The principal purpose of a supplemental executive retirement plan (SERP) is to ensure adequate post-retirement income for selected senior executives. Under these plans, they receive benefits beyond those provided by the employer's qualified retirement plan. SERPs are becoming increasingly popular--a recent survey of the Fortune 100 industrial companies showed 93% currently maintain SERPs.
WHY A SERP?
SERPs are beneficial to executives and employers for many reasons. For the executive, the principal benefits are the supplemental retirement income and survivor compensation in the event of the executive's premature death.
The benefits usually are carefully defined and easily understood by the executive. Typically, SERPs do not require that performance goals be achieved but do require continued employment to a specified age for eligibility. As opposed to many other forms of compensation, the executive is able to defer tax on the earned benefits until they are paid, usually after retirement.
A substantial disadvantage to the executives covered by a SERP is that the employer's obligation to pay the promised benefit is unsecured. Although certain techniques discussed below may provide limited security for the executive, the participant must rely on the employer's financial stability.
This reliance is a disadvantage often overlooked by executives. Today's turbulent economic and legal climates have left major corporations unable to meet their legal obligations, including those owned to their employees. One prominent example is LTV Corporation, which has been in bankruptcy since 1986 and was the subject of a U.S. Supreme Court decision. The Court ordered LTV to reassume responsibility for its pension plan, thereby relieving the Pension Beenfit Guaranty Corporation, but left it up to the bankruptcy court to set priorities for the company's obligations.
Still, SERPs remain attractive to employers since they can provide benefits to a select group of executives without jeopardizing the preferred tax status of retirmenet benefits under qualified plans. What's more, the employer needn't provide the same benefits to a broad group of employees. If the company had to provide these benefits to a large group of employees, often it would not provide the benefit at all.
A employer can use a SERP to
* Facilitate early retirement for executives whose services are no longer desired.
* Attract senior executives who otherwise would receive an inadequate pension due to short service.
* Enhance the executive compensation package to motivate toplevel executives.
* Protect selected executives against involuntary termination.
* Create "golden handcuffs" by proportionately increasing benefits for additional years of service, thus providing a financial incentive for valued executives to remain with the company.
Changes in tax law have increased the popularity of nonqualified deferred compensation. Tax reform legislation has reduced the amount of benefits an executive can receive from qualified plans and increased the expense of providing a particular level of benefits to executives.
In annual reports to Congress, the Office of Management and Budget consistently lists qualified employee benefit plans as the single greatest "tax expenditure" in the federal system. In an era of proclaimed fiscal responsibility and a mounting deficit, Congress is likely to continue to reduce benefits and tax advantages associated with qualified retirement plans, particularly those for highly paid executives. Accordingly, employers will continue to search for programs that supplement or replace qualified employee benefit plans for these executives.
SERPs vs. EXCESS BENEFIT PLANS
Employers can use two principal types of nonqualified deferred compensation arrangements to bypass the qualified plan rules: the excess benefit plan and the SERP. …