Supplemental Executive Retirement Plan
A supplemental executive retirement plan (SERP) is a set of benefits that may be made available to top-level employees in addition to those covered in the company's standard retirement savings plan.
A SERP is a form of a deferred-compensation plan. It is not a qualified plan. That is, there is no special tax treatment for the company or the employee, such as is available through a 401(k) plan.
Definition:
A Supplemental Executive Retirement Plan (SERP) is a series of benefits provided to senior employees in addition to the company's standard retirement savings plan. SERP is a type of deferred compensation plan that is not a qualified plan, meaning that neither the company nor the employees enjoy the special tax benefits provided by 401(k) plans.
Origin:
The concept of SERP originated in the mid-20th century when companies began to realize the need to provide additional retirement benefits to attract and retain top talent. Over time, SERP has evolved into a common executive compensation tool, especially in large corporations.
Categories and Characteristics:
SERP mainly falls into two categories: defined benefit plans and defined contribution plans. Defined benefit plans promise a specific amount of benefits upon retirement, while defined contribution plans determine the retirement benefits based on the contributions made by the company and the employee, as well as the investment returns. The main characteristics of SERP include: 1. Flexibility: Companies can design different plans based on the needs of the executives and the financial status of the company. 2. Incentive: By providing additional retirement benefits, companies can incentivize executives to serve the company long-term. 3. Tax Considerations: Although SERP does not enjoy the tax benefits of 401(k) plans, it can reduce the current tax burden of executives through deferred compensation.
Specific Cases:
Case 1: A large tech company designed a SERP for its CEO, promising to pay a certain amount of pension annually after retirement. This plan not only helped the company retain this key executive but also provided additional financial security for the CEO.
Case 2: A financial services company offered a defined contribution SERP to its senior management team. The company annually contributed a certain amount to the plan based on the executives' performance and the company's profit situation. This plan not only motivated the executives' work enthusiasm but also tied their benefits to the overall performance of the company.
Common Questions:
1. How is SERP different from a 401(k) plan?
Answer: SERP is not a qualified plan and therefore does not enjoy the tax benefits of a 401(k) plan, but it can provide higher flexibility and customized benefits.
2. Why do companies offer SERP?
Answer: SERP can help companies attract and retain top executives, provide additional retirement security, and incentivize executives to serve the company long-term.
