Non-Qualified Compensation

Supplemental Executive Retirement Plans
One of the most effective ways an employer can assist executives in reaching target retirement goals is through a nonqualified supplement executive retirement plan (SERP), which provides additional retirement benefits. SERPS, also referred to as Top Hat plans, are designed to restore benefits lost to regulatory restrictions on compensation used to calculate qualified pension benefits. In SERPs, executives do not defer current salary or bonus because the dollars used are provided entirely by the employer.

There are many types of SERPs such as offset plans or excess benefit plans, and they may be tied to the employer’s qualified retirement plan. In calculating benefit formulas, employers may select a defined benefit or defined contribution. Defined benefit provides a stated monthly and annual amount at retirement; defined contribution specifies a calculation based on lost benefits.

There are many plan versions and unlimited benefit and contribution formulas that may be used in plan design. Many respondents to the recent Executive Benefits Survey of Fortune 1000 base benefit formulas on a percentage of executive’s final five-year average compensation. What’s more, careful consideration of withholding rules, tax implications and golden parachute payments is essential.


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