Odd Nonqualified Arrangement

[Randy Watson]

I have a nonqualified retirement plan that does not meet the top hat exemption. Plan contributions are made to a secular trust and participants have the authority to direct investments. Since we are subject to Part 4 of title 1 of ERISA, we should make efforts to comply with 404© to avoid liability. Even though everything is telling me that we should comply with 404©, it seems very odd to me that we need to worry about 404© when the amounts are held in each employee's secular trust. Any comments?

[mbozek]

Who is the trustee of the secular trust, the participant or the plan fiduciary? If the participant is the trustee then the participant has a self directed account for which the plan fiduciary is not liable for the participant's exercise of independent control over the investments. What I dont know is whether the employee can be both the sole trustee and sole beneificary of the trust since this may violate the merger of interest rule under the trust law of some states.

[Randy Watson]

Plan participants are not trustees in this case. Have you ever seen anything like this before?

[mbozek]

I always thought that secular trusts were limited to top hat plans. There is no prohibiton under ERISA in using a taxable trust to fund benefits which is what a secular trust is under IRC 402(b). The difference is that unlike a Q plan there is no tax deferral for contributions and earnings that are vested in the employee.

I once drafted a taxable trust for for an ERISA plan that provided early retirement benefits for life for an employee who was 55. The terms of the plan provided that the employer make an anual contribution to the trust of $20,000 which was the amount of the annual vested benefit paid by the trust to the employee. Since the trust had 0 assets at the end of each year there was no tax to the trust. An actuary signed the sked B that the plan met minimum funding standard since the benefits would be fully funded over 30 yrs and each year's contribution met the minimum funding requirement.