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About Supplemental Executive Retirement Plans
- SERPs
A salary continuation plan generally uses a defined- benefit type of
formula to calculate the benefit amount.
The salary reduction approach typically resembles a
defined-contribution plan, with individual "accounts" that usually
have an investment element for each participant.
Economically, both the salary continuation and the salary reduction
approach amount to the same thing, but represent significantly
different underlying compensation philosophies.
Employer-instituted
plans often use the salary continuation approach rather than salary
reduction, but this is not universal.
Salary Continuation (Defined Benefit) Formulas.
The salary continuation or defined-benefit approach usually
specifies plan benefits as a percentage of compensation.
Compensation for this purpose is typically measured over a three to
five year period of the employee's highest earnings, as in a
qualified defined-benefit plan. The benefit payable can also be
dependent on the employee's years of service.
The salary continuation benefit can be integrated with social
security, usually using a 100 percent offset.
For example, the
nonqualified plan might provide an annual retirement benefit of 60
percent of the employee's final average (or highest three year
average) compensation less the actual social security benefit paid
to the employee.
The complex social security integration rules
applicable to qualified plans do not apply so any suitable type of
integration formula can be used. An offset for other types of
benefits can also be used in the formula; for example, the
nonqualified salary continuation payments could be offset by any
other retirement or disability pay- able to the employee under
qualified or other plans.
A SERP
is a plan similar to a qualified defined benefit plan in that
it focuses on providing adequate retirement income to executives.
Benefit formulas and other provisions are similar to those for
qualified defined benefit plans. The term SERP is usually used to
refer to a plan covering a relatively broad group of executives. A
company may also refer to its entire collection of special
retirement benefits for executives as a "SERP"
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