Supplemental Executive Retirement Plans, often abbreviated as “SERPs”, are pension-style nonqualified plans used to restore benefits that executives lose due to qualified plan limitations.

A SERP delivers employer provided retirement income. SERPs are sponsored to replace benefits lost by IRC Section 415 limits (i.e., $185,000 annual benefits and $46,000 annual contribution limits), benefits lost by IRC Section 401(a)(17) limits (i.e., $230,000 salary cap), other limitations and as incentives to join (golden handshake) or to stay at the company (golden handcuff).

Ordinarily, an executive's defined benefit SERP follows the base benefit plan formula-- mirroring the same benefit design without the limits to eligible compensation and maximum benefit restrictions. The amount is also often offset by other compensation like social security, the qualified plan, a nonqualified plan, and even disability benefit payments. The target compensation replacement ratios may be 60 to 70 percent of the executive's pre-retirement pay, taking the offsets into account.

While a company could provide for defined contribution SERP (for example, a profit-sharing arrangement), defined benefit arrangements are more common. These plans can be easily structured to target a specific percentage of replacement income. The SERP can also be set up as a defined contribution plan with a specified annual amount contributed during each year of the executive's active employment, like a percentage (perhaps 10 to15 percent) of compensation, growing with interest or via account management until retirement.