Let's face it: Retirement planning isn't what it used to be, and hasn't been since 1982. That's when Congress passed the Tax Equity and Fiscal Responsibility Act, which slashed the amount of money companies can set aside for each employee's retirement. Beginning this year, the lid on annual contributions to a defined-benefits plan is $90,000, down from $136,425 a year ago. For a defined-contribution plan, the cap is $30,000 a year, reduced from $45,000.

"It's easy to see that with these limits, it's difficult to add up enough money for retirement," says Ruth Ryals, manager of benefits and compensation planning for the Pittsburgh office of Arthur Young & Co., the Big Eight accounting firm.

Small companies apparently agree, and they are turning in growing numbers to supplemental-benefits plans. Under these plans, designated executives and principals in a company continue to receive a portion of their salaries (usually 20% to 25%) each year after they retire or become disabled. In most instances, the money is in addition to other pension programs, and some sort of death benefit is provided.

"I know dynamite is a strong word," says Arthur Spector, assistant vice-president for personal insurance marketing at Metropolitan Life Insurance Co. in New York City, "but supplemental-benefits plans are really taking off."

Just how many businesses have jumped on the supplemental-benefits bandwagon is anyone's guess. The U.S. Department of Commerce doesn't keep such statistics. And corporations, for the most part, prefer to keep mum on the subject.

"Businesses don't want to advertise to the competition how they're paying their employees, especially if they're in the high-technology area," Ryals says. "People are these companies' most important assets, and they want to keep these plans under wraps."

Companies also try to muzzle talk about supplemental-benefits packages because they don't want junior-level employees to find out that senior executives stand to reap an additional plum upon retirement or disability. Many of these companies fear that if word of the plans leaked out, it would hurt morale.

Take the case of one advertising agency in the Midwest. Two years ago, it adopted a supplemental-benefits package to cover its principals. At the time, they agreed to keep quiet about this plan, and, so far they haven't changed their minds. "If I felt like everybody would understand the plan, I'd tell them," admits the chief executive officer, who asked that his name not be used. "But I don't feel like I could go up to a 10-year employee, who has been in our art department and is being paid a proper salary, and explain to him or her why [he or she] doesn't receive the same benefit."

What prompted this advertising agency to adopt a supplemental-benefits plan was its desire to provide key individuals with the option of early retirement. "In this business, you can burn out or the time can pass you by," says the CEO. "Who knows if you're as productive at 60 or 70 as you were between 40 and 50? Our concern," he continues, "was to set up a mechanism where the key people wouldn't feel obliged to sit here and mold after they reach their 55th or 60th birthday."

In addition to encouraging early retirement, supplemental-benefits programs can be used to promote loyalty, boost the morale of key executives, and provide employees and business owners with extra retirement income. The packages also help corporations lure experienced, mid-career executives who might otherwise be hesitant to forfeit retirement benefits by resigning from their present jobs.

What's more, the plans are an important weapon in the corporate battle to retain talented executives. "You can put all sorts of 'bad-boy' clauses in, since the benefits are usually provided under an employment agreement. You can't do that with other types of benefits," Ryals explains. "But with these plans, you can say, 'You'll only get these dollars if you stay with us, and you won't get these dollars if you do certain things, like join [one of our] competitors.' "

One drawback to supplemental-benefits packages is the lack of any guarantees. If the company goes belly up, you have little chance of receiving the benefits that were promised to you. "You stand in line with all the other creditors," explains Margaret A. Handmaker, a specialist in executive compensation for William M. Mercer-Meidinger Inc., a New York City-based human-resource and financial management consulting firm.

Another drawback to supplemental programs is their tax treatment. The Internal Revenue Service won't allow corporations to deduct the cost of the plans on their income tax returns until the benefits are paid, since supplementalbenefits packages, unlike traditional pension and profit-sharing programs, cover only a select group of executives. This fact might make the plans more expensive for corporations.

In a similar vein, supplemental-benefits programs used to be exempt from taxation for Social Security and unemployment compensation. Not any more. Under the Social Security Amendment Act of 1983, payments from supplemental plans are subject to Social Security and unemployment compensation either when the services are performed or at the time the benefits are paid. The later date applies, Ryals says, if "there is a substantial risk of forfeiture of the benefits."

In most instances, an employment agreement spells out the risk of forfeiture by specifying that an individual must fulfill certain requirements (such as remaining with the company until retirement or disability) before he or she can receive the benefits provided.

Should you decide to set up a supplemental plan, the key step is choosing the right form of financing. To cover your company's liability for future benefits payments, you may opt to self-fund or fund with insurance policies.

Self-funding means that you pay as you go. The primary benefit of this approach is that the cost is minimal during the early years of the program. For example: Your company adopts a supplemental-benefits plan under which the business's owners and key executives are paid benefits beginning at age 65. If the oldest person participating in your plan is now 45 years old, your company won't have to shell out a penny for 20 years.

Funding with insurance means that your company buys individual, cash-value life insurance policies on key executives and the business's owners. Thomas Johnson Jr., sales manager of The Johnson Cos., a consulting firm based in Newtown, Pa., recommends insurance funding, as does Ryals of Arthur Young. "The smaller the number of people involved," she says, "the more critical the use of insurance. You could fund it yourself if you have 100 or more people. Below that, it's probably easier to let the insurance company worry about what happens if somebody dies."

The reason the experts opt for insurance funding is that it offers a way for the corporation to recoup its costs. The corporation is the owner and sole beneficiary of the policies and, as such, can borrow back the cash value of the policies.

To explain how all this works, Handmaker of Mercer-Meidinger uses the example of an executive who is 50 years old and earns $100,000 a year working for a company that is in the 50% tax bracket. To provide the executive with supplemental retirement income equal to 25% of the executive's salary, the company purchases an increasing whole-life policy, which has an initial face value of $117,000.

The first year, the corporation pays a premium of $8,948. The second, third, and fourth years, it borrows the premiums, so its only expense is the interest on the loans -- $331 in year two, $662 in year three, and $993 in year four. In the fifth, sixth, and seventh years, the company pays the premiums, plus the interest, which total $9,941 each year. In the eighth year and every year thereafter, the corporation borrows back the entire cash value of the policy. If the executive lives to be 78, the company will receive $43,443 more than it paid in premiums interest, and benefits.

For more information on supplemental-benefits plans, write Barbara Cambron, William M. Mercer-Meidinger 2600 Meidinger Tower, Louisville, KY 40202, for a free copy of the firm's booklet, "Tax Efficient Compensation." Additional information on the plans is also available from Lora W. Jones, The Johnson Cos., P.O. Box 8, Newtown, PA 18940.

CORRECTION-DATE: September, 1984


"Someday Supplements" (Financial Tactics, June) should have stated that the annual benefit from a defined benefit is $90,000.