Helping Top Executives Save More for Retirement
Case Study: Helping Top Executives Save More for Retirement
By: Wilmington Trust

There are strict rules regarding the amount of contributions that an employee is able to contribute to an employer sponsored retirement plan such as a 401(k) Plan. These rules often preclude executives of a company from contributing as great an amount, or percentage of income, as lower level employees are allowed to, due to top heavy rules.

The following is an example of what can be done to enable a company to provide its top executives with a means of having more tax deferred assets available for their retirement:

Mr. Jones is a 50-year-old company executive that has been limited in the amount he can contribute to his company's 401(k) Plan due to top heavy rules. He would like to have an opportunity to save more money for his retirement on a tax-deferred basis. To allow executives like Mr. Jones to accomplish this, the company is considering establishing a Supplemental Executive Retirement Plan (SERP) and a 401(k) Mirror Plan.

A SERP is a non-qualified retirement plan that distributes employer provided retirement income to the employee at retirement. Often these plans will provide for a specific percentage of an executive's final compensation as income to the employee once he or she retires. This amount is reduced by the employee's benefits from his or her qualified retirement plan and Social Security. Since a SERP is a non-qualified plan, it allows an employer to provide this compensation to its executives without being constrained by the restrictions placed on qualified plans.

A 401(k) Mirror Plan is also a non-qualified plan. Highly paid top executives are limited in the amount they can contribute to Qualified 401(k) Plans due to compensation limits, contribution limits, and nondiscrimination testing. In contrast, a 401(k) Mirror Plan allows executives, like Mr. Jones, to contribute on a non-qualified, but tax-deferred basis, to a plan that has the identical investment options as the company's Qualified 401(k) Plan.

Since these plans are non-qualified, the expected financial benefits of the plans are not guaranteed to be paid to Mr. Jones. These assets must be subject to a risk of forfeiture in order for it to get the benefit of tax deferral. Often, life insurance is used to offer some protection to the plan assets. Mr. Jones is very excited that his company is going to provide these plans because of the significant benefit that they can provide, without the severe limitations that his qualified plan contributions have been subjected to each year.

Executive Benefit Plans are a great way for a company to provide its highly paid top executives with a way to enable assets to be available during the executive's retirement, without the severe limitations of qualified plans. SERPs and 401(k) Mirror Plans are only two types of plans available to accomplish these goals.

This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.


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