Supplemental Executive Retirement Plan and Taxes Review
What is a supplemental executive retirement plan, and what are the tax consequences for this type of plan? This is one of the available account types that can be used for retirement planning purposes, and there are both benefits and disadvantages with these plans. The goal is to provide additional compensation for valued employees, to retain them and their talents. A supplemental executive retirement plan involves an agreement between the employee and the company that provides a source of supplemental retirement income as long as the executive meets the conditions that have been agreed upon in the contract. This retirement income is not taxable until it is paid out to the executive, and the business can not deduct this expense before payment is made either.
Some retirement plans for small business employees are not sufficient to attract the needed level of executive experience in employees, and a SERP can sweeten the pot and attract the attention of qualified employees. Supplemental executive retirement plan benefits are usually covered with a cash value life insurance policy on the executive, and the policy premiums are paid by the business. No approval from the Internal Revenue Service is required for these plans, and they can provide valuable retirement cash flow to executives that are essential to the business interests.
Even the best 401k plans may not be sufficient for top level executives, and a SERP can address this problem. Taxes are not applied to this plan until the payment is made to the covered executive, and this can have benefits in many situations. A supplemental executive retirement plan can be customized to meet the specific needs of the company and executive, making it highly effective. It is possible to have a SERP and another type of retirement account as well, and if this option is utilized then you should compare the benefits of IRA vs 401k accounts.