A “supplemental executive retirement plan” (SERP) is a deferred compensation agreement between an employer and a select employee, typically part of the senior executive team or key personnel, in Canada. SERPs are designed to provide retirement benefits beyond those covered by standard retirement plans like the Canada Pension Plan (CPP), registered retirement savings plan (RRSP), and employer-sponsored pension plans. These plans are a form of non-registered benefit, offering a way for businesses to attract, retain, and reward executives by providing them with enhanced retirement benefits.
Key features of SERPs include:
Customized benefits
SERPs are tailored to meet the specific needs of both the employer and the executive, allowing for a high degree of flexibility in terms of benefit structure, payout conditions, and vesting schedules.
Deferred compensation
A SERP is usually the employer’s promise to pay retirement income on top of the registered plans. It isn’t a way for the executive to defer their own salary: under the Income Tax Act, salary deferred under a salary deferral arrangement is generally taxed in the year it’s earned.
Tax implications
While SERP benefits are taxable to the executive upon receipt, the deferred nature of the compensation can lead to tax deferral benefits, assuming the executive may be in a lower tax bracket upon retirement.
Funding
Employers may choose to fund SERPs through a variety of methods, including setting aside corporate assets, purchasing life insurance policies, or utilizing other investment vehicles. The funding strategy may impact the plan’s security and the tax implications for both parties. If the employer sets money aside for a SERP in a trust or with a custodian, the plan is generally a retirement compensation arrangement (RCA): contributions and investment income are subject to a refundable tax, and the executive is taxed on benefits when they’re paid.
Retention tool
SERPs often include vesting provisions that require the executive to remain with the company for a certain period before becoming entitled to the full benefits, serving as a powerful incentive for key talent retention.
Not registered
Unlike RRSPs and other registered pension plans, SERPs are not registered with the Canadian government, which means they are not subject to the same contribution limits and regulations. However, they must still comply with Canadian tax laws and regulations regarding deferred compensation.