Executive Retirement Plan

For higher paid executives, the limits imposed by the IRS on the maximum income that can be considered in Qualified Retirement Plans is not large enough to cover the executive'' post retirement income needs. A SERP plan is one in which the corporation makes a contribution to a plan that will provide future benefits to the executive. It is considered a Non-Qualified plan meaning there is no limit on how much the corporation can invest into the plan or on the amount of income paid to the executive, except for the "reasonable compensation" rules otherwise enforced by the IRS. There are two ways that this type of plan can be set up. In both techniques, money is invested into Variable Life Insurance* policies so that the benefits can come out free of income tax.

In the basic design, the employer is the owner and beneficiary of the policy. The death benefit beneficiary is the employer who retains an insurable interest on a “Key-Man”. The corporation takes no current tax deduction on the amount it contributes to the plan and the executive pays no income tax on the contribution. The cash value of the policy remains an asset of the employer. When the executive retires, the employer takes money out of the policy on a non-taxable basis and gets a deduction for the amount it pays to the executive. The executive pays income tax on the amount received. Normally, the corporation grosses up the compensation to the executive so that the after tax cost to the corporation is equal to the non-taxable withdrawal from the policy. This approach gives the employer control over the asset, but also subjects the employer to IRS rules covering corporate owned life insurance.

In the alternative design, the corporation puts money into a policy owned by the executive. The corporation takes a deduction and the executive pays tax on the annual contribution. The amount of the corporation's contribution can be grossed up so that the executive pays no out-of-pocket tax. Control of the policy immediately belongs to the executive who names his beneficiary. At retirement, all payments are made directly to the executive on a non-taxable basis (See pages on Variable Life Insurance under Personal Retirement Plans.)

For further information, contact us at 1-888-PLAN AHEAD or at info@vbscorp.com.

*VBS is NOT a securities dealer. VBS has representatives who are registered with member firms of FINRA through whom all securities are offered.