Have the limitations of qualified plan funding reduced the ability of your business clients to provide highly compensated executives with retirement benefits? Would your business clients be interested in providing a supplemental benefit to a select group of key executives as long as the arrangement binds the executive to the company? Or, do you have a business owner who wants to provide a retirement benefit for some of his key employees, but does not want to be tied into the non-discrimination rules of qualified plans? If so, a Supplemental Executive Retirement Plan (SERP) may provide a solution. Following is an example of how a SERP works.
Example of How a SERP Works
ABC, Inc. is a consulting company structured as a regular C corporation that detects and prevents fraud for the government. The company has 250 employees. Ten of the employees are critical to the success of the business. As a result, they are highly sought after by competitors. ABC, Inc. is willing to incur additional costs to keep them but prefers to use the money in a way that ties the executives to the company. The company’s objective is to provide a benefit plan that acts as “golden handcuffs” rather than paying higher salaries.
All of the executives are contributing the maximum amount possible to their qualified plans. As highly compensated executives, they recognize that the limits placed on qualified plan contributions prevent them from saving enough to maintain their accustomed standard of living in retirement. Consequently, the executives are looking for alternatives to help fund for retirement, especially if it can be done using employer dollars on a pre-tax basis.
SERP Benefits Both Employer and Executive
A SERP arrangement informally funded with business owned life insurance provides the following benefits:
For the Employer
• The ability to pick and choose who participates
• The flexibility to vary each arrangement
• Full control of the policy cash values
• Tax-favored cash accumulation
• Tax-favored death benefit to help provide funding of benefit to executive’s heirs in the event the executive dies prior to retirement
• A tax deduction at the time benefits are paid to the employee/ heirs
• Possible to structure the arrangement to provide corporate cost recovery
For the Executive
• Current taxation is avoided
• Tax-deferred growth accumulates on the SERP account balance
• The income gap caused by “reverse discrimination” associated with qualified plans can be reduced
How Can DBS Help?
A SERP must be structured carefully in order to achieve the desired results. Fortunately, DBS has access to products and plan support specifically designed to help serve this market. For more in-depth information on how DBS might help your business clients retain the talents of their key executives by establishing a supplemental retirement plan, contact your DBS advanced case design resource, Terri Getman, JD*, CLU, ChFC, RICP, AEP (Distinguished) at extension 230.