Clergy Tax Facts
Rabbi Trust
A rabbi trust is an irrevocable trust used to fund deferred compensation benefits. It is often used as a vehicle for deferring taxable income. As a non-qualified deferred compensation plan, rabbi trusts avoid many of the complex and administratively burdensome requirements that govern qualified plans under ERISA and the Internal Revenue Code. In addition, they can be tailored with great flexibility to fit precise objectives and be targeted for specific church employees.
Deferred compensation arrangements fundamentally consist of an agreement between the church and an employee that payments due for current services will be made at a future date. The employee's tax objective is to ensure that taxation does not occur until payments are actually received. The built-up value of investment income is also generally tax-deferred to the individual.
Rabbi trusts are exempt from the participation, vesting, funding and fiduciary requirements of ERISA, but are subject to limited reporting and disclosure requirements.
A rabbi trust must be both "unfunded" and benefit a select group of employees. To be considered "unfunded," plan assets must remain unsecured and may not unconditionally vest in or be transferable by the employee beneficiary. Any "unfunded" plan must clearly provide that participants have the status of general unsecured creditors.
The promise to pay the deferred amount must be a mere contractual obligation of the church, not evidenced by notes or secured in any way. The election to defer must be made before the beginning of the period of service for which the compensation is payable, unless the plan imposes a substantial forfeiture provision that remains in effect throughout the entire period of deferral. The plan must also define the time and method of payment for each event that entitles a participant to receive benefits and must state clearly that participants have the status of general unsecured creditors of the church and that the plan constitutes a mere promise to make payments in the future. The plan must specifically prohibit the transfer or alienation of a participant's interest and must state that it is the intention of the parties that the arrangement be unfunded for tax purposes.