How to Establish a Supplemental Executive Retirement Plan (SERP)

A supplemental executive retirement plan (SERP) is a non-qualified retirement plan provided by an employer to a select group of key executives. SERPs are designed to offer additional retirement benefits over and above those available through standard retirement plans, and they can be a powerful tool for attracting and retaining top talent. 

Below are the main steps involved in establishing a SERP:

1. Determine which executives are critical to the organization’s success and should be included in the SERP.
2. Choose the type of SERP that aligns with your company’s objectives.
3. Verify that the plan complies with federal and state regulations, including tax laws and reporting requirements.
4. Decide how the plan will be funded. This could include methods such as corporate-owned life insurance (COLI), cash reserves, or other financial instruments.
5. Create the necessary documentation outlining the terms and conditions of the SERP. This includes agreements, summary plan descriptions, and any other required documents.
6. Present the plan to the company’s board of directors for approval.
7. Communicate the plan details to eligible executives and assist them with the enrollment process.
8. Establish a process for ongoing management of the plan, including record-keeping, monitoring contributions and distributions, and compliance updates.

In this article, the high-net-worth retirement planners from Avidian Wealth Solutions will guide you through the key features and benefits of SERPs, as well as important considerations to keep in mind when setting up a plan for your organization’s executives.

Learn more: 

What is retirement planning?

How to choose the best retirement plan for you

What is a SERP? And how do supplemental executive retirement plans work?

Because we already addressed the SERP definition above, here we will dive into the specifics of the plans and how they work.

Unlike standard qualified retirement plans, which have contribution limits and are subject to nondiscrimination rules, SERPs are highly customizable and can be tailored to meet the specific needs of both the company and its executive’s retirement planning solutions. 

These plans are usually negotiated on an individual basis and can take into account factors such as years of service, performance metrics, and overall compensation packages. SERPs are designed to bridge the gap between the retirement income provided by qualified plans and the executive’s pre-retirement earnings, helping to ensure they maintain a comparable lifestyle post-retirement. 

Key features of SERPs

• Customizability: Employers have the flexibility to design the plan to align with their strategic goals and to reward individual executives based on criteria such as performance, tenure, and company profitability.
• Tax deferral: Contributions to a SERP are typically tax-deferred until the executive withdraws the funds upon retirement, allowing for potential tax advantages.
• Retention tool: By offering substantial post-retirement benefits, SERPs act as a powerful incentive for key executives to remain with the company long-term.
• Selective participation: Unlike qualified plans, which must be offered to all employees, SERPs can be tailored to just a select group of top-tier executives.

Benefits of SERPs

• Attracting talent: Offering a SERP can be a significant differentiator when recruiting high-caliber talent, because of the prospect of enhanced retirement security.
• Boosting retirement savings: For executives who have already maxed out contributions to qualified retirement plans, SERPs provide an additional means to save for retirement.
• Tailored benefits: Companies can structure SERPs to provide specific benefits that cater to the needs and circumstances of individual executives, making them a highly personalized form of compensation.

How to set up a SERP plan

1. Determine which executives are critical to the organization’s success

Identifying the key executives who are instrumental to the company’s success is the first crucial step in setting up a SERP. These individuals typically hold positions with significant responsibility and influence over the company’s direction and performance. 

Conducting an assessment of roles such as C-suite executives, senior management, and other pivotal positions helps make sure that those who drive the organization’s success are rewarded and incentivized with additional retirement benefits.

2. Choose the type of SERP that aligns with your company’s objectives

Although there are a number of types of SERPs that can be customized to meet specific company goals, the two primary types are: 

1. Defined benefit plans, which promise a specified monthly benefit upon retirement, and; 
2. Defined contribution plans, which specify the contributions the company will make. 

Selecting the appropriate plan involves considering factors such as the company’s financial stability, long-term objectives, and the desired level of retirement income for key executives.

3. Verify that the plan complies with federal and state regulations

Making sure that the SERP plan complies with relevant federal and state regulations is essential to avoid legal and financial pitfalls. This includes adhering to the: 

• Employee Retirement Income Security Act (ERISA)
• Internal Revenue Service (IRS) regulations
• Any other applicable laws

Compliance affects not just the structuring of the plan but also its tax treatment and reporting requirements. Consulting with legal and tax advisors is highly recommended to navigate this complex landscape.

4. Decide how the plan will be funded

Funding the SERP plan is a critical step that requires careful financial planning. Companies can choose from various funding methods, such as corporate-owned life insurance (COLI), which can provide significant tax advantages, or setting aside cash reserves specifically for this purpose. Other financial instruments like annuities can also be considered. 

The chosen funding method should align with the company’s financial strategy and plan for the plan’s sustainability. When setting up a SERP, using a SERP calculator won’t alone cut it, as trusted financial guidance from an advisor is essential to estimating future benefits and truly understanding the financial impact of the plan.

5. Create documentation outlining the terms and conditions of the SERP

This includes drafting detailed agreements, summary plan descriptions, and any other required documents that clearly outline the plan’s terms and conditions. These documents should cover eligibility criteria, benefit calculations, vesting schedules, and any other pertinent details to ensure transparency and understanding among all parties involved.

6. Present the plan to the company’s board of directors for approval

The proposed SERP plan must be presented to the company’s board of directors for review and approval. This involves preparing a detailed presentation that highlights the plan’s benefits, alignment with company objectives, and compliance with regulations. Gaining the board’s approval is essential for the plan’s legitimacy and subsequent implementation.

7. Communicate the plan details to eligible executives

Once approved, the details of the SERP must be communicated to the eligible executives. This includes providing them with comprehensive information about the plan, its benefits, and how it works. Offering personalized assistance during the enrollment process helps make sure that executives fully understand the plan and can make informed decisions regarding their participation.

8. Establish a process for ongoing management of the plan

Maintaining the SERP plan requires vigilant ongoing management. This includes meticulous record-keeping, regular monitoring of contributions and distributions, and staying up-to-date with any changes in compliance requirements. 

Establishing clear procedures and designating responsible personnel or external administrators can help manage these tasks effectively, ensuring the continued success and integrity of the SERP.

Avidian Wealth Solutions can help your organization effectively design, implement, and manage a SERP.

If your company is interested in implementing a supplemental executive retirement plan (SERP), Avidian Wealth Solutions can help. We are a wealth management firm offering a boutique family office experience to high-earning families and business owners. 

Our team of experienced financial advisors and retirement planners can assist with the steps of the process, from designing a customized plan to communicating it to executives and providing ongoing management support. 

We understand the unique challenges and opportunities that come with offering SERPs, and can offer guidance to help your organization work to achieve its goals while remaining compliant with regulations. 

Schedule a conversation with us today to learn more about our strategies for retirement income planning and retirement planning for high-net-worth individuals and business owners in Houston, Austin, Sugar Land, and The Woodlands.

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• What is Tax Planning for High-Net-Worth Individuals?

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