Rabbi Trust

Summary

This template is a so-called rabbi trust, which may be used as a funding vehicle for a nonqualified deferred compensation (NQDC) plan or arrangement. This template includes practical guidance, drafting notes, and alternate and optional clauses. Because the assets of a rabbi trust used to fund a NQDC plan are subject to the claims of the general creditors of the sponsoring company, the IRS treats the plan as an unfunded arrangement under Internal Revenue Code rules. Consequently, taxation of the compensation obligations under the NQDC plan may be deferred beyond the time that would apply if the plan were actually funded pursuant to I.R.C. § 402(b). The IRS established model rabbi trust language in Rev. Proc. 92-64, as modified by I.R.S. Notice 2000-56. Employers must use the model language (tailored with appropriate optional and alternate provisions) if they want to rely on the tax-favorable treatment or if they intend to request an IRS ruling on the arrangement. This template is based on the model language. The Department of Labor has also taken the position that establishing a rabbi trust to fund a NQDC plan will not cause the plan to be treated as funded for purposes of qualifying for the top hat plan exemption from various provisions of ERISA. See DOL Adv. Op. 90-14A, 1991 ERISA LEXIS 16. For more information, see Top Hat Plans, Top Hat Plan Statement Filing Rules and Procedures, and ERISA Coverage of Benefit Plans. Note that adverse tax consequences will arise under Section 409A funding rules if a NQDC plan subject to Section 409A is funded: • Via an offshore trust (or with assets held offshore) • Via a springing trust that is funded upon a change in the sponsor's financial health –or– • In cases where the sponsor (or one of its controlled group members) also sponsors a qualified defined benefit plan, (1) during a period when the defined benefit plan sponsor is subject to a bankruptcy proceeding, (2) during a period in which the defined benefit plan is in at-risk status, or (3) during the 12-month period beginning 6 months prior to the termination of the plan if it is not fully funded on the termination date I.R.C. § 409A(b). For information about using rabbi trusts to set aside corporate assets to provide nonqualified deferred compensation benefits, see Rabbi Trust Drafting and Design. For a further discussion on rabbit trusts, see New York University Annual Institute on Federal Taxation § 6.05 and Lexis Tax Advisor -- Federal Topical § 1C:6.04. For a sample deferred compensation plan for a select group of management or highly compensated employees, see Nonqualified Deferred Compensation Plan.