Modernizing Your SERP: Advanced Thinking for Supplemental Employee Retirement Plans
Senior Director, Vizient Insurance Services
Employee retention and talent acquisition are top of mind for healthcare system boards and executives. In an effort to maintain strategic and operational continuity at the executive levels, many health systems have implemented qualified and non-qualified benefit plans to enhance total compensation. Specifically, many systems have implemented 457 (b) and 457 (f) Supplemental Employee Retirement Plans (SERPs) for highly compensated individuals. This article is a call to action for boards and healthcare system executives to evaluate and modernize their SERPs. We will focus on the impact of relatively new excise taxes imposed on non-profits, key program design features and the opportunity to immediately turn your SERP commitments into financial assets on your balance sheet.
The 2017 Tax Cuts and Jobs Act impacts SERPs for employees in tax-exempt organizations, referred to as applicable tax-exempt organizations (ATEOs) in the regulations. Beginning in 2018, with final rules released in 2022, the law imposes an additional 21% excise tax on W-2 compensation over $1 million. This represents a "game-changer" for non-profit organizations, as they are already at a disadvantage with for-profit entities when it comes to competing for top talent. Compensation includes all current compensation, qualifying deferred compensation, non-qualifying deferred compensation without substantial risk of forfeiture, income under Section 457 (f) and severance payments. By implementing other SERP arrangements, whether employer or employee funded, the excise tax penalty may be eliminated. We recommend you contact a compensation expert to lead you through this analysis and implementation.
It is important for the design, structure and features of your SERP to meet the goals and intent of your board and leadership team, as well as deliver efficient management of taxes and program cost. Considerations for both employers and employees include:
- Form 990 exposure: Some organizations seek to reduce reportable compensation in publicly available data such as Schedule J of the IRS Form 990. Reportable amounts can be reduced using structures such as collateral assigned split dollar (CASD) programs.
- Assessing each employee: Employers should focus on each individual and design the SERP to meet the needs of the organization. If the expectation was to retain an executive for four to five years, the structure would be different than for retaining an executive for ten years or more, as the retention period dictates which strategies may be used due to the underlying products being utilized.
- Withdrawals: SERPs do not have the same withdrawal limitations that are required by a qualified program, like a 401(k). It is possible to structure payouts that meet the "life needs" of the executive over their career, such as college tuition, weddings, vacation homes, early retirement or unforeseen circumstances. There are not any imposed required minimum distributions, meaning, one can choose to take distributions, or not, letting the account balance grow and reaping the benefits of compound interest.
- Reporting difficulties: Some SERPs are subject to IRC 409(a) and/or IRC 101(j), increasing the reporting difficulty, while others are not, which saves time and hassle.
Modernizing your organization's SERP should involve an evaluation of collateral assigned split dollar (CASD) programs and other supplemental insurance products such as whole life or indexed universal life policies. Converting from a 457(f) plan to a CASD program has an immediate positive financial impact on the organization by turning a SERP expense into a recognized asset for the company. This conversion can represent hundreds of thousands and possibly millions of dollars in cost savings.
The specific CASD transaction involves the purchase of a life insurance policy for the employee. The employer typically pays the policy premiums, although it could be structured as a shared expense. The paid premiums are regarded as a "loan" to the employee. The employee owns the policy. There is a negotiated arrangement between the employee and the employer that typically involves the amount of insurance, shared expenses, expected retention and other work-related requirements.
At the cash surrender or payment of a death benefit of the policy, the employer and the employee benefit from the CASD. Using the proceeds of the insurance policy, the employer is fully reimbursed for the paid premiums and interest paid on the policy. The remainder of the death benefit or cash value is paid to the insured or their designated heir. A key benefit is the tax-deferred growth and tax-free retirement income, similar to a ROTH account.
To recap recommended next steps to modernize your SERP 457 plan:
- The 21% excise is a game changer for the highly compensated. Must address this issue.
- Employers and employees benefit from targeted, well-constructed SERPs with features and benefits that meet the needs of both parties.
- Converting your 457 (f) represents a six or seven figure financial windfall of cost savings and improved features and benefits for the employer and employee.
We recommend contacting a national compensation consultant who can help assess and evaluate the best options for your organization. Vizient Insurance Services has a strategic partner relationship with a highly regarded consulting firm if you would like to modernize your SERP today.