SERPs, Split-Dollar, and Deferred Comp
Which executive benefit strategy fits your company? A comparison guide.
If you’ve decided your company needs to offer executive benefits beyond the 401(k), the next question is which vehicle to use. The three primary options—SERPs, split-dollar life insurance, and nonqualified deferred compensation—each solve different problems and work best in different contexts.
Supplemental Executive Retirement Plans (SERPs)
Best for: Companies that want to provide a targeted retirement benefit to close the specific income gap for selected executives.
How it works: The company promises a defined retirement benefit (e.g., $200,000/year for 20 years), funded informally through COLI. The benefit vests over a schedule (typically 5–10 years). If the executive leaves before vesting, the benefit is forfeited.
Strengths: Maximum retention power (golden handcuff effect), precise gap-closing for each executive, company controls the design entirely, COLI death benefit recovers cost.
Considerations: Employer-funded (not a deferral of the executive’s own compensation), subject to 409A, benefit is an unsecured promise.
Split-Dollar Life Insurance
Best for: Executives who need personal life insurance (estate planning, family protection) and companies that want to provide a valuable benefit at minimal net cost.
How it works: The company pays premiums on a permanent life insurance policy. The executive’s beneficiaries receive a portion of the death benefit; the company recovers its premium investment from the remaining value. The executive reports the economic benefit as taxable income (typically a modest amount).
Strengths: Provides substantial life insurance at little or no cost to the executive, company recovers its investment, simpler than a SERP, immediate tangible benefit (death benefit from day one).
Considerations: Primarily a death benefit (not a retirement income tool), regulatory complexity (split-dollar regulations, Sarbanes-Oxley restrictions for public companies), less retention power than a vesting SERP.
Nonqualified Deferred Compensation (NQDC)
Best for: Executives who want to defer current income to reduce current taxes, particularly those in high-tax states or with variable compensation (large bonuses).
How it works: The executive elects to defer a portion of salary or bonus before the tax year begins. Deferred amounts are credited to a bookkeeping account with notional investment returns. Distributions occur at a specified future date (typically retirement). The company may informally fund the obligation through COLI.
Strengths: Employee-funded (the executive defers their own compensation), unlimited deferral amounts (no IRS cap), tax deferral on both the contribution and the growth, executive has some control over investment direction.
Considerations: Strict 409A compliance required, benefit is unsecured (general creditor risk), no retention effect unless combined with an employer match or vesting provision.
Combining Strategies
Many companies use multiple strategies simultaneously. A SERP provides the retention anchor and closes the retirement gap. Split-dollar provides life insurance protection. NQDC gives the executive tax planning flexibility. When all three are funded through COLI, the company creates a comprehensive executive benefit program with a single funding mechanism.
The right combination depends on the company’s goals, the executives’ needs, and the tax and legal considerations specific to the situation. SSG Financial Group designs customized executive benefit strategies that integrate all three tools where appropriate. Schedule a 20-minute consultation to discuss which approach fits your company.
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About SSG Financial Group
SSG Financial Group provides integrated insurance and financial planning solutions for business owners, their executive teams, and their advisory partners. Our focus areas include executive benefits, wealth transfer, business transition planning, and ESOP repurchase liability funding.
