Taxation on Distributions

[Guest Lex]

When a distribution is taken from the Non-Qual Plan (using a Rabii Trust arrangement), it is my understanding that it is taxable as W-2 wages to the employee.

What about the earnings/loss on the contributions ? Are they taxable to the employee?

For example, the employee "contributions" total 10,000. Due to the market performance of the investments, that 10k is now worth 8,000. On what amount is the employee taxed?

Likewise, what about if the 10k is now worth 12k?

[four01kman]

Until the distribution is made, no amount is "owned" by the participant. Accordingly, the amount distributed is taxed as ordinary income in the year of receipt, or when "made available". No gain or loss is recognized to the participant.

Any realized gains or losses (including interest or dividends) is taxed in the year they are earned to the sponsoring employer.

[Guest Lex]

if I am understanding you correctly, based on my examples, if the amount distributed was 12k, the employee would be taxed on all 12k, even if some of this 2000 increase is due to capital gains/realized gains?

Likewise for the 8k?

[four01kman]

Yes. The key here is the money in the Rabbi Trust does not "belong" to the employee until distributed. The $8,000 or $12,000 in your example would be taxed as ordinary income.