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NON-QUALIFIED RETIREMENT PLANS
Remember, non-qualified plans do not have to meet ERISA requirements. They're typically offered to top executives.
Non-qualified plans include:
- Rabbi trusts
- Secular trusts
- Supplemental executive retirement plans (SERPs)
- Annuities
- Employee stock compensation plans
- Phased retirement
We will now take a look at each of these options.
Option 1: Rabbi Trusts
A rabbi trust is an irrevocable trust established by an employer that's used to pay deferred compensation benefits to employees.
The first IRS ruling that pertained to this type of trust involved a religious congregation that contributed money to a trust for its rabbi. Hence the name.
The IRS ruling declared that the rabbi's funds couldn't be taxed until the rabbi (or his beneficiary) received the funds for the following reasons:
- death or disability
- employment termination
- OR
- retirement
Employers use rabbi trusts to provide employees with benefit security.
Here’s how a typical rabbi trust works:
Company S contributes stock to a rabbi trust for Ella, the company’s highest-paid employee. Ella’s deferred account increases with the stock’s value.
Vesting can take 7 years or more. In Ella’s case, vesting occurs over a 9-year period. Company S records an expenditure according to the award amount spread over 9 years (vesting). Company distributions are acceptable in company stock or cash. Ella won’t be taxed until distribution. At that time, Company S will get a corresponding tax deduction.
A model Rabbi Trust form has been issued by the IRS. As long as it is used, the model trust form provides a "safe harbor" for the plan.
Memory Jogger
When do companies receive tax deductions for contributions they make to employees' rabbi trusts?