Protecting Deferred Compensation
Non-qualified deferred compensation plans are often used as a fringe benefit to recruit and retain key executives. Even if funds are aside by the employer to meet its future obligation, the company's creditors may reach the funds if there is financial difficulty. In order to protect these funds, an irrevocable arrangement commonly known as a "secular trust" can be established. The employer pays the agreed upon contibutions to the trust, which invests the funds until the executive's retirement, disability or death. Unlike the popular "rabbi trust," the funds are not available to the company's creditors or management, thus assuring that the funds will be available when needed.

Tax Consequences

A. Funds are taxable to the employee during the year they are contributed to the plan. IRC Section 83 and 451(a)

B. The contributions are deductible to the corporation in the same year. IRC 162(a)

Many advisors feel that future tax rates will increase and that payment of the loweer tax now will result in a larger fund at the executive's retirement. One disadvantage, however, is that the executive's taxes will increase, but his or her current available income does not. The employer may wish to provide an additional cash bonus to pay the extra taxes. The possible tax advantage combined with the seperation of the fund from potential corporate creditors makes the secular trust attractive to many executives. Recent Private Letter Rulings from the IRS have raised doubts regarding secular trusts and should be considered before drafting the trusts. See PLR 9206009 and 9207010.

This document was last modified on July 15, 1999

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