Limit On Rabbi Trust Contributions Resulting From Asset Depreciation In Single-Employer Defined Benefit Plans

Originally published December 9, 2008

Keywords: ERISA, rabbi trust, contributions,

asset depreciation, single-employer, benefit plans, deferred,

insiders, compensation benefits, employment agreements,

Recent drops in the value of assets for qualified defined

benefit pension plans may effectively preclude employers from

making any contributions in coming years to a rabbi trust or

similar arrangement used to set aside amounts for nonqualified

deferred compensation plan benefits.

Many companies maintain rabbi trusts to pay benefits under

nonqualified deferred compensation plans. Assets in a rabbi trust

must be subject to the claims of the company's creditors upon

an insolvency of the company. A rabbi trust sometimes provides that

the decision to make contributions is within the discretion of the

company. A rabbi trust may also require the company to make

contributions, although contributions may be required only in

certain specified circumstances, such as upon a change in

control.

Tax code section 409A(b) provides that if a contribution is made

by a company to a rabbi trust or other similar arrangement during a

period in which a single-employer defined benefit plan of the

company or a member of the company's controlled group is in a

"restricted period" (as described below), the

company's named executive officers, and other executive

officers and directors subject to section 16(a) reporting under the

Securities Exchange Act of 1934 (sometimes referred to as

"insiders"), will recognize income to the extent the

contributed assets are for the benefit of such officer. The

above-described limitation on contributions does not apply to

contributions made prior to a restricted period. (The rules also

require accelerated income recognition if amounts that were

previously set aside in the trust become restricted to the

provision of benefits in connection with a restricted period.

Discussion of these provisions is beyond the scope of this Client

Alert.)

The above-described limitation applies to contributions made on

a mandatory or on a discretionary basis. It applies to

contributions to rabbi trusts used to fund nonqualified defined

contribution plans and nonqualified defined benefit plans, as well

as contributions to rabbi trusts used to fund deferred compensation

benefits under individual arrangements such as employment

agreements.

A restricted period with respect to a single-employer defined

benefit plan is any period during which the plan sponsor is...