Rabbi Trust fund more than supplemental pension benefits

[Guest RW]

A rabbi trust funds a supplemental pension plan. Company wants to pay gratuitous retirement benefits that are outside of the supplemental plan out of rabbi trust assets.

Any issues?

[pjkoehler]

I assume that the gratuitous benefits are ad hoc pension benefits granted by the company under the terms of a severance or other employment agreement with the employee. You will want to analyze these agreements to determine whether or not they are ERISA Title I Plans. There have been some recent federal appellate court decisions that held that severance agreements covering only one employee can be ERISA Title I pension benefit plans. If they are ERISA plans, then one issue is whether the employee entitled to receive the gratuitous benefit is within the "top hat" group?

Regarding the use of the existing rabbi trust assets, you'll want to review the terms of the trust agreement. Such trust agreements typically have a provision that prohibits the employer's use of the trust assets for any purpose other than the payment of benefit liabilities arising under a specified plan or plans, other than in the case of insolvency of the employer. The issue here is whether these gratuitous retirement benefits arise under agreements that are recognized benefit liabilities under the rabbi trust agreement. If they aren't, you should consider setting up a separate rabbi trust for these benefits. Diverting the assets of the existing rabbi trust to pay benefits that are not consistent with the exclusive purpose of the trust, raises state law fiduciary duty and breach of contract issues. It may be possible to amend the agreement to expand the number of plans the rabbi trust assets are intended to finance, but again, this will depend on the language of the agreement. Since rabbi trust agreements are designed to enhance the executive's benefit security, they often contain language that would not permit such amendments, or would only permit them if a super-majority of current trust beneficiaries consent.

[This message has been edited by PJK (edited 06-21-2000).]