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Have you heard of a SERP SWAP?


Guest Suzan Fenner

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Guest Suzan Fenner

I am working on a deferred compensation plan for a company and a consultant wants to add a "SERP swap" feature in which the employees can choose to forego deferred compensation benefits and the employer then enters into a split dollar life insurance arrangement in which the insurance is owned by an irrevocable life insurance trust with a collateral assignment to the company. I am concerned with taxability to the executive at the time of the swap to the split dollar. If you have worked on this issue, I'd appreciate your input.

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Guest Harry O

I think there is a significant risk that the swapping of earned and accrued SERP benefits will trigger current tax to the employee. No different than if the employer and employee agreed to reduce SERP benefits dollar-for-dollar as the employer pays off the employee's mortgage each month.

Better course, IMHO, is to only swap future, unearned benefits for the split dollar coverage.

Of course, whether all this swap stuff this makes sense from the company's after-tax viewpoint is another matter . . .

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Guest bswift

i have worked a fair amount with companies that have had the serp swap idea proposed by consultants. idea is usually proposed for very high end executives who make an irrevocable election not to receive certain deferred compensation amounts in exchange for split dollar life. the tax issues are a bit tricky, but the conclusion that the exec is not taxed on the swapped deferred compensation does in theory make sense. of course being too good to be true, the irs hates the idea and will likely challenge the right swap, but, based on current law, they'll probably lose. if it makes any difference, a very well respected attorney out of wash, d.c. wrote an opinion for a serp swap concept for a consultant out of boston that i reviewed and thought was technically good. hope that helps.

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Guest Harry O

bswift-

You say "executives make an irrevocable election not to receive certain deferred compensation amounts in exchange for split dollar life."

What type of deferred compensation? Is it previously earned deferred compensation or future compensation?

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Guest bswift

harry, as an example, say an executive has 500k in his or her deferred compensation account under a savings type deferred compensation plan. the theory is that the executive makes an irrevocable election to foregoe that amount compensation already deferred in exchange for split dollar insurance, the death benefit of which is some exponential number of the 500k amount. the concept is designed for those execs that have substantial amounts of deferred compensation and are rich enough that they won't need it during their liftime. Lots of issues arise including what happens on divorce, financial hardships, etc. hope that helps.

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  • 6 months later...

It has been a few months since anyone has commented on this serp-swap issue. We are also reviewing this type of plan, not only using split-dollar, but other benefits as well. Has anyone seen or come across anything new lately? This is the first of these plans we are reviewing and had already looked into the issues already posted. If anyone knows a good resource for material on this concept, we would love to know.

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