Compensation for Business Leaders

Retirement Plans

Supplemental Executive Retirement Plans (SERPs)

Since business leaders’ pay levels are generally higher than non-managerial employees, there is a disproportionate participation (contribution level) of these highly compensated employees in qualified retirement plans which, under ERISA, can result in plans losing their tax advantage qualified status so various types of non-qualified supplemental executive retirement plans (SERPs) are offered. SERPs provide benefits beyond the limitations of 401(k) plans and matching contributions. They are structured to replace a defined percentage of income in retirement.

Rabbi Trusts

To partially offset the risk inherent in deferred plans, rabbi trusts were created. Here, a quasi-trust partially protects business leaders from creditors by giving them the same standing in claims against the company. The funds are highly regulated, and employers are unable to access the money once it is placed in the rabbi trust. Taxes are deferred until the beneficiary retires, is terminated, dies, or is disabled.

The first IRS ruling that pertained to this type of trust involved a religious congregation that contributed money to a trust for its rabbi, hence the name.

A rabbi trust has to be:

• unfunded so assets have to be unsecured
• for a certain management group or group of top-paid employees

Secular Trusts

A secular trust is an irrevocable trust established by an employer to contain assets that are meant for employee retirement. A secular trust’s security features - bankruptcy creditors cannot reach them - may be attractive, but they aren’t cheap. Secular trust contributions and the trust’s earnings are immediately taxable to the employee. However, the employer may take a deduction at the time the employee pays the tax or when the trust vests.

Many of these nonqualified plans are informally funded using life insurance products and the variations are many.

Not well understood by many practitioners, we discuss these plans further in DLC Course 74: Trends in Retirement Plans and Course 42: Accumulated Earnings and Deferred Compensation.