Small business owners need to show top performers they’re appreciated to ensure they stay with the business. One way to accomplish this is with a defined benefit supplemental executive retirement plan (SERP) funded with life insurance.

How this plan works

A defined contribution SERP is an arrangement in which an employer makes contributions to a retirement account earmarked for a key employee until a predetermined age of retirement and/or years of service. Upon retirement, the employee will receive distributions based on the account value at that time.

Diagram of how a defined contribution supplemental executive retirement plan (SERP) works, during the key employee’s working years; description below.

The employer and the key employee enter into an agreement for the employer to set aside pre-defined contributions annually until the employee’s retirement. During the working years, the employer pays the premium on a life insurance policy for the key employee, which funds the defined contribution plan.

Diagram of how a defined contribution supplemental executive retirement plan (SERP) works, upon the key employee’s retirement; description below

Upon the key employee’s retirement, the insurance company pays out to the employer, who in turn pays the account balance to the retired employee via distributions.

Potential benefits of the plan

  • It can be both a recruiting and retention tool for valued employees
  • It has less administration and fewer filing requirements than traditional qualified plans
  • The business owner has the ability to choose which employees receive the benefit, when, and how much

Drawbacks of the plan

  • There is no immediate tax deduction for the employer
  • Plan documents and ongoing administration may be required
  • The plan may be subject to Internal Revenue Code Section 409a

Resources

Have small-business clients but don’t know which life insurance solution is right for their business? Answer a few questions and get a recommendation from the Nationwide Small Business Solutions Analyzer.

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As situations change, so will the business's life insurance needs. Care should be taken to ensure these strategies and products are suitable for the business's and the client's long-term goals. Weigh the business's objectives, time horizon and risk tolerance as well as any associated costs before investing. Also, be aware that market volatility can lead to the possibility of the need for additional premium in the policy. Variable life insurance has fees and charges associated with it, which include costs of insurance, underlying fund expenses and administration fees. Investing involves risk, including possible loss of principal. Nationwide and its representatives do not give legal or tax advice. An attorney or tax advisor should be consulted for answers to specific questions.

Variable life insurance has fees and charges associated with it that include costs of insurance that vary with such characteristics of the insured as gender, health and age, underlying fund charges and expenses, and additional charges for riders that customize a policy to fit their individual needs. Variable products are sold by prospectus. You can obtain the product prospectus and underlying fund prospectuses by writing to Nationwide Life Insurance Company, P.O. Box 182021, Columbus, OH 43218-2021. Before you invest, you should read the prospectus carefully and consider investment objectives, risks, charges and expenses. The product prospectus and underlying fund prospectus contain this and other important information.

Loans and withdrawals will reduce the death benefit. Most distributions will be taxed on a first-in/first-out basis, as long as the contract is not a modified endowment contract (MEC) according to Section 7702A of the Internal Revenue Code. Loans from a MEC are generally taxable and subject to a 10% tax penalty if taken before age 59 1/2. If the policy lapses with a loan outstanding, it will be treated as a distribution and some or all of the amount may be taxable.

Guarantees and protections are subject to Nationwide's claims-paying ability. They do not apply to the investment performance or safety of the underlying investment options.

Investment products are not FDIC-insured, may lose value and have no bank guarantee.

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