Using SERPs (and Rabbi Trusts) to Sweeten the Exec Comp Deal

Deferred compensation arrangements appeal to executives and other highly paid employees because they allow each participating executive to postpone their recognition of income taxes until a future year. There aren’t any caps on the amount that may be deferred into a nonqualified deferred compensation plan, commonly referred to as a Supplemental Executive Retirement Plan (SERP), as there are for qualified plans. So a defined contribution variety can consider the executive’s compensation above the Section 402(g) limit (the 401(k) plan-annual limit), the Section 415 limit (for annual additions), and the Section 401(a)(17) limit (on compensation that can be recognized in determining the amount of contributions). However, participating in these plans does carry risk as the assets used to fund the plan, which may have been a deferral of the executive’s own compensation, must remain subject to the claims of the sponsoring company's creditors until they are paid out. Enter the rabbi trust which provides greater assurance to the executive that these amounts ultimately will be paid to the executive on the prescribed payable event.

Read now »

Related Content

• Rabbi Trust
  Use this template for a rabbi trust that follows the IRS-established model rabbi trust language in Rev. Proc. 92-64, as modified by IRS Notice 2000-56. Employers must use the model language (tailored with appropriate optional and alternate provisions) if they want to rely on the tax-favorable treatment or if they intend to request an IRS ruling on the arrangement.
• Top Hat Plans
  Learn more about “top hat” plans, a colloquial term for a SERP, or any unfunded pension benefit plan maintained by an employer "primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees."  
• Section 409A Resource Kit
  Remember the importance of Section 409A compliance when counseling on nonqualified deferred compensation. Section 409A governs almost every aspect of nonqualified deferred compensation, which is generally defined as any legally binding compensation where payment is or can be made in a taxable year after the taxable year in which the arrangement is created. 

Practical Guidance Updates 
Featuring the latest updates from your Practical Guidance account.    

• Employee Benefits & Executive Compensation Key Legal Developments Tracker
  Stay informed on new developments.
  • Retirement Plans. PBGC revised final regulations on the allocation of assets in single-employer plans to prescribe interest assumptions for plans with valuation dates in the fourth quarter of 2023. These interest assumptions are used for valuing benefits under terminating single-employer plans and for other purposes. 88 Fed. Reg. 62706 (Sept. 13, 2023).
  • Health and Welfare Plans. The Department of Labor, HHS, and Treasury issue guidance regarding the transparency in coverage (TiC) rules under the Consolidated Appropriations Act, 2021. Among other topics, the FAQs announce that the agencies are now rescinding Q1 of FAQs Part 49, which had expressed the agencies’ general policy of deferring enforcement of the TiC Final Rules' prescription drug machine-readable file requirement pending further consideration. See FAQs Part 61.
  • Health and Welfare Plans. Treasury, IRS, Department of Labor, and Health and Human Services (the Agencies), proposed regulations regarding the fees established by the No Surprises Act for the federal independent dispute resolution (IDR) process, as established by the Consolidated Appropriations Act, 2021. The proposed regulationswould provide that the administrative fee charged by the Agencies to participate in the federal IDR process, and the ranges for certified IDR entity fees, would be set by the Agencies through notice and comment rulemaking. 88 Fed. Reg. 65888 (Sept. 26, 2023).
• Generative Artificial Intelligence (AI) Resource Kit is a collection of current guidance on generative AI, ChatGPT, and similar tools.
• Public Interest, Pro Bono, and Non-Profit Resource Kit offers valuable guidance for those providing pro bono legal services and assisting non-profit organizations and public interest groups. It includes useful content on topics including tenant's rights, fair housing and lending, discrimination, immigration, and general non-profit resources. 
• Document alerts allow you to stay current on legal developments that affect your practice. Find out how to set up your document alerts. 
• Practical Guidance Journal Third Edition 2023 features Generative AI cautions and benefits, new trends in lending, environmental law considerations, and market intelligence.
• Check out our Practical Guidance Author Center! Learn about the 1750+ leading attorney authors contributing to our 26 practice areas, and find out how you can Become a Practical Guidance Author. Practical Guidance is committed to amplifying diverse voices of attorneys across all differences, including gender and race.  
• Legal Developments provide the latest updates and analyses of emerging topics impacting your practice area. Visit the Legal Developments page to see the latest topics, which also include breaking legal news and related Practical Guidance content. 
• Listen Up! The Practical Guidance and Law360 Podcasts Resource Kit features interviews with industry-leading attorneys on cutting edge issues in the law: AI, NFTs, Cannabis, and more.
• New and Updated Practical Guidance Content
  • Executive Separation Agreement Negotiation (Pro-executive) 
  • Considerations for Health and Welfare Church Plans in Electing ERISA Status
  • Church Plan Election of ERISA Status under Section 410(d)
  • Executive Employment Agreement Drafting Checklist
  • 401(k)ology: Highly Compensated Employees Why It’s Time to Regulate Plan Data as an Asset
  • IRS Delays SECURE 2.0’s Roth Catch-up Mandate until 2026
  • Agencies Propose Overhaul of Fixed Indemnity Plan Rules

PRACTICAL GUIDANCE CUSTOMER EMAIL EDITION ON THE WEB

Experience results today with practical guidance, legal research, and data-driven insights—all in one place.

Experience Lexis+