The „unqualified“ nature of a SERP means that it operates outside the rules of IRS qualification plans such as Plans 401 (k). In addition, the „deferred“ status of the plan is an agreement to pay the employee at some point in the future. If a SERP is not funded, the employer promises to pay compensation in the future, but that promise is not guaranteed. When the plan is funded, the employer places the assets in trust or in a trust where potential creditors of the employer cannot claim them. As a SERP is not offered to all employees, it is unlikely that you will find a predefined package in the staff manual. In addition, the details of the plans vary considerably from company to company. However, in a typical unfunded agreement, the employer agrees to provide a superannuation to its executives or HCEs, funded by their own dollars. With a defined benefit SERP, the most common, the employer generally calculates the benefit using a lump sum in dollars or a percentage of the employee`s average final salary. It then pays this amount over a one-year period from the worker`s retirement age. Another agreement is a defined contribution plan in which the employer makes periodic contributions to a staff account until retirement, like a pension plan.
The money is invested in the employee`s name until the employee`s retirement triggers the payment. In a defined benefit SERP, a company could, for example, agree, when it retires at age 65, to give its COO a salary equivalent to 70% of its average salary over the last three years over a period of twenty years. The company will set an annual charge equal to the current value of electricity for future benefit payments. Because of its many advantages, most companies use cash value life insurance to finance the SERP contract. The company acquires life insurance on the life of the key employee, sufficient to recover the costs associated with future benefits described in the agreement. The company pays the premiums, holds the policy and is the beneficiary of the policy. Cash policies increase with a tax advantage and can be used at any time by the company at its sole discretion. While every employee of a company has value, some employees are more difficult to replace than others. Companies do not want to hire executives or other important HCEs who only stay until the next opportunity arises.
Not only is there a lot of investment in high-level staff, but it is also often required to implement complex, multi-year plans, such as restructuring. As such, companies could offer a SERP as part of the large staff benefits packages to encourage them to stay for a longer period of time; it serves as an additional benefit to the employee and informal insurance for the company. A SERP must function as gold handcuffs because it encourages a highly compensated employee to stay in a company long enough to obtain the full benefits of the plan. Complementary life insurance plans have several advantages for the company: a SERP is a kind of unqualified deferred repayment plan that a company makes available only to certain highly compensated executives or employees (HCEs) to supplement the pensions it offers under the qualified old age pension. While qualified pension plans require testing to ensure that employers do not exceed contribution limits (and that workers do not exceed benefit limits), an unqualified plan, such as a PRSP, does not require an equity test and has no contribution or benefit limits. A Complementary Executive Reprocessing Plan (SERP) is an unqualified deferred compensation plan proposed by a company to its executives or other highly compensated employees. Unlike qualified plans, employers are not required to offer a PRSE to all workers. SERPs are generally only available to employees of the „Top Hat“ group, i.e. executives (such as CEOs, CFOs and COOs) and other employees who are normally considered „highly paid“