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FAQ About Supplemental Executive Retirement Plans

A SERP is a non-qualified supplemental retirement plan that’s meant to enhance an executive’s retirement benefit. While a 401(k) and 457(b) have strict contribution limits, a SERP (457(f) or Split Dollar) is flexible in the amount that may be provided to the executive with no imposed limits.

A SERP makes sense for retaining and/or rewarding valuable executives. SERPs continue to grow in popularity as the war on talent continues to become more competitive. SERPs help credit unions and other non-profit boards ensure that their top executives succeed financially in retirement  and are not wooed away to another institution.

SERPs allow organizations to successfully attract and retain key executives. Ultimately, SERPs are a tool that can be utilized to create predictable transitions from current to future leaders while ensuring long term business success and profitability by avoiding unexpected turnover.

There are 3 reasons driving the implementation of a SERP: Reward, Retention and filling the gap due to limits on qualified retirement programs commonly called a Restoration plan.

Reward occurs when you have an executive that has done a great job and you want to do more to recognize his/her positive impact on the organization. In addition, it is also an important component of a compensation strategy that matches long term performance with financial reward.

Retention utilizes the term, “Golden Handcuffs,” the premise being when the executive feels he/she can succeed financially while working for you, there is no reason to look elsewhere.

Traditional retirement plans such as 401k’s, pensions and social security have limits and are progressive in nature. These limits restrict the amount an executive can save in a tax deferred manner, negatively impacting their ability to replace their income in retirement. These types of plans are typically called restoration plans.

457(f) – This type of plan is essentially a bonus based on time. The organization can hand select which employees they choose to include in this type of plan. Unlike qualified plans like 403(b)/401(k) where both employer and employee can contribute with limits or a 457(b) which also has limits similar to the 401(k), with a 457(f), there are no limits set by the IRS, but there is a reasonableness standard that should be considered (NCUA).

Split Dollar – A split dollar plan is based on a secured loan from the credit union to the executive to purchase a life insurance policy. The Credit Union has a first lien on the life insurance policy similar to a mortgage on a house. Properly designed these plans provide non-taxable distributions to the executive during retirement, or at other intervals, with the credit union/non-profit recovering all funds invested into the plan, plus interest.

Either type of plan is completely customizable; there is no one size fits all approach.

The new excise tax was part of the Tax Cuts and Jobs Act passed by Congress and signed into law by President Trump in December 2017. It requires not-for-profit organizations to pay an additional 21% federal excise tax for executives earning more than $1 million in one year. The tax impacts the top 5 highest paid employees at the organization. It was designed to create parity between for-profits and not-for-profits with respect to the treatment of existing non-qualified deferred compensation plans. In the most recent guidance from the IRS released in early 2021, it appears, Federal Credit Unions may be exempt from the excise tax liability. However, it does not appear non-Federal Credit Unions will get this relief. Additional guidance from the IRS is expected later in 2021 or 2022.

No, because they do not generate any remuneration for tax purposes.

Yes! Both the executive and the board must agree to the change.

457(f)s can be replaced with a Split Dollar plan to provide similar or better benefits to the executive while also improving the financial position of the organization. In the year the 457(f) is replaced, the credit union recovers as non-operating income, the entire accumulated deferred liability from the 457(f).

Typically, the only out of pocket costs to the credit union/non-profit is for the legal documents that are required to implement the plan. It’s generally less than $2,500 and if you’re looking at multiple agreements, the cost per each plan will be reduced. Some providers charge an annual servicing fee from the first year, OM Financial does not charge an annual service fee for the first 10 years. After the first ten years, we charge a nominal fee, $1,000 annually today to cover the annual administrative and travel costs for annual reviews.

The key criteria are the assumed rate of return on the life insurance policy, vesting schedule, benefit amount provided, and consideration of the type of life insurance utilized to fund the plan, Whole Life or Indexed Universal Life (IUL). They have very different performance and risk profiles. Age, health and time until retirement also play a part in determining the size of the loan.

If for some reason an executive cannot be insured due to medical concerns, we can insure the spouse as a substitute insured.

It would not be too late, but it might require a very large loan to achieve any desired benefits.

457(f) plans have cliff vesting where they 100% vest at a date the board decides. The executive is 0% vested until the day they are 100% vested. Utilizing a split dollar plan allows you for customizable vesting schedules based on retention goals, either incrementally or with periodic “cliff vesting”.

We believe the ideal first step is to attend one of our free, weekly educational webinars or to schedule a meeting with one of our consultants. Once there is an understanding of the basics, we can provide a benefit analysis for executives under consideration or simply review a current plan with no obligation.