Supplemental Executive Retirement Plan

Summary

This template is a Supplemental Executive Retirement Plan (SERP) that an employer can adopt to provide a select group of employees with additional retirement benefits under a nonqualified deferred compensation (NQDC) arrangement compliant with I.R.C. § 409A. This template includes practical guidance, drafting notes, and alternate and optional clauses. SERPs are one type of NQDC plan that many employers use as an executive perquisite to attract key talent (and often as retention tool since SERP benefits are usually contingent upon satisfying an extended vesting period). For a discussion of different types of NQDC plans, see Nonqualified Deferred Compensation Answer Book (CCH) Q 1:6 ("Are There Different Categories of Nonqualified Plans?"). Although SERPs are not subject to the limitations on contributions or the nondiscrimination or other rules governing tax-qualified retirement plans under the Internal Revenue Code, they are almost always subject to the nonqualified deferred compensation tax rules under I.R.C. § 409A since their main benefit is to provide for payment of benefits that are not taxed until they are paid at some point in the future. Among other things, Section 409A imposes strict rules regarding the timing of NQDC plan elections and distributions. For practical guidance on nonqualified deferred compensation generally, see the Section 409A Resource Kit. Further, SERPs are almost always structured as top hat plans so that they will be exempt from many of the rules imposed on retirement plans (and employee benefit plans generally) under the Employee Retirement Income Security Act (ERISA). Top hat plans are limited to unfunded arrangements that are made available only to a select group of management or highly compensated employees. For general information on top hat plans, see Top Hat Plans and Top Hat Plan Statement Filing Rules and Procedures. SERPs are almost always maintained as unfunded plans not only to qualify for ERISA top hat plan status, but also to retain a structure that allows for deferral of income taxes on SERP benefits until they are actually paid. See I.R.C. § 402(b). Note, however, that assets set aside to fulfill SERP obligations in a rabbi trust (which assets are thus accessible by the sponsor's creditors) will not cause the plan to be treated as funded for purposes of ERISA or the Internal Revenue Code. For more information, see Rabbi Trust Drafting and Design. Many SERPs, including the one in this template, provide for benefits in an amount determined by a formula like that of a qualified defined benefit plan. Benefit formulas are commonly based on a combination of factors such as compensation and years of service. Other SERPs are structured as an individual account plan, like a cash balance plan, under which notional accounts established for participants who are credited with specified amounts periodically, such as a percentage of compensation each year. Interest or earnings amounts may also be credited to these accounts. Some SERPs are linked closely to the sponsor's qualified retirement plan. These include excess benefit plans and wraparound 401(k) SERPs. The benefits of an excess benefit plan must be limited to additional amounts a participant would receive under the employer's qualified plan if it weren't for the application of the limits under I.R.C. § 415. See Nonqualified Deferred Compensation Answer Book (CCH) Q 3:1 ("What is an Excess Benefit Plan?"). A wraparound 401(k) plan usually provides for benefits similar to those under the sponsor's 401(k) plan for contribution amounts in excess of what is permitted under the Internal Revenue Code or the terms of the plan and may also make up for the application of other limits under the 401(k) plan. Some SERPs are not formally linked to a qualified plan, but have a benefit formula that offsets the benefits payable under the SERP by the amount of benefits the participant accrues under the sponsor's qualified plan. This template is a formula based SERP suitable for a for-profit private employer. In the case of tax-exempt or tax-indifferent entities, there are additional considerations. For more information on NQDC plans and other compensatory arrangements sponsored by tax-exempt entities, see Executive Compensation Arrangements for Tax-Exempt Organizations. For rules applicable to certain tax-indifferent entities, see Nonqualified Deferred Compensation Rules for Tax-Indifferent Entities (Section 457A). For a listing of key content regarding nonqualified deferred compensation and the governing rules, see Section 409A Resource Kit. For more information on SERPs generally, see Supplemental Executive Retirement Plan Design and Compliance. For other NQDC plan templates, see Nonqualified Deferred Compensation Plan, Supplemental Executive Retirement Agreement (Tax-Exempt Employer 457(f) Plan), and Non-employee Director Compensation Plan.