Vested benefits required to "fund"

[B21]

Once an employee who participates in a NDC plan becomes vested in his/her benefit( no longer subject to substantial forfeiture) is the employer required to set aside funds to pay the employee his/her benefit in the form of a lump sum or installments? Are these funds then considered funded & therefore protected from the employer's creditors?

[QDROphile]

With respect to the law, no and no. However, if funds are set aside because of contract, both the tax consequences and the second question depends on how the funds are "set aside."

[My 2 cents]

The "Rabbi Trust" approach (so-called because the first such trust approved by the IRS was for a synagogue's rabbi) involves a trust for the exclusive benefit of the individual covered, which cannot be rescinded or taken away BUT which is subject to the claims of the sponsor's creditors. This last feature creates the tax magic that enables the intended recipient to owe no taxes on the vested benefits until receipt (although the investment income prior to that would be taxed to the sponsor, since the trust would not be a qualified trust).

Normally, money cleanly set aside that nobody can touch but the intended recipient would be considered taxable income to the recipient at the point it becomes vested (or at least that is my understanding).