10 Oct 2023
Using SERPs (and Rabbi Trusts) to Sweeten the Exec Comp Deal
Deferred compensation arrangements appeal to executives and other highly paid employees because they allow each participating executive to postpone their recognition of income taxes until a future year. There aren’t any caps on the amount that may be deferred into a nonqualified deferred compensation plan, commonly referred to as a Supplemental Executive Retirement Plan (SERP), as there are for qualified plans. So a defined contribution variety can consider the executive’s compensation above the Section 402(g) limit (the 401(k) plan-annual limit), the Section 415 limit (for annual additions), and the Section 401(a)(17) limit (on compensation that can be recognized in determining the amount of contributions). However, participating in these plans does carry risk as the assets used to fund the plan, which may have been a deferral of the executive’s own compensation, must remain subject to the claims of the sponsoring company's creditors until they are paid out. Enter the rabbi trust which provides greater assurance to the executive that these amounts ultimately will be paid to the executive on the prescribed payable event.
Related Content
- Rabbi Trust
Use this template for a rabbi trust that follows the IRS-established model rabbi trust language in Rev. Proc. 92-64, as modified by IRS Notice 2000-56. Employers must use the model language (tailored with appropriate optional and alternate provisions) if they want to rely on the tax-favorable treatment or if they intend to request an IRS ruling on the arrangement. - Top Hat Plans
Learn more about “top hat” plans, a colloquial term for a SERP, or any unfunded pension benefit plan maintained by an employer "primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees." - Section 409A Resource Kit
Remember the importance of Section 409A compliance when counseling on nonqualified deferred compensation. Section 409A governs almost every aspect of nonqualified deferred compensation, which is generally defined as any legally binding compensation where payment is or can be made in a taxable year after the taxable year in which the arrangement is created.
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