Employer enters into an agreement with
the Executive for the payment of supplemental retirement income. These benefits will be financed with
Employer dollars, and may be subject to a "substantial risk of forfeiture."
Employer purchases a life insurance policy
on the Executive's life, naming itself owner and beneficiary of this policy. The policy provides a death
benefit and tax deferred accumulation of cash values.
In the event of Executive's death,
heirs will either receive annual income or a lump sum payment from from the Employer.
At retirement, Executive receives the
SERP compensation from the Employer.
It is a well known fact that the most important assets of any business
are its key people. Consequently, it is very important for business owners to find ways of attracting
and retaining key executives. Coincidentally, this often occurs at a time when executives are
experiencing difficulty in planning for their own retirement. Today's executives are having trouble
accumulating retirement dollars because most savings programs are funded with after-tax dollars, and as
a result of the "reverse discrimination" that highly compensated executives experience under qualified
plan limits. Also, any gains on these investments are currently taxed, thereby reducing the net yield.
However, there is a strategy for this difficult situation.
The Employer enters into a Supplemental Executive Retirement Plan (SERP)
with its key executives. Through this arrangement, the Employer agrees to provide supplemental retirement
income to selected executives and their families in return for the attainment of agreed-upon objectives.
Since these benefits are either a mere promise to pay, or are subject to a "substantial risk of
forfeiture," they are not currently taxable to the key executives. However, when this deferred compensation
is distributed or is no longer subject to a substantial risk of forfeiture, it becomes tax-deductible to the
Employer and reportable as income to the executives or their heirs.
The Employer purchases a life insurance policy on the Executive's life.
In accordance woth the agreement, the Employer retains all ownership rights in the policy and names
itself beneficiary. Generally, the policy creates an income tax-free death benefit and over time a
tax-deferred accumulation of cash values for the Employer. At retirement, the Executive begins
receiving the agreed-upon supplemental deferred compensation from the Employer. In the event of the
Executive's death, the Employer can use the death benefit to pay the Executive's heirs either annual
income or a lump sum settlement. By properly structuring a SERP and the policy, the Employer and the
Executive will obtain the following advantages:
Plan has minimal ERISA requirements, and can provide selected employees with
supplemental benefits.
The Employer controls the plan, owns the policy and carries the cash value as an
asset on its balance sheet.
The Employer's cash value accumulates within the insurance policy on a tax-deferred basis.
Plan benefits are paid with tax-deductible dollars.
The policy can be structured to allow for Employer cost recovery.
The plan can be custom designed to meet the Executive's individual needs.
Retirement income is accumulated without current taxation to the Executive.
The plan, through the policy's death benefit, can be self-completing in the event
of the Executive's death.
The Executive avoids "reverse discrimination" associated with qualified retirement plans.
