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Sweeten Your Exec Benefits with Some SERP!

January 05, 2022 (3 min read)

Employers often maximize high-earning executives’ deferred compensation by establishing a supplemental executive retirement plan (SERP) that adds to the executive’s defined contribution plan account—but on a nonqualified basis. Qualified plans are subject to IRS limits. For example, in 2022, execs may want to save more than the IRS limits ($20,500 of their own money in a 401(k) plan, pre-tax/designated Roth, and $6,500 more if they are age 50 or older). Other IRS limits may apply to limit their qualified plan contributions. Having a SERP in place can allow executives to save significantly greater amounts. 

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Related Content

  • Substantial Risk of Forfeiture under the IRC
    Remember that Section 3121(v)(2) of the Internal Revenue Code determines when Social Security and Medicare (FICA) taxes are imposed on an amount that an executive (or the employer) contributes under a nonqualified deferred compensation plan. The basic rule is that such amounts are taken into account for FICA taxes as of the later of (1) when the services are performed or (2) when there no longer is a substantial risk of forfeiture of the right to such amount. So, like 401(k) elective contributions, usually you’ll pay FICA taxes at the time that the amounts are contributed to the deferred compensation plan.
  • Rabbi Trust Drafting and Design
    See how executive contributions to a nonqualified deferred compensation plan usually are held in a notional account (just an accounting entry of a payment due in the future). Will the money be there when it becomes payable? Executives gain some confidence that payment ultimately will be made if the employer establishes a rabbi trust. This is an irrevocable trust used to fund a company’s obligations under a nonqualified deferred compensation plan, the assets of which are still subject to the claims of the general creditors of the sponsoring company. 
  • Top Hat Plan Statement Filing Rules and Procedures
    See how SERPS, like other top-hat plans, fall within a loosened reporting structure under ERISA’s reporting and disclosure rules. A top hat plan sponsor may satisfy its ERISA Title I reporting and disclosure obligations by (1) filing a statement with the Secretary of Labor about the plan and (2) providing plan documents to the Secretary of Labor on request.

 

Practical Guidance Updates

Featuring the latest updates from your Practical Guidance account.   

    • ERISA Litigation. Supreme Court hears oral arguments in ERISA fiduciary breach suit over 403(b) plan's investment menu selection and excessive fees. Divane v. Northwestern Univ., 953 F.3d 980 (7th Cir. 2020), cert. granted, Hughes v. Northwestern Univ., 2021 U.S. LEXIS 3583 (2021). Oral arguments transcript.
    • Retirement Plans. IRS issues 2021 Required Amendments List for individually designed plans qualified under 401(a) and 403(b) plans (sole entry relating to multiemployer plans seeking special financial assistance). I.R.S. Notice 2021-64. [Note that the required amendments list fails to mention hardship amendments in 401(k) plans that may be required for a plan to comply with final regulations under the Bipartisan Budget Act of 2019.] 
    • Executive, Incentive, and Equity-Based Compensation. SEC staff modifies executive compensation reporting interpretive guidance in Staff Accounting Bulletin Series to align its views on fair value estimations of equity-based compensation grants while the company is in possession of material non-public information with current authoritative FASB standards. SEC, Staff Accounting Bulletin 120. 


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