When the agreement is made prior to services being rendered, there are certain requirements that must be met in order to receive a favorable IRS letter ruling. These requirements are:

–The nonqualified plan provides that the election to defer compensation must be made before the beginning of the “period of service” for which the compensation is payable. In general, this means the election must be made before the beginning of the calendar year and this is regardless of any forfeiture provisions contained in the plan.

–In the year in which the plan is first implemented or the year in which an employee first becomes eligible to participate, the election to defer may be made within 30 days after the plan is effective or the employee becomes eligible, so long as the election to defer is for compensation for services after the date of the election.

–If any deferral election may be made by an employee subsequent to the beginning of the “period of service” the plan must define the time and method for payment of deferred compensation for each event that entitles an employee to receive benefits (such as retirement, disability, etc.).

–The plan must define the time and method for payment of deferred compensation for each event that entitles an employee to receive benefits (such as retirement, disability, etc.).

–The plan may provide for hardship distributions due to an unforeseeable emergency beyond the control of the employee or beneficiary and that would cause a severe financial hardship. The permitted withdrawal must be limited to only the amount necessary to eliminate the emergency.

–The plan must provide that employees have the status of general unsecured creditors of the employer and that the plan constitutes a mere promise by the employer to make benefit payments in the future.

–If a trust is used, it must conform to the terms of the model trust described in Rev. Proc. 92-64 (IRSs model rabbi trust).

–The plan must state it is the intention of the parties that the arrangement be unfunded for tax purposes and for purposes of Title I of ERISA.

–The plan must state that an employees rights to benefit payments are not subject to alienation, pledge, anticipation, sale, transfer, assignment or garnishment by creditors of the employee or the employees beneficiary.


Reproduced from National Underwriter Life & Health/Financial Services Edition, March 4, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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