What is a Supplemental Executive Retirement Plan?

Sometimes referred to as a top hat plan, a supplemental executive retirement plan is a type of additional preparation for retirement that is above and beyond any other plans that are in effect, such as an Individual Retirement Account, Individual Savings Account, or 401(k) plan. Sometimes referred to simply as a SERP, these plans are normally reserved for key corporate executives. The idea behind this additional planning for retirement is to ensure that the executive can maintain the same standard of living even after leaving the work force.

One of the distinguishing characteristics of a supplemental executive retirement plan is that the employee does not actually make any contributions. With this type of program, the employer is responsible for making regular contributions based on the terms of the contract that exists between the employee and the employer. For example, the contract may call for the employer to contribute a flat figure each calendar year that the executive remains with the firm. In other situations, the yearly contribution may be based on a percentage of the annual salary of the employee, and is influenced by the cash flow enjoyed by the business for the period under consideration. Many companies also fund the plan with the use of an insurance scheme.

One of the most common ways to fund a supplemental executive retirement plan is in the form of cash value life insurance coverage. With this model, the employer owns the policy, pays monthly premiums, and is able to make use of the asset as it sees fit. Once the employee retires, the employer pays monthly installment payments to the retired employee, while remaining the beneficiary of the policy. In the event of the death of the employee, the company collects the entire cash value of the policy and uses the proceeds to settle any benefits that are due to the survivors or other beneficiaries of the deceased.

There is some difference of opinion on the use of supplemental executive retirement plan strategies. Many labor groups are highly critical of the approach, since it increases the potential for overpaying mediocre employees. For this same reason, shareholders are also sometimes uncomfortable with this type of retirement plan strategy, and prefer to go with some sort of arrangement that is based more on merit.

In most countries, a supplemental executive retirement plan is considered a non-qualified retirement program. This means that the employee is responsible for paying taxes on any funds received from the plan. At the same time, those disbursements usually count as a tax deduction for the employer at the time they are issued, a fact which helps to make up for the inability to claim a tax deduction at the time the premium payments were made on the life insurance policy.