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An executive retirement plan is a retirement benefit or set of retirement benefits tailored specifically for one individual. Such plans are often created for corporate executives and others who may be employed for a short time at a high salary. They maybe used to provide additional compensation to individuals without increasing their taxable income.
There are some major differences between these plans and pensions or other regular benefit plans. In many cases they involve a life insurance policy, annuity or other vehicle purchased by the company on a particular individual’s behalf.
Supplemental Executive Retirement Plans
Such plans are sometimes called SERPS or supplemental executive retirements. They are called this because they are either outside of an organization’s normal retirement plan or offer additional benefits. An example of the additional benefits could be an annuity or universal life insurance policy purchased by a company on behalf of an executive.
Such plans are not regulated by the IRS but they are usually tax deferred. That can provide somebody with additional income without incurring an immediate tax penalty. The executive will have to pay the income tax when or he she receives the benefits from the plan. The executive would also be liable for the 10% tax penalty on retirement benefits for persons under 59½ years old.
In many cases these plans were designed to give older executives that have maxed out IRA or 401k plans additional retirement income. They may also give the executive or the company access to the cash value of the insurance policy. The plans often provide a lump sum benefit to the company if the executive dies.
Top Hat Plans
These plans are 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’s normal retirement arrangements including consultants and contractors. For example an expert in a particular field brought in to work for just a few years.
Some of these plans can be considered gross income so they might be taxable by the IRS. In most cases they are only taxable if the funds are taken out. In some cases a company might also use a Roth IRA in which it pays the taxes on the funds up front as an executive retirement plan. The advantage to this arrangement is that no further taxes would be due on that money.
It must be pointed out that some taxes including FICA (Social Security and Medicare withholding) could be on a top hat plan. Top hat plans maybe subject to state income taxes as well.
Setting up a Plan
The best rule 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 because the IRS has been cracking down on such plans. The agency has a new set of rules for the plans and there is new law in the area.
There are also additional taxes on some of the health insurance plans contained in some SERPS. These taxes were imposed by the Patient Protection and Affordable Care Act aka Obamacare.
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