Spinoff of nonqualified deferred compensation liabilities and rabbi tr

[Guest hank]

Employer maintains a number of nonqualified plans for elective deferral of bonus and other incentive compensation. A rabbi trust holds assets to fund such payments in the event of a change in control, etc. Employer is forming a joint venture in which it will have an exact 50% ownership interest. A number of employees who have deferred compensation are being asked to terminate service with the employer and become employees of the joint venture. In ordinary circumstances, their termination of employment would trigger distribution of their nonqualified deferred compensation, but the employer wants to "spin off" the deferred compensation liabilites and transfer rabbi trust assets to a deferred compensation plan and rabbi trust to be established by the joint venture company. The employees will not be given an opportunity to do anything with respect to the proposed process (because of constructive receipt issues).

My question: does anyone know of an IRS

ruling or GCM/TAM which addresses a rabbi trust "spin off" to a non-related entity?

I'm grateful for any thoughts you might have on the proposed transaction.

[Guest]

Interesting question . . . The transfer of rabbi trust assets should be deemed a nontaxable capital contribution to the JV(assuming sections 351 or 721 are satisfied). But what happens to earnings on the assets and any gain on the sale of assets to pay benefits? If your JV is a partnership, you better check where the income gets allocated. If your JV is taxed as a corporation I frankly don't know the answer. Is the JV really the grantor or is the contributing partner? If rabbi trust assets are sold to effectively pay the parents deferred compensation liability does that trigger tax to the original employer? You need a REAL tax lawyer to work through this! This is outside the expertise of mortal benefits lawyers.

Please post the answer to your question since this is something we could all learn from.

[pjkoehler]

One approach that may make sense involves a corporate-level spin-off by the plan sponsor of a wholly-owned subsidiary to which the employees in question, and related corporate assets (including the rabbi trust assets attributable to the transferred employees' benefit liabilities) are transferred, simultaneously spining-off that portion of the deferred comp plan that covers those employees to a new plan sponsored by the sub. The new sub would establish its own rabbi trust. At the completion of the corporate-level and plan-level spin-offs, the parent would contribute all of its stock in the sub to the partnership, or the LLC, formed by the joint venturers, in exchange for its 50% interest in the entity. One note of caution, is to determine whether such a corporate transaction triggers automatic plan termination or other distribution event under the existing plan.

[This message has been edited by PJK (edited 06-23-2000).]