SERP – Providing Benefits to Your Most Valuable Employees
Updated: Dec 21, 2020
There are many moving parts when it comes to building a successful company. Managing day-to-day operations, overseeing the development and enhancement of products, cultivating an award-winning customer service team, attracting and retaining talent, and even more so now, navigating a clear path through the political, economic and global changes that face organizations every day.
Success depends on executive leadership to drive all of the company’s strategic and financial initiatives. These dependable, hard-working employees create the foundation of a successful organization and expect a compensation and benefits package that goes beyond a paycheck and traditional bonus plan. They want to be recognized for their contributions with additional benefits that protect their future and that of their families. So how do you properly attract, retain and reward those individuals?
One possible solution is to create a supplemental executive retirement plan (SERP). A SERP is a deferred compensation agreement between the company and the selected key executive, where the company agrees to provide supplemental retirement income to the executive if the executive meets certain pre-determined eligibility, years of service, performance and vesting conditions. A SERP provides benefits in addition to those covered in other traditional retirement plans such as IRA, 401(k) or pension plan.
A properly designed SERP can not only attract and retain a highly compensated employee important to the organization, but it can also help to facilitate a smooth transition from the employee to new executive leadership after a certain period of service, or upon retirement.
Benefits for the Company:
Retain key executive talent and keep in place the team that is driving corporate growth and profitability
Relatively easy to implement and requires no IRS approval or involved administration
Employer controls the plan design and eligible group
Plans can be designed with manageable profit and loss impact if appropriately designed and financed
Plans can be designed with the ability to recover costs plus a cost of money
Allows customized options to determine contribution and/or benefit amounts that correspond with the company’s needs and financial sensitivities
Benefit amounts are not subject to disclosure in the Summary Compensation Table but rather are noted within a separate benefits table
Significantly less costly to provide a SERP benefit as opposed to losing a key executive who could leave the company with intellectual capital and industry and customer relationships
Designs can take the form of a defined benefit plan (e.g. percentage of final average compensation), defined contribution plan (e.g. percentage of compensation contributed annually) or can take the form of a Private Equity whereby the executive earns a preferred return and then profit shares with the company above some income threshold.
Benefits for the Executive:
Compensation is deferred and not subject to income tax until received
Benefits, once received, are not subject to FICA
Benefits can be distributed to eliminate state tax
Benefit amounts can make up a meaningful part of one’s retirement income (40-60% of total final average compensation)
In the event the executive dies, a lump-sum survivor benefit can be provided to the executive’s beneficiary equal to the present value of future benefits
Benefits can be secured via a grantor trust from a change in control, change in heart or the company’s inability to pay plan benefits
Planning retention and succession strategies are essential for any business. A SERP is a proven strategy used to attract and retain top talent and can help the business achieve specific financial and business goals. Before moving forward, we would recommend that you discuss your options regarding plan design, plan funding, plan security and plan administration with our team of knowledgeable consultants.
To learn more, contact Mezrah Consulting now.