A Rabbi Trust is a non-qualified deferred compensation arrangement in which funds are invested in an irrevocable trust to be held for the benefit of employees for retirement purposes. The funds contributed are tax deferred in a similar manner to other tax deferred vehicles such as the RPB 403(b) Plan. The name “Rabbi Trust” was established because the first IRS letter ruling with respect to this type of trust involved a rabbi; however, the Rabbi Trust is widely utilized in commercial enterprises and not-for-profit organizations.
In some instances, depending on a participant’s includable income, (generally, includable income is a participant’s salary without including parsonage) employers can make contributions that exceed the IRS 403(b) limits during an RPB plan year. If this occurs, the RPB will automatically place the amount that exceeds the IRS maximum contribution limits for the RPB 403(b) plan into a Rabbi Trust account in the participant’s name.
Distribution rules for Rabbi Trust accounts are not as flexible as for 403(b) accounts; a Rabbi Trust is a non-qualified deferred compensation plan, and money in a Rabbi Trust is not eligible to be rolled over into qualified retirement plans such as other 403(b) plans or IRAs. IRS regulations have made distributions from the RPB Rabbi Trust more complicated over the past few years, as Congress enacted laws that limit the flexibility of when Rabbi Trust balances can be distributed. The laws were a reaction to abuses in Rabbi Trust plans resulting from the Enron, WorldCom and other financial scandals. The laws have had the unintended consequence of affecting participants in all pension plans with Rabbi Trust provisions no matter what the situation.
IRS rules concerning Rabbi Trust distributions were changed a few years ago to separately track Rabbi Trust balances and associated earnings that were a result of contributions made up until December 31, 2004 from those contributions made after January 1, 2005. The RPB maintains separate accounts for both types of Rabbi Trust plans so that participants can take distributions correctly for both plans. Parsonage exemptions can be made by clergy on both accounts.
Both types of Rabbi Trust plans, the pre- and post-2005 versions, are not eligible for rollover into qualified pension plans including traditional IRAs. Parsonage exemptions can be made by clergy on both accounts. Click here to read the rules concerning distributions from Rabbi Trust accounts.
While the Rabbi Trust funds are invested by the RPB and held in trust by the RPB, the actual account (contributions and earnings) is technically an asset of the congregation that contributed the funds. Congregations, however, do not have access to the money. The only time that Rabbi Trust funds could be accessed is if the congregation becomes legally insolvent. Under those circumstances, assets in the Rabbi Trust would be available to the claims of creditors of the congregation that contributed the funds.
Click here to read our Rabbi Trust Q&A.