
What information will come out from SERP? ›
The SERP includes a list of both paid search ads and organic results. Results are displayed in a variety of formats, including websites, images, videos, featured snippets, shopping results and more. Read more: Check out this article on SERP Features for more information on the kinds of content you may see on a SERP!
What is the difference between SEO and SERP? ›
SEO (Search Engine Optimisation) is the work a website owner does to get a webpage to the top of the SERP (Search Engine Results Page) for relevant user search queries.
What is SERP analysis in SEO? ›
SERP analysis is a process of looking at the top-ranking web pages in the SERP (Search Engine Results Page) in order to evaluate whether or not the particular keyword you want to rank for is relevant and to determine how hard it would be to outrank your competitors.
What are the basic elements of SERP? ›
The organic search results, query, and advertisem*nts are the three main components of the SERP, However, the SERP of major search engines, like Google, Yahoo!, Bing, Petal, Sogou may include many different types of enhanced results (organic search, and sponsored) such as rich snippets, images, maps, definitions, ...
