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 could 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.

Contributions to the Rabbi Trust receive the same tax deferral status as 403(b) contributions. The RPB invests the Rabbi Trust funds on a commingled basis with the RPB 403(b) plan fund; therefore, the investment results for Rabbi Trust assets are identical to the results of the RPB 403(b).

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 on or 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.

The rules concerning distributions from the accounts are as follows:

Rabbi Trust accounts that are from contributions and associated earnings made up until December 31, 2004:

  1. You cannot take a distribution until the latter of your attainment of age 65 or retirement.
  2. You can defer receiving a distribution from your Rabbi Trust account until April 1st in the year following the attainment of age 70 ½ or the year you retire if you work past the age of 70 ½.
  3. If no election form is on file at the RPB, a payout over five years (the “Default Election”) will be commenced in the year you are eligible to receive a distribution.
  4. You can make an election in the calendar year prior to your scheduled receipt of your Rabbi Trust account to receive the Rabbi Trust balance in one to 15 year installments and start distributions when eligible to do so or to defer the distribution until the attainment of age 70 ½.
  5. In any case, in the year you are eligible to take a Rabbi Trust distribution, the minimum annual distribution you will receive from the Rabbi Trust is the lesser of your account balance or $25,000.

Rabbi Trust accounts that are from contributions and associated earnings made in or after 2005 (Rabbi Trust Post-2004 Account):

  1. You can take a distribution upon the latter of your attainment of age 65 or retirement.
  2. You can defer receiving a distribution from your Rabbi Trust Post-2004 Account until April 1st in the year following the attainment of the age of 70 ½ if you are retired.
  3. An election of a distribution method must be made at least 12 months before a distribution is eligible to be made from the Rabbi Trust. Once you are less than 12 months from being eligible to receive your rabbi trust distribution the election form on file at the RPB will be irrevocable. If no election form is on file at the RPB, a payout over five years (the “Default Election”) will be commenced in the year you are eligible to receive a distribution.
  4. When you change your election to something other than the RPB default option, you will have to defer your distribution for at least five years, but not later than the April 1st in the year following your attainment of age 70 ½.
  5. Regardless of your election, the annual distribution from the Rabbi Trust is based on your account balance divided by the number of years that you elect to receive a distribution; however, if your total account balance drops below the IRS maximum deferral amount (currently, $16,500), then your account balance will be distributed in full. This means that if a participant with a Rabbi Trust balance of $37,500 elects a five-year distribution, he/she will receive $7,500 per year (excluding earnings or losses) until the account balance goes below $16,500 and then the account will be paid in full, so that if there are no earnings and losses the full account balance of $15,000 will be paid out in the fourth year.
  6. If you in fact retire after the age of 65 and there are less than five years until the April 1st following the attainment of age 70 1/2, the five year distribution rule will govern because you cannot postpone commencement of the distributions by five years. This means that if you retire at age 68, you must follow the five-year default election payment schedule as there are fewer than five years until you attain the age of 70 ½.

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.

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