How Executive Retirement Plans Work

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An executiveretirement plan is a retirement benefit or set of retirement benefits tailoredspecifically for one individual. Such plans are often created for corporateexecutives and others who may be employed for a short time at a high salary.They maybe used to provide additional compensation to individuals withoutincreasing their taxable income.


There aresome major differences between these plans and pensions or other regularbenefit plans. In many cases they involve a life insurance policy, annuity orother vehicle purchased by the company on a particular individual’s behalf.


SupplementalExecutive Retirement Plans

Such plansare sometimes called SERPS or supplemental executive retirements. They arecalled this because they are either outside of an organization’s normalretirement plan or offer additional benefits. An example of the additionalbenefits could be an annuity or universal life insurance policy purchased by acompany on behalf of an executive.


Such plansare not regulated by the IRS butthey are usually tax deferred. That can provide somebody with additional incomewithout incurring an immediate tax penalty. The executive will have to pay theincome tax when or he she receives the benefits from the plan. The executivewould also be liable for the 10% tax penalty on retirement benefits for personsunder 59½ years old.


In manycases these plans were designed to give older executives that have maxed outIRA or 401k plans additional retirement income. They may also give the executiveor the company access to the cash value of the insurance policy. The plansoften provide a lump sum benefit to the company if the executive dies.


TopHat Plans

These plansare also called top hat plans because they are designed for top executives.This includes people who are not in a position to benefit from a company’snormal retirement arrangements including consultants and contractors. Forexample an expert in a particular field brought in to work for just a fewyears.


Some ofthese plans can be considered gross income so they might be taxable by the IRS. In most cases they are only taxable if thefunds are taken out. In some cases a company might also use a Roth IRA in whichit pays the taxes on the funds up front as an executive retirement plan. Theadvantage to this arrangement is that no further taxes would be due on thatmoney.


It must bepointed out that some taxes including FICA (Social Security and Medicarewithholding) could be on a top hat plan. Top hat plans maybe subject to stateincome taxes as well.

Settingup a Plan

The bestrule of thumb is to have a professional retirement planner set up such a plan.It would be a good idea to have a tax attorney look at the plan as well becausethe IRS has been cracking down onsuch plans. The agency has a newset of rulesfor the plans and there is new law in the area.


There arealso additional taxes on some of the health insurance plans contained in someSERPS. These taxes were imposed by the Patient Protection and Affordable CareAct aka Obamacare.

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