IRS Issues Guidance on Offshore Rabbi Trusts

March 22, 2006 ( - The Internal Revenue Service has released IRS Notice 2006-33 that provides transitional relief to nonqualified plans whose assets are held in certain off-shore trusts or whose provisions contain a financial trigger that would provide additional protections to participants

Generally, Section 409A prohibits (specifically Section 409A(b)) the use of off-shore rabbi trusts or financial distress triggers. Both methods were occasionally used by some companies, but not by the vast majority of companies, to attempt to provide participants in the plans more protection prior to the adoption of Section 409A.

This Notice provides that the penalty provisions of Section 409A will not apply if the plan is amended to come into compliance with the new law by December 31, 2007.   If plans do not take advantage of this transitional relief, the income provisions under Section 409A will come into play.  

The Notice establishes “Grace Period Assets.”   Under the Notice, Grace Period Assets are assets (including earnings) actually transferred, restricted or set aside by March 31, 2006 but do not include assets transferred, restricted or set-aside   or earnings on such assets after that date.   If Grace Period Assets are used to make payments, the plan will be treated as having complied with Section 409A(b) so long as the plan is amended pursuant to the Notice.

This relief is being granted because of the confusion around the application of Section 409A(b) to amounts already set aside under the plan prior to December 31, 2004.    The full notice can be found  here .