An employer uses a SERP to provide additional retirement income to a key employee. A SERP is the opposite of a salary deferral plan. Its a non-contributory plan, meaning the employee does not contribute to a SERP, rather the employer is responsible for funding the benefit. Its an excellent way for an employer to compensate key employees who are faced with reverse discrimination. The employer has the flexibility to select to employees it wants to participate in the plan, thus increasing retention by rewarding highly compensated employees with a total compensation package.
HOW IT WORKS:
In a SERP arrangement, the employer and employee enter into an agreement that states that the employer will pay the employee a certain amount of money either over a period of time or in a lump sum upon death, retirement, or termination of the plan. The income received by the employee is taxable at the ordinary income tax rate and the employer will receive an income tax deduction.
ADVANTAGES:
-An excellent way to provide highly compensated individuals with supplemental retirement income.
-No cost to the executive.
-Provides significant incentive to executives to remain employed with the business.
