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Supplemental Executive Retirement Plan (SERP)

Definition

A Supplemental Executive Retirement Plan (SERP) is a non-qualified retirement plan for key company employees, such as executives, that provides benefits beyond those covered in other retirement plans. These are typically deferred-compensation plans where the employer agrees to pay future benefits to the employee. SERPs are primarily used by employers to provide high-level employees with additional retirement savings options.

Phonetic

The phonetics of the keyword “Supplemental Executive Retirement Plan (SERP)” is: /sʌ’plɛmɛntəl ɪɡˈzɛkjʊtɪv rɪˈtaɪrmənt plæn (sɜrp)/

Key Takeaways

  1. A Supplemental Executive Retirement Plan (SERP) is a non-qualified retirement plan for key company employees, such as executives, that provides benefits above and beyond those covered in other retirement plans such as 401(k) or IRA. It’s generally funded entirely by the employer.
  2. SERPs are designed to retain key executives by providing them with significant benefits upon retirement. They are often used to provide additional retirement coverage that is not otherwise covered by ERISA (Employee Retirement Income Security Act) limited plans.
  3. The benefits from a SERP are typically paid out to the executive either as a lump sum or in a series of payments over time. However, if the company goes bankrupt, the executives will be considered unsecured creditors concerning the money promised via the SERP.

Importance

The Supplemental Executive Retirement Plan (SERP) is a significant business/finance term as it refers to a set of benefits that is specifically provided to top-level executives. These are non-qualified retirement plans aimed at incentivizing executives to continue their tenure within a company for a longer period. SERPs offer deferred compensation, which can be a significant part of an executive’s overall compensation package. These often provide benefits not available through the standard pension plans and can be key in providing financial security in retirement. Therefore, understanding and negotiating SERPs can be a critical factor in an executive’s decision to remain with a company, making them an important business strategy tool.

Explanation

The purpose of a Supplemental Executive Retirement Plan (SERP) is primarily to provide senior executives with additional retirement benefits, above and beyond those covered by more traditional retirement plans like the 401(k) or the Pension Plan, that would most often be capped because of their comparatively higher compensation. It is primarily used as a strategic tool by businesses to attract, reward, and retain high-value executives. This is due to the fact that SERPs can offer a competitive edge in the marketplace when it comes to securing top-level talent, given they offer these high earning executives the opportunity to further shelter additional earnings for retirement, which otherwise might have been limited by IRS ceilings on contributions to standard defined contribution or Defined Benefit Plans.In terms of function, a SERP is a non-qualified retirement plan offered by a company to compensate the retirement needs that their executives might otherwise be unable to meet through other retirement plans. The SERP arrangements are contractually agreed between the employer and the executive, where the employer promises to pay the executive certain benefits in the future, typically a predetermined sum at retirement or upon fulfilling certain conditions. This, in turn, serves to create a long-term, vested commitment from the executives, as the benefits are substantial, but often tied to sustained performance and tenure in the company. In this regard, it also fosters executive loyalty besides functioning like a deferred compensation plan.

Examples

1. General Motors Corporation: In 2018, the company reported that it had provided its CEO, Mary T. Barra, with a SERP valued at about $11.1 million, in addition to other compensations. This program offers top executives deferred compensation that significantly enhances their retirement package, thereby motivating them to perform better during their tenure.2. IBM Corporation: IBM has a number of executive officers who participate in its Supplemental Executive Retirement Plan. This non-qualified retirement plan offers select executives a pension benefit that’s designed to supplement the benefits they receive under IBM’s tax-qualified retirement plans. The SERPs offered by IBM aim to provide its executives with a level of retirement benefits that match the terms of employment of senior executives in similar companies.3. Apple Inc.: While not directly identified as SERPs, Apple has established mechanisms similar to them to secure the retirement of their high-level executives. For example, in 2011, Apple awarded then CEO Tim Cook one million shares of company stock, worth roughly $384 million, as a long-term incentive. Part of the stock vested in 2015 and part in 2021, provided Cook stayed with the company. This practice mirrors SERPs’ objective to retain and reward key employees.

Frequently Asked Questions(FAQ)

What is a Supplemental Executive Retirement Plan (SERP)?

A SERP is a non-qualified retirement plan for key company employees, such as executives, that provides benefits above and beyond those covered in other retirement plans such as 401(k) or IRA plans.

Who is eligible for a SERP?

Eligibility varies by company, but generally, SERPs are offered to top executives and key employees whose retirement contributions are limited by qualified plan restrictions.

How does a SERP differ from a traditional retirement plan?

SERPs are non-qualified, meaning they aren’t subject to the same IRS restrictions as a qualified plan like a 401(k). This allows companies to offer additional benefits to key employees.

How are SERPs funded?

The funding method differs from company to company. Some opt to pay benefits out of company assets, while others take out life insurance policies on participating employees.

How are SERP benefits taxed?

Taxation depends on the specific agreement. Typically, the employer deducts the costs when incurred, and the employee pays regular income tax on benefits upon receipt.

What happens to a SERP if an employee leaves before retirement?

The terms would be specified in the individual agreement, but typically benefits are forfeited if an employee leaves or is terminated before retirement.

What are the advantages of a SERP?

SERPs provide additional financial security in retirement for leaders within a company. They can also be a powerful tool for companies to attract and retain top talent.

Are there any disadvantages to a SERP?

SERPs can be costly for companies to maintain, and they are not protected by the Employee Retirement Income Security Act (ERISA). This means that if the company faces bankruptcy, SERP payments could potentially be used to pay creditors.

Is a SERP the same as a deferred compensation plan?

While both provide retirement benefits beyond standard plans, they are not the same. A SERP is designed specifically for a select group of key employees, while a deferred compensation plan can be offered to all employees.

Related Finance Terms

  • Deferred Compensation
  • Non-Qualified Retirement Plan
  • Top Hat Plan
  • Excess Benefit Plan
  • Executive Life Insurance

Sources for More Information

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