Question

Quentin Wilson's employer has offered him the option of participating in a nonqualified deferred compensation plan (subject to substantial risk of forfeiture). To ensure that the funds will be used for his benefit, Quentin requests the use of a rabbi trust. If the plan is set up correctly, on which of the following can Quentin rely?

a) The employer may only access the funds for capital expenditures, and then only after a vote by the board of directors.
b) It is likely that the funds would not be there if the employer enters bankruptcy.
c) Life insurance and employer stock may be used to fund the trust.
d) Since the funds in the trust are for Quentin's benefit only, the earnings of the trust are taxable to him as earned.

Answer 1

Quentin Wilson can rely on a rabbi trust to fund his nonqualified deferred compensation plan with life insurance and employer stock, and the earnings are taxable to him. However, if the employer faces bankruptcy, the funds in the trust may not be available.

Step-by-step explanation:

When Quentin Wilson's employer offers him a nonqualified deferred compensation plan (NQDC) with a rabbi trust, Quentin is concerned about ensuring that the funds are protected for his benefit. If the rabbi trust is set up correctly:

• b) It is likely that the funds would not be there if the employer enters bankruptcy.
• c) Life insurance and employer stock may be used to fund the trust.
• d) Since the funds in the trust are for Quentin's benefit only, the earnings of the trust are taxable to him as earned.

Therefore, Quentin cannot rely on the employer accessing the funds only for capital expenditures after a board vote (option a), but he can rely on the tax implications (option d) and the types of funding allowed for the trust (option c). However, he should also be aware that if the employer files for bankruptcy, the funds in the trust may not be protected (option b).