Rev. proc. 92-64 and rev. proc. 92-65 relating to rabbi trusts.

On November 5, 1992, TEI filed comments on Rev. Proc. 92-64 and Rev. Proc. 92-65, relating to deferred compensation arrangements that employ trusts known popularity as "rabbi trusts." TEI's comments were prepared under the aegis of its Employee Benefits Subcommittee whose chair is David L. Klausman of Westinghouse Corporation. Contributing substantially to the development of TEI's remarks were Paul Cherecwich, Jr. of Thiokol Corporation, W. Kurt Maier of Morton International Corporation, and Susan A. Williams of Hewlett-Packard Corporation.

The Internal Revenue Service recently released Revenue Procedures 92-64 and 92-65 (1992-33 I.R.B. 11 and 16, respectively), relating to deferred compensation arrangements popularly referred to as "rabbi trusts." Since many taxpayers obtain private letter rulings concerning the validity of their deferred compensation arrangements, Rev. Proc. 92-65 provides general guidance for securing advance rulings for arrangements that employ the rabbi trust device. In a complementary fashion, Rev. Proc. 92-64 sets forth model trust provisions to assist taxpayers in drafting trust instruments acceptable to the IRS. Section 7 of Rev. Proc. 92-64 invites public comments. This letter responds to that request.

Overview

In designing and implementing nonqualified deferred compensation plans, companies must balance the demands of the tax law with the desires of their employees for security and preservation of company assets to pay the promised compensation. Specifically, to defer taxation to the employee of the promised but unpaid sums, a nonqualified deferred compensation plan must comply with the separate but related tax doctrines of constructive receipt and economic benefit.

One means of balancing these competing demands is to create an employer-sponsored grantor trust arrangement for deferred compensation -- loosely referred to as rabbi trusts. Briefly described, rabbi trusts involve a transfer of property by a corporate employer to a trust for the benefit generally of a class of selected employees to secure partially or fully a promise to pay the compensation at a future time. In order to avoid the doctrines of constructive receipt or economic benefit from being invoked against the employee (thereby subjecting the unpaid sums to current tax), the trust must be a grantor trust, the assets of which are subject to claims of the employer's general creditors. As a result, trust arrangements serve mainly to ensure that the employer will have the funds available at a future date to pay the promise, upon...