Many trusts commonly encountered in the context of the funding of pensions and other forms of deferred compensation in the United States permit employees to defer income until it is received by them. These trusts include (i) plans that “qualify” under Internal Revenue Code (IRC) §§401(a) and 501(a), and (ii) so-called “rabbi trusts” that, although not “qualified,” are treated as “grantor trusts” of the employer. However, other types of trusts are sometimes encountered in the pension context, including §402(b) trusts, the principal focus of the discussion below.
By way of background, a trust that is a part of a stock bonus, pension or profit-sharing plan described in IRC §401 will be “qualified” if it meets numerous requirements set forth in the Code, one of which is that the assets of the trust be used for the exclusive benefit of employees of the employer. Although amounts contributed to such trusts are generally deductible by the employer when the contributions are made, those contributions, and the income thereon, are generally includible in the incomes of the employees or their beneficiaries only when distributed. (The trust itself is generally exempt from tax under Code §501(a)).
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