Supplemental Retirement Plan

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Supplemental Retirement Plan

It is an agreement between the company and its key employees whereby the former agrees to provide additional retirement benefits to the latter as per the conditions laid down in the agreement. It is a non-qualified plan, meaning that it is tax deferred, sponsored by the employer and falls outside the scope of statutory employee retirement guidelines. The benefits become taxable when paid to the employee.

Most companies fund the costs associated with this plan by getting a life insurance policy on the employee’s life. They own the policy, pay the premiums and become a beneficiary under the policy. The value of the policy grows and can be used by the company at any time as it desires.

Purpose of a Supplemental Retirement Plan Agreement

A supplemental retirement plan is offered to those executives who the company considers to be very valuable. These top-level employees work on company strategies for the coming years orthey have proven their worth in the company over the years. Hence, it becomes increasingly important to retain them. This plan gives an added benefit to these employees as well as serves as an informal insurance policy for the company.

A supplemental retirement plan agreement does not involve any administrative approval. It can be tailored according to the specific requirements of the employee. It provides the company with tax deductions for each year that it pays the premium. The employee gets to save for his/her retirement and sustain a similar standard of living that he/she had while employed.

Key Terms of Supplemental Retirement Plan Agreement

A supplemental retirement plan agreement should include the following important terms:

  • Names of the parties
  • Purpose of the agreement
  • Effective date
  • Definitions of important terms used in the agreement
  • Eligibility for the plan
  • Benefits under the plan
  • How the payment of benefits will take place
  • Action in events such as retirement, disability or death of employee
  • Beneficiaries
  • Effect of employee’s misconduct on the plan
  • Claims and appeals 
  • Grounds for termination 
  • Governing law 
  • Signature of the parties

Drafting a Supplemental Retirement Plan Agreement

The following points need to be kept in mind when drafting a supplemental retirement plan agreement. 

  • The company should first identify the employees to whom it seeks to offer the plan. The management and the employee should then negotiate the terms of the plan.
  • Include the date from which the agreement will become effective.
  • Clearly define the terms used in the agreement to avoid any misunderstanding. 
  • One of the most important clauses is the one that enumerates the benefits that the employee will receive under the agreement. These include usual retirement benefit, benefit if the employee retires before the normal date and death benefit. The time when these benefits will be paid should be clearly mentioned.
  • The beneficiaries designated by the employee should be named. The agreement should also make clear with whom the benefits would vest if there is no valid beneficiary at the time of the payment.  
  • Clarify what will happen in case of disability or death of the employee.
  • The agreement should contain a provision that states what happens if the employee is involved in a case of gross misconduct. This would help to have a course of action in place in case such a situation arises.
  • The procedure for filing claims and appeals should be defined to provide the employee with a grievance redressal mechanism. It should include provisions such as cases when a claim can be filed, time limit to resolve the claim, time limit within which an appeal can be filed and the related procedure.
  • The grounds for termination of the agreement should be clearly enlisted. 
  • The law governing the agreement should be stated to avoid jurisdictional disputes. This law must be in compliance with federal laws.
  • Both the employee and the employer (through an authorized person) should affix their signatures to the agreement.

[Also Read: Supplemental Benefit Plan]

Types of Supplemental Retirement Plan Agreement

The different types of supplemental retirement plan agreements are- 

  • Non-qualified deferred compensation plans- such plans allow the top employees to defer more current compensation until their retirement.
  • Executive bonus plans- these act as an additional way for businesses to retain and reward their top employees.
  • Insurance-based income solutions- an employer can offer this plan to its employees for additional retirement income.

Download a Supplemental Retirement Plan Agreement

A sample of the agreement can be downloaded from below.

Supplemental retirement plan

Supplemental retirement plan

 

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