Readers will know that I have blogged on the desirability of the QSERP (or SERP-swap) strategy a few times previously. The market crash and the resulting increase in underfunded pension plans meant that this strategy may not have been viable for many companies for the last few years. However, a law passed this summer known as MAP-21 should revive the availability of the strategy, particularly in light of ISS's (and other investment advisors') continued dislike of SERPs.

As a reminder, a QSERP is one of the names given to a perfectly legal strategy of shifting accrued or future benefits from a non-qualified retirement plan – where contributions are not immediately deductible, cannot accumulate tax-free, are available to creditors, and cannot be rolled over – to a qualified retirement plan – where contributions are immediately deductible, can accumulate tax-free, are not available to creditors, and can be rolled over (and that is only a partial list of the advantages). What make this strategy legal is that most plan sponsors have additional room with the Internal Revenue Code's non-discrimination in benefits test. That is, there is space for additional benefits to accrue for highly compensated employees without a violation of the Code. Many individuals and employers with "cross-tested" retirement plans understand and use this space. The employer/plan sponsor can amend its qualified plan to slightly increase benefits for certain highly compensated employees and, following the limits of 409A, relieve itself of an obligation to provide non-qualified benefits to such employees.

I'm not going to lie to you, until I read a summary by leading actuary John Lowell, I thought MAP-21 was a movie starring Gene Hackman and Danny Glover. See his blog on MAP-21. In July, Congress passed and President Obama signed The Moving Ahead for Progress in the 21st Century Act ("MAP-21") [P.L. 112-141] into law. MAP-21 changed the funding requirements for single employer defined benefit pension plans. These changes should reduce the minimum funding obligations for pension plan sponsors, making the plan seem better funded than it was before.

I know a lot about QSERPs, but not much about MAP-21. Therefore, with his permission, I will quote from Mr. Lowell's blog: 

In a nutshell, MAP-21 allows plan sponsors to use significantly above-market discount rates in the determination of funding requirements for their qualified pension plans. The trade-off comes in increases in PBGC premiums. But, while the first of these items is optional, the second is required.

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The time may be right to consider a QSERP. Briefly, a QSERP is a means to transfer certain nonqualified benefits to a qualified plan. So, why might now be the right time. MAP-21 has given companies the ability to use higher discount rates in funding their pension plans. This means that any restrictions that might have arisen due to low funded statuses have likely disappeared. So, companies have the opportunity to fund this obligation in a qualified plan without having to fund it all at once.

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Risk managers might tell you not to do this and there are good reasons. Paramount among them is that temporary use of above-market discount rates does not change the "true" funded status of a plan.

Other risk managers might tell you that you should do this and you should do it now. Why? Let's consider a simple example. Suppose you have agreed to pay your CEO an additional $100,000 per year (for life starting at age 65) from the SERP. This is over and above what he will get from the qualified DB plan. The present value of that obligation is the same whether that benefit is in the qualified plan or in the SERP. But, in the qualified plan, you get these advantages and many others:

  • The benefit will not be subject to 409A
  • You could efficiently fund the benefit immediately and generally get an immediate tax deduction for that funding
  • That tax deduction may be taken at a higher corporate tax rate than it will be in the future
  • When the CEO retires, his benefit can be paid out of a large pool of assets rather than creating a cash flow crunch

This is a complex process and there is much to consider. But, for the right company, now is the time. You'll only know if you are the right company after careful analysis. Ask an expert.

You can find other blogs of mine on the QSERP/SERP Swap strategy here: 

On November 6, 1860, Abraham Lincoln defeated three other candidates for the U.S. presidency.