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Option 2: Secular Trusts
A secular trust is an irrevocable trust established by a company to contain assets that are meant for employee retirement.
A secular trust's security features 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 an employee pays the tax or when the trust vests.
Option 3: Supplemental Executive Retirement Plans (SERPs)
A supplemental executive retirement plan (SERP) is designed to provide retirement benefits for owners, officers and highly compensated employees. These plans allow individuals to receive benefits that compensate them for the limitations imposed by the Internal Revenue Code on salary deferrals and matching contributions to 401(k) plans. Benefits are taxed when received by the beneficiary.
SERPs are often structured to provide a specific percentage of replacement income. This way, no matter how an employee's contributions to a qualified plan are limited by tax laws, the employer is still able to give a set level of post-retirement income (often expressed as a percentage of current pay).
Option 4: Annuities
An annuity is a fiscal plan that renders a series of equal payments to the annuity beneficiary in exchange for an investment.
Annuities contractually agree to make future payments to the employee (in this case, retirement payments).
The employer pays the cost of an annuity in the name of each participant.
The amount of the annuity benefit purchased is:
- based on the participant's vested benefit
- AND
- projected to provide an equal amount of cash (after-tax) as the vested benefit, which would otherwise be paid from general assets
As the participant's vested benefit grows, the employer funds the annuity to match the liability.
Nonqualified annuities are funded with after-tax money so only the annuity investment increase is subject to ordinary tax upon withdrawal.
Disadvantages
Annuities have some significant disadvantages. They are usually:
- expensive
- not liquid
- limited in investment choices
Memory Jogger
An irrevocable trust established by a company to contain assets that are meant for employee retirement is a description of a(n):