Even the most modern and innovative organizations face significant competition when recruiting and retaining key leadership. Supplemental Executive Retirement Plans (SERPs), which provide retirement benefits above and beyond traditional plans like 401(k)s and IRAs, are important for attracting and ultimately keeping the very best talent. Keep reading for an overview of three different kinds of SERPs and how they could benefit your organization.
Deferred Compensation can be an effective tool for employee retention. The employer promises to pay the employee a certain amount of money at a future date, contingent upon specific service milestones or performance metrics. The compensation is promised but not paid until said date, and ideally, the taxes are deferred until that date as well. Today’s Deferred Compensation plans are typically structured with a “defined contribution” where the organization commits to a certain payout, in a lump sum or periodically. Once received, it is the employee’s responsibility to save or invest the after-tax money for their future retirement needs.
Executive Bonus Plans are another strategy for keeping the very best talent. This structure utilizes insurance to provide tax-free earnings for retirement and death benefit coverage. The employer pays a bonus to the executive in exchange for service or performance milestones. The bonus is immediately includable in compensation and taxes are withheld. The net proceeds are paid as a premium to a cash value-oriented life insurance policy that the executive owns. Due to the tax advantages of life insurance, the policy’s cash value grows tax-free, and the executive can borrow tax-free against the policy for retirement cash flow needs.
While Split Dollar has been around since the 1950s, the IRS issued the final regulations in 2003 for the tax treatment of split dollar plans, which divided split-dollar arrangements into two classifications, loan regime and economic benefit regime. Loan Regime Split Dollar can be a powerful mechanism for delivering tax advantaged retirement benefits to a key employee. Similar to Executive Bonus, the employee can borrow against the policy’s cash value tax-free, and the organization is repaid it’s funds from the death proceeds. The value of the program remains an asset on the organization’s balance sheet, but it is generally illiquid and can be a life-long commitment, with recovery occurring upon the death of the employee. For this reason, Split Dollar is best utilized in organizations with strong balance sheets and a long-term focus on investments.
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