Supplemental Retirement Plans: Maximizing Your Golden Years

Supplemental retirement investment plans are a form of non-qualified deferred compensation offered by some employers to certain individuals, which go beyond the limits established for qualified plans. These plans are generally not available to standard employees but are instead provided for executives or high-level corporate employees. They can be tailor-made for an individual employee or negotiated as part of a compensation package. Supplemental retirement plans give employees the chance to save more for retirement once they've maxed out their contributions to a qualified plan, which can increase engagement and retention.

Characteristics of Supplemental Retirement Investment Plans

Non-qualified supplemental retirement plans

A non-qualified supplemental retirement plan is a type of tax-deferred, employer-sponsored retirement plan that falls outside of Employee Retirement Income Security Act (ERISA) guidelines. They are designed to meet the specialised retirement needs of key executives and other select employees.

Non-qualified plans are so-called because they do not adhere to ERISA guidelines, unlike qualified plans. They are generally used to provide high-paid executives with additional retirement savings options. They are also used as recruitment and retention tools.

There are four major types of non-qualified plans:

• Deferred compensation plans
• Executive bonus plans
• Split-dollar life insurance plans
• Group carve-out plans

Non-qualified plans are not available to standard employees. They are usually provided for executives or high-level corporate employees, and can be tailor-made for an individual employee or negotiated as part of a compensation package.

One of the main goals of a non-qualified plan is to allow highly compensated employees to contribute to another retirement plan after their qualified retirement plan contributions have been maxed out.

Deferred Compensation Plans

There are two types of deferred compensation plans: true deferred compensation plans and salary-continuation plans. The difference between the two is the funding source. With a true deferred compensation plan, the executive defers a portion of their income, often bonus income. With a salary-continuation plan, the employer funds the future retirement benefit on the executive's behalf. Both plans allow for the earnings to accumulate tax-deferred until retirement.

Executive Bonus Plans

With an executive bonus plan, a company issues an executive a life insurance policy with employer-paid premiums as a bonus. Premium payments are considered compensation and are deductible by the employer. The bonus payments are taxable to the employee. In some cases, the employer may pay a bonus over the premium amount to cover the executive's taxes.

Split-Dollar Plans

A split-dollar plan is used when an employer wants to provide a key employee with a permanent life insurance policy. The employer purchases a policy on the employee's life, and the employer and the employee divide ownership of the policy. The employee may be responsible for paying the mortality cost, while the employer pays the balance of the premium. At death, the employee's beneficiaries receive the main portion of the death benefit, while the employer receives a portion equal to its investment in the plan.

Group Carve-Out Plans

A group carve-out plan is another life insurance arrangement in which the employer provides a key employee with a life insurance policy on top of a company's group term life insurance plan. This allows the key employee to avoid the imputed income on group life insurance above $50,000. The employer redirects the premium it would have paid on the excess group life insurance to the individual policy owned by the employee.

SERPs as a sole retirement plan

A Supplemental Executive Retirement Plan (SERP) is a deferred compensation agreement between a company and a key executive. SERPs are a type of supplemental retirement plan that companies often use to attract, reward, and retain top talent. SERPs can act as the sole retirement plan for executives or as a supplement to a more typical qualified plan such as a pension.

SERPs are typically funded through a cash value life insurance plan, although they could be paid out of cash flows or investment funds. The employer buys the insurance policy, pays the premiums, and has access to its cash value. The employee receives supplemental retirement income paid through the insurance policy.

SERPs are attractive to employers because they are easy to implement, require no IRS approval, and allow the company to decide which executives will receive the benefit. The employer can also structure the life insurance policy to allow the company to recover its costs.

SERPs are beneficial to employees because they provide a supplemental retirement benefit that is only taxable when received as income in retirement, at which point most executives will likely be in a lower tax bracket than when working. The plan can be tailored to meet the specific needs of individual employees.

A defined benefit SERP provides a benefit in the form of an annuity at retirement. When added to the employee's projected income from other retirement plans and Social Security benefits, the annuity will equal a specified percentage of the employee's final average compensation, similar to a traditional defined benefit pension plan.

A defined contribution SERP provides periodic contributions to an individual employee account. The money remains invested for the employee until retirement, death, or a disability triggers payment.

Deferred compensation

A supplemental retirement plan is a way for employers to give their top employees an opportunity to save more for retirement once they've maxed out their contribution to a qualified plan. One type of supplemental retirement plan is a deferred compensation plan.

With a deferred compensation plan, an employee defers accepting a portion of their compensation until a specified future date, usually retirement. The deferred funds are set aside and can earn a return on investment until they are paid out to the employee. The employee pays Social Security and Medicare taxes on the deferred income but doesn't have to pay income tax on the deferred compensation until the funds are received.

Another type of deferred compensation plan is a non-qualified deferred compensation (NQDC) plan. NQDC plans allow corporate executives to defer a much larger portion of their compensation and to defer taxes on the money until the deferral is paid. NQDC plans are not for everyone, as they come with substantial risks, including the risk of complete loss of assets.

Advantages for employers

A supplemental retirement investment plan can be a great way to enhance an employee's compensation package. Here are some advantages for employers who offer these plans:

Attract and Retain Top Talent

Supplemental retirement plans can be a powerful tool for attracting and retaining key executives and employees. By offering these plans, employers can provide an additional incentive for top talent to join and remain with the company. This can lead to improved employee retention and reduced recruitment costs.

Tax Benefits

While supplemental plans may not offer immediate tax advantages, they can still provide tax benefits to employers. For example, when benefits are paid out, employers can deduct them as business expenses. Additionally, if a cash-value life insurance policy funds the plan, the employer can benefit from tax-deferred accumulation within the policy and may be able to recover their costs.

Flexibility

Employers have the flexibility to choose between a fixed-dollar benefit amount or a formula-based benefit amount for their employees. They can also design the plan to provide reduced benefits if an employee leaves the company before reaching retirement age. This flexibility allows employers to customize the plan to meet their specific needs and goals.

Easy to Implement and Manage

Supplemental retirement plans, such as Supplemental Executive Retirement Plans (SERPs), are generally easy to put together and require minimal management. They do not require IRS approval, giving employers more control over the plan's structure and administration.

Enhance Employee Productivity and Satisfaction

Offering supplemental retirement plans can lead to increased employee satisfaction and motivation. Employees who feel their employer is investing in their future are more likely to be engaged and productive in the workplace. This can have a positive impact on the overall success of the business.

In summary, supplemental retirement investment plans offer employers a range of advantages, including talent retention, tax benefits, flexibility, ease of implementation, and improved employee satisfaction and productivity. These plans can be a valuable tool for employers to attract and retain top talent while also enhancing their overall compensation packages.

Advantages for employees

A supplemental retirement investment plan, also known as a Supplemental Executive Retirement Plan (SERP), is a set of benefits offered to top-level employees in addition to their company's standard retirement savings plan. Here are some advantages that employees may enjoy through SERPs:

Tax Benefits

SERPs allow employees to accumulate funds on a tax-deferred basis. This means that employees do not have to pay taxes on the funds until they withdraw them in retirement. This can result in significant tax savings, especially if the employee retires in a lower tax bracket than when they were working. Additionally, distributions before the age of 59 are not subject to the 10% early withdrawal penalty that applies to some other retirement plans.

Increased Retirement Savings

SERPs provide employees with a way to increase their retirement savings beyond what is offered by traditional retirement plans, such as a 401(k) or Individual Retirement Account (IRA). This can be particularly beneficial for employees who have already maxed out their contributions to these qualified plans. By offering a supplemental plan, employers give their top employees an additional opportunity to save for retirement.

Flexible Payout Options

SERPs typically offer employees the choice between receiving their benefits as a lump-sum payment or as an annuity. A lump-sum payment provides immediate access to the entire amount, while an annuity provides regular payments over time. This flexibility allows employees to choose the option that best suits their financial needs and tax situation.

Peace of Mind

SERPs often provide peace of mind for employees and their families. In the event of the employee's death, their spouse or beneficiaries can receive annuity income or a lump-sum survivor benefit. This ensures that the funds are not wasted and provides financial support for the employee's loved ones.

Tailored to Individual Needs

SERPs can be tailored to meet the specific needs of individual employees. Employers have the flexibility to choose between a fixed-dollar benefit amount or a formula-based benefit amount, taking into account factors such as participant compensation and years of service. This customization ensures that the plan aligns with the employee's long-term financial goals.

Frequently asked questions