Supplemental Executive Retirement Plan – Definition

Cite this article as:"Supplemental Executive Retirement Plan – Definition," in The Business Professor, updated April 7, 2020, last accessed September 26, 2020,


Supplemental Executive Retirement Plan

A supplemental executive retirement plan (SERP) is a non-qualified compensation plan offered to the key employees of a company and high-ranking officials such as CEOs, CFOs, and others. SERP is a tax-deferred retirement plan that provides supplemental retirement income outside of the benefits covered in retirement plans. Through SERPs, companies can provide additional income for their key employees such as directors, CEOs, managers, to help them maintain their standard of living, even in retirement.

A Little More on What is a Supplemental Executive Retirement Plan (SERP)

A supplemental executive retirement plan (SERP) is a major strategy companies use to reward top-ranking staff and sometimes retain their services after retirement. By providing supplemental income to key employees in addition to their retirement plan benefits, the commitment of such employees towards a company is retained. There are many types of SERPs with varying eligibility requirements and vesting conditions.

Usually, corporations use the supplemental executive retirement plan to give an assurance to key employees that their standard of living in retirement will be the same while in active service. The provisions SERPs are not enjoyed by all the core employees of a company, they are selectively available to only a few employees. Companies enter into a formal agreement with qualified executives promising them of a Supplemental retirement income which is available based on vesting.

Advantages of a Supplemental Executive Retirement Plan

The major advantages of supplemental executive retirement plans are;

  • SERPs are non-qualified deferred retirement plans that offer additional retirement income to a company’s executives.
  • A SERP is controlled by a company and the income made available to qualified executives based on vesting, and other eligibility conditions.
  • A company does not need IRS approval before setting up a SERP.
  • SERPs offer tax benefits to the company and beneficiaries, for instance, the IRS and state tax a SERP income as ordinary income when they are paid to executives upon retirement.
  • Executives also accrue benefits in the plan without any tax consequences.

Disadvantages of a Supplemental Executive Retirement Plan

SERPs are offered selectively to the top executives of a company, thereby disqualifying all other employees regardless of their contributions to the company. This supplemental retirement plan is offered to top-ranking or high-earning executives. Although a Supplemental Executive Retirement plan offers a company a tax-deferred accumulation or tax deduction benefit, a company does not receive an immediate tax deduction on payments made to the qualified executives. Also, the funds that a company accumulates in a SERP are still exposed to creditor claims.

Here are some things to note about a Supplemental Executive Retirement Plan (SERP);

  • A SERP is a non-qualified retirement plan for a company’s top employees, it is tax-deferred plan.
  • A company offers SERP to its high-ranking officials to provide them with a Supplemental retirement income outside of their normal retirement plan benefits.
  • SERPs serve as an incentive to a company’s top executives for their service at a company, it is also a way of retaining their service.
  • SERP is not supervised by the IRS and offers tax benefits to the company and executives.

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