How Does A SERP Work?
A Supplemental Executive Retirement Plan (SERP) begins with a contract between the bank and one or more top executives, e.g. the bank president. The bank might promise the president that if he remains in his position and continues to perform at the expected level, he will receive an income stream at the completion of the contract. For example, the bank could promise $150,000 per year for 15 years to begin at age 65. Since the bank is contractually obligated to provide that benefit, it must accrue an expense equal to the present value of the expected future benefit payments on a systematic basis by the time the executive is eligible for the benefits. The bank purchases a BOLI contract to informally fund the obligation. There are three reasons why BOLI works so well as a funding mechanism. First, when the bank pays the premium it has little effect on the balance sheet and none on the income statement. The amount moves from cash to cash value on the balance sheet. Secondly, ideally in the
