By Mike Martinez, CLU, ChFC, AEP, Director, Doeren Mayhew Insurance Group

Many employers recognize the need to offer incentives to keep talented people. A well-structured insurance plan can be beneficial to help retain them. One of the most widely used incentives offered to key executives is a Supplemental Executive Retirement Plan (SERP). Alternatively, a loan-based, split-dollar (LBSD) plan could be another option to explore.

Consider the factors below to identify which plan may be more beneficial to your company and key executives:


A SERP is a non-qualified retirement plan for key employees that provides additional benefits. It also is a form of deferred compensation used by companies to reward and retain key employees.

Employees enjoy SERPs because they defer current taxes on retirement savings, but there are drawbacks to consider:

  • For employers, a SERP represents a future liability on the balance sheet. Whether the plan is informally funded with invested corporate cash, or is unfunded, the employer will ultimately incur large deferred compensation expenses.

Additionally, the employer is required to adhere to Section 409A requirements and must administer the deferred compensation plan through the employee’s retirement.

  • For employees, their SERP benefits fully vest only at retirement which, for younger employees, might be so far away that the incentive is diluted. Once benefits are received, they are taxed as ordinary income. Plus, Section 409A requirements mean there is almost no flexibility in how and when the employee can receive benefits.

To avoid these potential expenses and administration, you may want to consider transitioning from a SERP to a LBSD plan, which turns the employer’s liability into an asset and creates a non-taxable benefit for the employee. Plus, it offers more flexibility and requires less administration than a SERP.

LBSD Plans

LBSD plans are more flexible and requires less administration than a SERP. It is an agreement between the employer and employee to share the rights and obligations of a life insurance policy. In this case, the policy premiums, cash value and death benefit are “split” or shared. Additional factors include:

  • The employee is the owner and insured of a life insurance policy.
  • The employer provides annual premium loans to the employee for a specified number of years.
  • The employee is required to collaterally assign the policy’s cash value and death benefit to the employer to secure the loan.
  • The loan will become due immediately if employment terminates prior to retirement; otherwise, the employee will have tax-advantaged access to policy cash values in excess of the loan balance to supplement retirement income.
  • Ultimately, the employer loan will be repaid out of either the policy’s cash value or death benefit.

As an alternative to implementing a new SERP, the employer’s premium loans take the place of informally funding the deferred compensation liability.

In the case of an existing SERP being restructured as a split-dollar agreement, the future deferred compensation liability is eliminated, and the assets set aside to fund the liability are repositioned as loans.

Growing companies are actively developing strategies that retain key employees to help ensure the business thrives. The same old deferred compensation plan may not be enough to move the needle in today’s competitive recruiting environment. LBSD plans work whenever you have a high-income earner motivated to reduce current taxation. If it fits, the LBSD plan is a more tax-efficient benefit for both your key employee and your company due to its low administration and full plan cost recovery.

Doeren Mayhew Insurance Group works closely with business owners to identify insurance policies that align with their overall objectives while still keeping both parties protected. To learn more about LBSD plans or other insurance-related questions, contact them today.