A supplemental executive retirement plan (SERP) is a non-qualified employer-provided benefit typically offered to a select group of employees. How, when, and what options are available regarding receiving that potentially substantial amount has repercussions for retirement, taxes, and the ability to use it for various financial planning goals. The SERP can accumulate significant income, making it a valuable tool for building your nest egg.
Not to be confused with a Nonqualified Deferred Compensation Plan (NQDC), when the employee defers their own compensation. In a SERP plan, the employer designates contributions to the plan. Many employers offer a combination of non-qualified deferred compensation and SERP plans. To learn the ins and outs of an NQDC, check out our blog post 7 questions to consider before you participate in a deferred compensation plan.
Who is eligible for a Supplemental Executive Retirement Plan?
Unlike a 401(k), a SERP isn’t a party where everyone gets an invite. In fact, to keep its special tax status, a SERP is legally required to be a “Top Hat” plan, meaning it’s strictly limited to a select group of management or highly compensated employees. can offer the SERP to as many employees as it likes.
Companies mainly use this exclusivity for two reasons:
- To attract and retain executives already maxing out their contributions to a company’s qualified retirement plans.
- To help an executive designated as a highly compensated employee (HCE). HCEs are subject to IRS restrictions on participating in a 401k. A SERP is used to help ease the pain of those restrictions, providing the HCE with some additional retirement support. You can learn more about HCEs in our blog on how to overcome being designated an HCE.
How does a SERP work?
A SERP is like the 401(k)’s cool, rule-breaking cousin. It doesn’t have contribution limits, and you don’t have to worry about those pesky Required Minimum Distributions (RMDs) at age 73.
However, it does have one strict rule: You can’t change your mind easily. Unlike a savings account, where you can grab cash whenever you want, the IRS (specifically Section 409A) demands you decide when you want the money (e.g., at retirement or in a lump sum) before you even earn it.
Can you change that date later? Technically, yes, but it’s not easy. If you want to push back your payout date, you usually have to give 12 months’ notice and delay the payment by at least 5 years. So, while the plan is flexible when you design it, it’s pretty locked down once you sign it.
A SERP is More Important than EVER in 2026
Here is the good news: That “One Big Beautiful Bill” passed, meaning we don’t have to worry about tax rates skyrocketing to 39.6% anymore. The rates are locked in.
But here is the bad news (and why you need a SERP): The Pre-Tax Catch-Up is dead.
Starting in 2026, if you earn over $145k, the IRS says you cannot make pre-tax catch-up contributions to your 401(k) anymore. You must put that money into a Roth (after-tax). That means you lose a big chunk of your tax break right when you need it most.
This is where the SERP is pretty darn handy. It is now one of the few remaining ways to stash away large amounts of pre-tax income. It effectively turbo-charges your savings when the new standard 401(k) rules try to slow you down.
Employer contributions to a SERP are included in the executive’s income for FICA and FUTA taxes in the year they become vested. Income taxes, however, are deferred until you begin receiving distributions. SERP withdrawals are taxed as W-2 income in the year received.
What happens to the Funds?
Like the different payment options, employer contributions to the Supplemental Executive Retirement plan have various possibilities.
- Life Insurance
- Company stock bonds
- Investment options
Typically, only the top few executives have life insurance policies purchased for their lives. When they retire, the company would either transfer the policy’s ownership to the employee or use the policy’s cash value to pay the employee’s benefit.
The common scenario is that the funds are invested in the employer’s stock, bonds, or an interest-bearing account. Once vested, the employer often allows you to select from a menu of investment options, like a 401k, where the funds grow tax-free until you take distributions.
How to take advantage of a SERP
Remember, there are no limits to SERP contributions. This benefit could grow into millions of dollars. Here are a few situations where a SERP is helpful.
A SERP can supercharge your retirement savings if you’re a high earner and already max out your 401k. It may even allow you to retire early, providing much-needed cash flow for retiree health insurance until you qualify for Medicare.
A SERP may also provide funding for pre-retirement purposes. If your employer allows in-service distributions, you could use them for college tuition, a vacation home, or any other non-retirement goal.
Many plans have some flexibility to mix and match distributions. Save some for retirement and plan others for college tuition. If your plan offers flexible distribution options, you can plan them in advance to provide extra cash flow when needed.
A SERP can be negotiated. Top-level key executives can arrange a specific plan just for themselves. It can be used to create the famous “golden parachute.” A SERP is a common benefit for CEOs, CFOs, and COOs to protect themselves if the relationship goes south.
SERP Risks
It’s not all butterflies, kittens, and rainbows with a SERP. There is a dark side with several significant risks.
- SERP funds may not perform well if invested in company stock or bonds, reducing your future payout.
- Even worse than poor performance, you will lose the SERP if your company files for bankruptcy. A SERP is only a promise to pay in the future. Bankruptcy could void that promise.
- Vesting: Don’t you think you’ll work for this employer in the near future? There may be vesting requirements that you remain employed for a specific number of years before you can receive your benefit.
- High tax potential: The potential of a significant SERP value is a double-edged sword. All of those funds have to be paid out eventually.
You have to balance these risks versus the reward of participating in a SERP. This is where financial planning comes into play. You must design a tax-efficient strategy to receive your Supplemental Executive Retirement Plan funds and integrate it into your financial plan.
SERPs are a valuable employer benefit. It can help ramp up your retirement or support other financial goals. However, understanding the terms and risks and incorporating the SERP into your financial plan will serve you well.
Do you have a SERP Plan that you’re unsure about or don’t have a full grasp of? Contact us to make sure it’s incorporated into your overall financial plan and tax strategy.
