FAQ on Rabbi Trust
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What is a Rabbi Trust?
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 Reform Pension Board 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.
Why the need for a Rabbi Trust?
IRS regulations limit the amount of deferred income that can be contributed to tax deferred plans such as the RPB 403(b) plan.
The IRS places limits on the contributions that can be made to a 403(b) plan. Click here to see the maximum contributions for the current plan year.
What do you mean by taxable income?
For clergy, taxable income is salary plus other taxable congregational income such as FICA tax reimbursement, but not including parsonage. For all other RPB participants, it is your W-2 salary.
How will I calculate my RPB 403(b) maximum and my Rabbi Trust contribution?
You don’t have to! The Reform Pension Board realizes that performing tax calculations can be complicated and time-consuming. The Board of the RPB decided to relieve its participants of the responsibility of becoming knowledgeable in this area. The staff, along with the Board’s outside legal and pension plan expert counsel, has researched the IRS rules and incorporated the formulas, including some of the exceptions, into our computer system.
Do I have to be concerned about administration?
No, the Reform Pension Board will do all the administration.
How will I know how my money is being invested?
Your account statements will show your RPB 403(b) plan and the Rabbi Trust funds separately.
What is the relationship of the Rabbi Trust money to my congregation?
The Rabbi Trust funds are invested by the RPB and held in trust by the RPB, but the actual account (contributions and earnings) is technically an asset of the congregation that contributed the funds.
Does that mean the congregation can use the money?
No. 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.
What if the congregation has a severe cash flow problem?
The Rabbi Trust assets cannot be used.
What if the congregation merges with another congregation?
The Rabbi Trust assets remain intact.
Can I commingle the Rabbi Trust assets with the RPB 403(b) plan into one account when I retire?
Unfortunately, you cannot. Each account is treated separately.
Why does the RPB maintain two different Rabbi Trust accounts?
As a result of the American Job Creation Act of 2004, there are two Rabbi Trust accounts based on when your contributions (and resulting investment earnings) were made to the RPB. Contributions received prior to January 1, 2005 (Rabbi Trust Account) and contributions received on or after January 1, 2005 (Rabbi Trust Post–2004 Account) are segregated in different accounts.
Are there any differences in how the two Rabbi Trust accounts are processed?
The main difference between the two Rabbi Trust accounts is in the way money is distributed at retirement.
How is the Rabbi Trust money paid out at retirement for contributions (and related earnings) that were received prior to January 1, 2005?
As a default, your distributions will commence upon later of attainment of age 65 or retirement, paid in five annual installments. You can, however, make an election in the year prior to your scheduled receipt of your Rabbi Trust account –usually at the later of age 65 or retirement– to receive the Rabbi Trust account balance in one to fifteen–year installments or to defer the distribution until the attainment of age 70 ½. In any case, the minimum annual distribution you can receive from the Rabbi Trust is the lesser of your account balance or $25,000. The RPB will mail an election form to you to make a timely election.
How is the Rabbi Trust money paid out at retirement for Rabbi Trust Post – 2004 accounts?
As a default, your distributions will commence upon later of attainment of age 65 or retirement, paid in five annual installments. In lieu of the five-year payout, a participant may elect to receive either a lump sum or distributions over two to fifteen–year installments, provided that the election has to be made at least twelve months in advance in order for it to be effective, and which defers commencement of payment (after termination of employment, if so elected) for at least five years, but to no later than the April 1 of the year following the year in which the participant attains the age of 70 ½. The remainder of the Rabbi Trust Post–2004 Account will be distributed if the value as of January 1 of any year is less than the elective salary deferral amount (currently $17,000) after payments have commenced. The RPB will mail an election form to you to make a timely election.
Can contributions that were placed in my Rabbi Trust account be transferred back to my 403(b) account?
Contributions in the pre–2005 Rabbi Trust account can be transferred to your 403(b) account if in any year you are still making pension contributions and have not used up your entire elective salary deferral limit. The RPB will notify you each spring of any transfers being made to your 403(b) account. Contributions in the Post–2004 Rabbi Trust account cannot be transferred to your 403(b) account.
What if I do not want any pension contribution funds automatically contributed to the Rabbi Trust?
You must inform the RPB in writing, jointly signed by you and an officer of the congregation. You must realize, however, that your pension contribution to the RPB will be limited to the IRS 403(b) maximum limits and your ultimate pension benefit from the RPB will be less than would otherwise be available.