THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
BUSINESS
STRATEGIES
Your business can
gain stronger loyalty
and commitment from
key executives by
using a Rabbi Trust
in conjunction with a
Non qualified Deferred
Compensation plan.
Nonqualified Deferred Compensation
Secured with a Rabbi Trust
A nonqualified deferred compensation arrangement
using permanent life insurance combined with a Rabbi
Trust can be an effective way to:
Assure your business has set aside funds to pay for future
executive benefits.
Allow the executive to defer taxation until benefits are paid at a
future time.
Secure benefits against changes in management and the use of
the funds for other business objectives.
BENEFITS TO THE BUSINESS:
A well-designed nonqualified deferred compensation plan can
help attract, reward, and retain key executives.
By establishing a Rabbi Trust, the business demonstrates its
commitment to its executives by setting aside current dollars
to informally fund future nonqualified benefits.
When life insurance is used as an informal funding vehicle,
premium dollars generate death benefit proceeds that help the
business recover all or part of the plan costs.
BENEFITS TO THE EXECUTIVE:
A Rabbi Trust adds “security” by informally funding the
employer’s “promise to pay.”
Although assets transferred to the Rabbi Trust are still available
to the employer’s general creditors, they are not available for
other company uses.
Executives are protected against an employer’s decision to
discontinue the plan and pay out existing plan balances (i.e.,
a “change of heart”) and the potential loss of benefits through
management changes (i.e., “changes in control”).
Continued on the next page.
© 2014 Prudential Financial, Inc. and its related entities.
0232464-00002-00 Ed. 09/2014 Exp. 03/29/2016
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
BUSINESS STRATEGIES
NONQUALIFIED DEFERRED COMPENSATION
NONQUALIFIED DEFERRED COMPENSATION WITH A RABBI TRUST
←
2. Salary deferral
•
•
Business
•
Executive
1. Deferred Compensation Agreement/
4. Notice & consent
3. Executive deferrals and/or
employer contributions
6. Pre-retirement or
post-retirement benefits
•
•
Life
Insurance
5. Premiums
6. Policy values and/or
death benefits
•
Rabbi
Trust
7. Employer
costs
recovered
1. The business and the executive enter into a written agreement detailing the terms of a nonqualified agreement
including pre- and/or post-retirement benefits.
2. The executive defers salary (or the employer contributes) according to the terms of the nonqualified agreement.
3. Executive deferrals and/or employer contributions are placed into an irrevocable grantor trust, known as a Rabbi
Trust. A Rabbi Trust holds the nonqualified compensation assets out of the reach of the employer or any of the
employer’s successors, providing participants with some measure of security. However, the assets in the trust
remain subject to the claims of the employer’s creditors and therefore continue to provide tax deferral.
4. The notice and consent requirements under IRC §101(j) should be executed before life policies are issued in
order to receive tax-favored treatment.1
5. The trustee applies for and owns a life insurance policy on the executive’s life that informally funds the
arrangement. The trustee makes premium payments using the contributions it receives from the employer.
6. At the occurrence of events triggering payment of benefits, the Rabbi Trust uses policy cash values and/or death
benefit to help meet the employer’s obligations under the agreement.2 Benefits are paid by the trust to the
executive pursuant to the terms of the nonqualified agreement.
7. The employer costs for the plan can be recovered from the death benefit proceeds.
Continued on the next page.
1
For employer-owned life insurance policies issued after August 17, 2006, IRC §101(j) provides that death proceeds will be subject to income tax; however, where specific
employee notice and consent requirements are met and certain safe harbor exceptions apply, death proceeds can be received income tax-free. Life insurance proceeds
are otherwise generally received income tax-free under IRC §101(a).
2
Life insurance cash values are accessed through withdrawals and/or policy loans. Interest is charged on loans. Loans are generally not taxable but withdrawals are
taxable to the extent they exceed basis in the policy. Unpaid loans and/or withdrawals cause a reduction in policy cash values and death benefits and may affect any
policy guarantees against lapse. Loans outstanding at policy lapse or termination, prior to death of the insured, will cause immediate taxation to the extent of gain in
the contract. For policies that are Modified Endowment Contracts, distributions (including loans and withdrawals) will be taxed to the extent of policy earnings and the
taxable amount may be subject to an additional 10% federal income tax penalty. Consult your tax advisor for advice regarding your particular situation.
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
BUSINESS STRATEGIES
NONQUALIFIED DEFERRED COMPENSATION
TAX CONSIDERATIONS:
Employers that adopt and maintain Rabbi Trusts using the model Rabbi Trust form found in Rev.
Proc. 92-64 have the assurance that any contributions currently made to the trust will not be taxable
to the executive. That is, the model Rabbi Trust serves as a “safe harbor” that ensures that the
trust will not be regarded as “secured” or “funded” for tax purposes. It is important that the trust
documents mirror the specific language and order of the model Rabbi Trust because the Internal
Revenue Service (IRS) will not issue a ruling on the tax consequences of a Rabbi Trust other than a
model trust.
The employer receives a compensation deduction when a distribution is made to a participant. The
participant is subject to income tax on the amount received.
For employer-owned life insurance policies issued after August 17, 2006, IRC §101(j) provides that
death proceeds will be subject to income tax; however, where specific employee notice and consent
requirements are met and certain safe harbor exceptions apply, death proceeds can be received
income tax-free. Life insurance proceeds are otherwise generally income tax-free under IRC §101(a).
Assets transferred to a Rabbi Trust are still available to the general creditors of the employer. Plan
participants are not protected against the insolvency of the employer.
Internal Revenue Code §409A requires that all amounts deferred under a nonqualified deferred
compensation plan for all taxable years will be includible in gross income to the extent not subject
to a substantial risk of forfeiture and not previously included in gross income, unless specific
requirements addressing distributions, acceleration of benefits, and benefit election requirements are
met. Failure to comply with the requirements will result in current income inclusion as well as penalty
and interest charges. Clients should consult with their own tax and legal counsel as to the application
of these rules before implementing a nonqualified deferred compensation plan.
All guarantees and benefits of the insurance policy are backed by the claims-paying ability of the issuing insurance company.
Policy guarantees and benefits are not backed by the broker/dealer and/or insurance agency selling the policy, nor by any of
their affiliates, and none of them makes any representations or guarantees regarding the claims-paying ability of the issuing
insurance company.
Life insurance is issued by The Prudential Insurance Company of America, Newark, NJ and its affiliates. All are Prudential
Financial companies and each is solely responsible for its own financial
condition and contractual obligations. Like most insurance policies, our Securities and Insurance Products:
policies contain exclusions, limitations, reductions of benefits, and terms Not Insured by FDIC or Any Federal Government Agency. May Lose Value.
for keeping them in force. Your financial professional can provide you with Not a Deposit of or Guaranteed by Any Bank or Bank Affiliate.
costs and complete details.
Prudential, the Prudential logo, and the Rock symbol are service marks of Prudential Financial, Inc. and its related entities.
0232464-00002-00 Ed. 09/2014 Exp. 03/29/2016