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Rabbi Trustee Refund of Assets to Employer for Benefit Payment


Guest gaham

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I have a client who maintains an irrevocable rabbi trust in connection with their nonqualified plan. The rabbi trustee, a bank, has recently decided that they don't want to make benefit payments any longer to participants; rather, they want to return the money to the employer and have the employer make the benefit payments. This seems to me to defeat the purpose of maintaining a rabbi trust, but we are faced with very few alternatives if the bank is insistent and so far they are. Of course, we could switch trustees but the employer does not wish to do this because the bank also is the trustee/recordkeeper of the qualified plan which works in tandem with the nonqualified plan. I am curious to know whether the bank's position is common or whether this position is unique to this bank or this particular situation, and what, if any, problems this would raise if we went along with the bank's position. Any comments would be appreciated. Thanks.

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Guest wmacdonald

This is not how most banks follow there client's requests on Rabbi Trust. If you don't want to move trustees, I think you need to look at what the employee's exposure is. If they are making monthly payments, you really only have one month at risk. You may want someone to modify the trust language stopping any additional transfers, if they default on one payment etc. I have a web site on Rabbi Trust, it's http://www.rabbitrust.com

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  • 1 month later...

Bill- your URL doesn't seem to be working.

I was going to ask a similar question. The IRS model rabbi trust provides that the employer can pay benefits directly upon notice to the trustee. However, the model language also provides that once the trust becomes irrevocable no payments can be made to the employer.

I have a client that wants two provisions in the trust. First, they want the ability to pay benefits directly, and be reimbursed by te trust. Second, they want to provide that if the trust is overfunded by a certain amount, the employer can request a return of the excess.

Both of these lessen an executive's security, so I don't see this as threatening the tax deferral. Has anyone used either of these provisions? My guess is that this is ultimately a matter of state trust law.

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Guest wmacdonald

Yes, we have many clients that have a provision that allows them to take money out of the Rabbi Trust, if it's more than XXX% of the liability. The normal percentage is 125%, however it can be less. I guess if they pay the benefits, and you exceed the percentage, they can pull money out.

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Guest halka

We are trustee of a number of Rabbi trusts that provide the employer may elect to pay the NQDC benefit directly to the trust beneficiary and the trust will then reimburse the employer. We think the arrangement makes sense -- (1) the Rabbi is not exposed to default risk since it is only reimbursing employer for NQDC distributions already made and (2) it consolidates FICA and income tax withholding and reporting where the Rabbi beneficiary is receiving other taxable compensation from the employer.

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Thanks, Halka! Have you seen the other provision? Return of assets if the plan is overfunded? I assume as trustee you might be wary of this type of provision as it might require a bit more oversight.

Also, where you reimburse the employer, what type of documentation do you require from the employer before you will reimburse?

Thanks again- very helpful.

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Guest halka

Haven't yet encountered an overfunding problem as vast majority of our trusts are for "defined contribution," not "defined/target benefit," plans. Still, if the trust agreement specifically authorizes distributing excess funding (and defined "excess"), I don't see a problem with doing so. As to the employer's documenting distributions to NQDC beneficiaries, the employer simply forwards to us a periodic "NQDC payroll ledger" certifying they have made the listed payments and we issue a single reimbursement check.

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Guest wmacdonald

When your funding your Rabbi Trust with COLI, the provision for a distribution to the company comes is handy. If you have a death benefit over the obligations to the employees, and assets are greater than the total liability, the dollars will be returned to the company. You can see the prevalance of this and other provisions from our survey. You can download it free from http://www.crgworld.com, see it under "publications".

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