Do You Know: What Is a Supplemental Executive Retirement Plan?

Oct 27, 2022 By Susan Kelly


Deferred compensation plans, such as a company's supplemental executive retirement plan, are often reserved for upper-level management and highly compensated workers (HCEs). They get a SERP on top of the regular retirement benefits the company gives out to everyone. SERPs are "non-qualified," meaning they are not subject to the same regulations as qualified retirement plans like 401(k)s. By designating the plan as "deferred," the company promises to make payments to the employee later. Even if a SERP is not now solvent, the company may guarantee to pay benefits in the future. The assets are held in an escrow or trust account when the plan is initially funded.

How Does a SERP Works?

Companies would rather not hire HCEs who will only stick around until they receive a better offer elsewhere. They make a concerted effort to recruit and retain star employees. Companies often hire this type of staff to assist with solving difficult issues. As such, a SERP might be included in a company's benefits package for its most valuable employees to retain them for the long term. The SERP benefits both the employee and the company, which will have an easier time retaining its best employees. But not all employees are given access to SERPs by their companies. Company-specific specifics of these plans can be found in their respective product descriptions.

Requirements for Supplemental Executive Retirement Plans

Unlike qualifying plans, companies are not obligated to provide SERPs to all employees. Chief Executive Officers, Chief Financial Officers, and other "highly compensated" employees are the only ones who typically receive SERPs from their companies. In your early years as an employee, you probably won't be considered important enough to the company's success for them to offer you a SERP. To qualify as a high-income individual (HCE) for tax purposes, the Internal Revenue Service requires either a 5% stake in the business in the current or prior year or $135,000 in annual income for tax years 2022 and later. There must be testing for a qualified retirement plan to ensure that neither the company nor the employees contribute more than they are allowed to. On the other hand, a SERP is not required to meet any standards of fairness and has no contribution or plan restrictions because it is not a qualified plan.

Benefits of Additional Executive Retirement Plans

Financial security in the late-career stage

Possibly you're contemplating a career shift from your current, more senior position. A SERP might become a bargaining chip for a higher salary or other benefits at your present company, or it can help you negotiate a new position with a prospective employer later in your career.

No contribution limits

You may have a cap on the amount of money you can put into an In 2021, an employee at a typical company might contribute up to $19,500 to a 401(k) plan; in 2022, that number would rise to $20,500. While HCEs are eligible to contribute up to 1.25 percent of their pay, they have limited to the lesser of two percent or twice the actual deferral rate of non-HCEs. 53 Due to this restriction, employers, may occasionally provide a SERP to provide their employees with a more convenient means of saving for retirement. Retirees may have as good of a quality of life as they did when working.

Taxation occurs in a lower bracket

In retirement, you could potentially enjoy a lower tax bracket. Many retirees experience a decline in their standard of living after leaving the workforce. As a result, they may pay less in taxes on their SERP payout now that they have a lower tax rate than while working. The strategy is most effective for employees who are further along in their careers and would benefit most from it.


A SERP plan is one-way businesses can reward and keep their most valuable employees. Non-qualified plans allow for preferential distribution to high-level executives whose participation in the company's qualifying plan (such as a 401(k)) is restricted due to yearly contribution caps, income thresholds, or both. Executive retirement packages are contracts between an employer and an executive that guarantee a set amount of money in retirement if the executive meets specified conditions. The plan is financed by the company's existing cash reserves or a cash-value life insurance policy. You can put off paying taxes on the money until later. The executive can take the money out and pay taxes when they retire.

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