Supplemental Executive Retirement Plans (SERPs) can be used as a retention tool for executives. SERPs and other nonqualified deferred compensation plans (NQDCPs) incentivize executives to stay with the business or organization, while providing flexible scheduling and payment options that qualified plans cannot provide. Not surprisingly, the majority of large credit unions offer SERPs to their CEOs and many extend the offering to other executives.
Supplemental Executive Retirement Plans for Credit Unions
As the name suggests, SERPs can be used as a supplemental plan to more traditional retirement plans, like a pension, 403(b), or 401(k). SERPs can also act as the sole retirement plan for executives.
Even as far back as 2006, a survey showed that more than 56% of credit unions with $200 million or more in assets offered a SERP to their CEO and almost half of those credit unions also offered SERPs to other executives. A 2017-2018 report shows that the percentage of credit unions offering SERPs to CEOs has increased to 60%.
SERP Offerings for the Organization
For businesses and organizations, a SERP is a way to reward and retain key executives. SERPs are not subject to the same restrictions as qualified retirement plans, and can be offered selectively and structured individually. Additionally, unlike SERPs, qualified benefit plans, such as a 401(k) or 403(b), are subject to contribution and income limits.
The SERP agreement generally provides benchmarks, requirements, and other eligibility conditions that the executive must comply with in order to receive payouts. As more organizations offer SERPs as a part of the executive compensation package, other organizations that don't offer similar benefits may have to provide similar benefits to stay competitive.
SERP Offerings for Credit Union Executives
Another benefit for the executive is that the taxes on many SERP benefits are deferred. After retirement, the executive will pay income tax on the benefits received, either in a lump sum or through installments. The employer may also be able to take an income tax deduction on the benefits paid to the executive. Deferring the taxes is advantageous for the executive because their marginal tax rate will be lower at retirement compared to years while still employed.
SERP Funding Options
Funding a SERP for credit union executives, including the CEO, Chief Financial Officer (CFO), or Chief Operations Officer (COO), is generally done through a 457(f) or a split-dollar life insurance plan.
With a split-dollar life insurance policy, the organization and executive share in the cost and benefits of the policy. The organization purchases a life insurance policy in the name of the executive, with ownership of the policy divided between the executive and the organization. Upon death of the executive, the beneficiaries receive the majority of death benefits while the employer is paid back the amount they invested in the policy.
A 457(f) is a type of SERP for tax-exempt organization. The terms of the 457(f) plans generally provide for the vesting schedule, number of years of employment necessary to receive benefits, and restrictions on benefits. These can be based on a defined benefit payout or defined contributions, with payouts often based on milestones, terms of years, or the executive's eventual retirement.
If you have any questions about qualified and non-qualified benefits for executives and employees for your California credit union or other non-profit organization, Butterfield Schechter LLP is here to help. We are San Diego County's largest law firm with a focus on employee benefits law. Contact our office today with any questions on how we can help you and your business succeed.
