Supplemental Executive Retirement Plans Employee Concerns
Why Secure Nonqualified Benefits?
Unlike qualified plans, nonqualified benefits are subject to additional risk:
Change of Heart
Change in Control
Change in Financial Condition
Insolvency/Bankruptcy
Nonqualified Deferred Compensation plans can be a significant investment of the participant’s own retirement resources.
Most employers wish to provide highest possible quality of benefit promises possible, qualified or nonqualified.
The primary purpose of nonqualified benefit plans is to attract, retain and motivate key executives; secure benefits will be more effective in accomplishing this purpose.
Tax consequences
In exchange for the employee’s beneficiaries receiving an income tax free death benefit from the life insurance policy paid for by your business, the employee is required to include in income the economic value of the current year’s death benefit protection each year that the Split Dollar arrangement remains in effect. This value is calculated based upon the employee’s age using either the Internal Revenue Service (IRS) Table 2001 rates or the insurance company’s alternative qualifying term insurance rates. At the employee’s retirement, the employee will be taxed on the value transferred from your business under the SERP arrangement. The business receives a deduction equal to the amount of compensation reportable by the employee. The business’ tax savings could be used to gross-up the employee’s compensation sufficient to cover the employee’s taxes on the distribution of the policy. Note that any promise, understanding or greement
by the employer to provide compensation (including a tax gross-up) at retirement or at any time in the future constitutes Deferred compensation within the definition of section 409A of the Internal Revenue Code. Any such arrangement must be fully compliant with the requirements of the IRC 409A.