Question:
I’ve just retired from a large organization and I have a SERP in place. I’d like to know, what is it, and how secure is it?
Answer:
A supplemental executive retirement plan, or SERP, is a non-qualified retirement plan for key company employees that provides benefits above and beyond those covered in other retirement plans such as IRAs or 401(k)s. It is non-ERISA governed and does not have the same tax-law treatment as qualified plans.
SERPs may, for example, calculate a certain pension for the employee, then offset that by the benefits the employee actually receives from the employer’s qualified plans and Social Security; the resulting difference is the non-qualified deferred compensation plan retirement benefit paid by the employer to the employee after the employee’s retirement. These plans often include a vesting provision, or are tied to the vesting schedule in the employer’s qualified plan.
For example, each year the company may put aside money for the executive, with benefits payable upon retirement, separation from service, disability, death, unforeseen emergency, or at a specified time. Benefits can be paid either in a lump sum or in a series of annual payments. Life annuities or payments for a fixed number of years (such as five or 10 years) are common. Since most ERISA requirements will not apply if you structure the plan correctly, you generally have some flexibility in establishing your own vesting schedule and forfeiture provisions.
Your age and whether you are fully vested factor into the safety of this benefit. If you have left the company at 55, and benefits are payable at 65, you could have 10 years before you see any money, and 20 years before you receive all of your benefit. Additionally, these types of plans are not protected from creditors. If the company were to fail before your benefits are paid, you could lose the benefits promised to you. You want to consider the financial strength of your former company.
The SERP is often funded by permanent cash-value life insurance that the company owns. For the company, the money grows tax-deferred within the life insurance policy. Executives cannot negotiate for earlier benefits of these plans. So even if the executive leaves the firm, the benefit remains payable at the specified time. Of course, this brings up the concern of how strong the insurance company is, and if they are matching the liability they will have to pay the executive.
SERP benefits are often very rich and attractive, but they carry considerable risk for the executive.
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