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Supplemental Retirement Plan | Executive Retirement Plan
The value and benefits of a Supplemental Executive Retirement Plan provided through qualified plans (401k or pension plans) can constitute a decreasing percentage of retirement income for highly compensated employees due in part to limits on Social Security benefits and qualified plan contributions.
As the employee earns more, tax laws limit their contributions to qualified plans. They cannot defer as much as someone earning less than they earn.
For example:
One key employee has compensation of $300,000, another has compensation of $150,000; both are limited by law to a maximum contribution of $49,000 in 2009.
The $49,000 that each employee contributes is a different percentage of income. For the first employee, the $49,000 is about 16% of income.
For the second employee, the $49,000 is about 33% of income. In this case, the second employee, the lower-earning one, has a larger percentage of retirement income coming from a qualified plan.
How the SERP works
The key employee and their employer enter into an agreement whereby the employer agrees to pay the employee a lump sum or a specific income stream for a specific period of time in the future. The agreement identifies events (which may include retirement, disability, or separation from service after a period of years) that trigger benefit payments. The employee is not taxed on their employer’s contributions to the plan. In fact, they are not taxed on the retirement benefits until they receive them.
Benefit Payments and Taxation
Payments to employee: At retirement or another specific event delineated in the agreement, the employer pays the specified benefits to the employee. Depending on their agreement, these benefits may be paid in a lump sum or as an income stream over a period of years. As the employee receives benefit payments, they will be included in their taxable income.
