401(k) Mirror Plan vs Supplemental Executive Retirement Plan

Ditch the Ordinary: These customizable benefit plans are retaining top talent in the middle market.

If you are a middle market business owner or executive, you may be looking for ways to attract and retain top talent in a competitive market. One of the most effective strategies to do so is to offer nonqualified benefit plans that provide additional retirement income and incentives for your key employees.

In this article we explore two types of nonqualified benefit plans that can help you achieve your goals: Supplemental Executive Retirement Plans (SERPs) and 401(k) Mirror Deferred Compensation plans. Read on to learn how you can use each plan to create a customized and flexible compensation package for your valued employees and to understand the fundamental difference between the two options.

It is important to note that nonqualified plans can be tailored to include features from either a SERP or 401(k) mirror plan, which are the two most common plan designs we see in the middle market.?

What is a Supplemental Executive Retirement Plan (SERP)?

A SERP is a nonqualified deferred compensation plan that allows an employer to promise a future benefit to a select group of employees, usually executives or other highly compensated individuals. The benefit is typically based on a percentage of the employee's salary, bonus, or other compensation, and is paid out at retirement or another specified date. The employer will often “informally fund” the plan with corporate assets, such as life insurance policies, to ensure they have liquidity when benefit payments are due.? When benefit payments are made, they are deductible to the company.

What is a 401(k) Mirror Plan?

A 401(k) mirror plan is a nonqualified deferred compensation plan that allows an employee to defer a portion of his or her compensation above the limits of a qualified 401(k) plan. The employee chooses how much to defer and how to invest the deferred amount, similar to a 401(k) plan. The employer may also provide a matching contribution or a discretionary contribution to the employee's account. The employee receives the accumulated balance at retirement or another specified date, subject to income tax.

What is the main difference between a SERP and a 401(k) mirror plan?

The main difference between SERPs and 401(k) mirror plans is that SERPs are employer-sponsored, while 401(k) mirror plans are voluntary.

This means that:

- In a SERP, the employer decides who is eligible for the plan, how much benefit to provide, and when to pay it out. The company may choose the investment allocations for participants if they have promised a guaranteed benefit amount or percentage. Otherwise, the participants are provided with a selection of funds that their contributions can be invested in.

- In a 401(k) mirror plan, the employee decides whether to participate in the plan, how much to defer, and how to invest the deferred amount. The employee also bears the risk of investment performance and tax liability. ?Generally, participants have a larger selection of investments which are closely tied to 401(k) mutual fund offerings.

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Recruiting, Retaining, Rewarding and Retiring Key Employees –

These are the 4 main reasons why businesses choose to offer a nonqualified benefit plan:

- Recruiting: You can attract top talent by offering competitive compensation packages that include additional retirement income and incentives. You can also differentiate yourself from other employers who may only offer qualified plans with lower contribution limits.

- Retaining: You can retain your key employees by rewarding their loyalty and performance with deferred benefits that vest over time. You can also reduce turnover costs and maintain continuity and stability in your organization.

- Rewarding: You can motivate your key employees by aligning their interests with yours and providing incentives for achieving strategic goals. You can also recognize their contributions and value to your business.

- Retiring: You can help your key employees achieve their retirement goals by supplementing their qualified plan savings with nonqualified plan benefits. You can also ensure a smooth transition of leadership and succession planning.

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Conclusion

Nonqualified benefit plans are powerful tools for middle market business owners and executives who want to reward and retain their key employees. SERPs and 401(k) mirror plans are two common types of nonqualified plans that offer different advantages and disadvantages. SERPs are employer-funded and promise a fixed benefit to the employee, while 401(k) mirror plans are employee-funded and allow the employee to choose the amount and investment of the deferral. Both plans are flexible and customizable, but also subject to complex tax and legal rules. Therefore, it is important to consult with a qualified professional before implementing any nonqualified benefit plan. By doing so, you can create a win-win situation for your business and your employees.

Not sure which nonqualified benefit plan will most effectively meet the needs of your business and key employees? Contact us for more information.

Disclaimer

This information is for general and educational purposes and not intended as legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. Information obtained from third-party sources are believed to be reliable but not guaranteed. The tax and legal references attached herein are designed to provide accurate and authoritative information with regard to the subject matter covered and are provided with the understanding that BoliColi.com is not engaged in rendering tax, legal, or actuarial services. If tax, legal, or actuarial advice is required, you should consult your accountant, attorney, or actuary. BoliColi.com does not replace those advisors. Securities and Investment Advisory Services Offered Through M Holdings Securities, Inc. A Registered Broker/Dealer and Investment Adviser, Member FINRA/SIPC. BoliColi.com is independently owned and operated.?File #6199501.1