Informal Financing of Benefit Obligations

More and more community bankers are looking to finance the obligations associated with non-qualified executive and director benefits. While there is no legal requirement to “fund”  these benefit liabilities, such liabilities continue to grow as larger numbers of executives are impacted by the IRS benefit and contribution limits and restrictions. Bank Owned Life Insurance (BOLI) has become the financing strategy of choice for financing these liabilities as well as supplementing the financing of pension contributions, health care costs and other general employee benefit expenses. BOLI describes a unique asset exclusively available to banks that combines an investment grade portfolio with institutionally priced life insurance specifically designed and priced for the community bank market.

Several other financing methods for non-qualified plans have evolved including “rabbi trusts” and “secular trusts.” 

Rabbi Trusts: An irrevocable trust whose assets can only be used (except in the case of bankruptcy) to pay non-qualified plan benefits. With a rabbi trust, the tax liability to the participant as well as the employer’s tax deduction for contributions are deferred until the benefits are actually paid. Investment earnings on any contributions are treated as taxable corporate earnings. The trust assets may be protected in the case of a change in control of the company, but are not protected in the case of bankruptcy or insolvency.

Secular Trusts: An irrevocable trust whose assets can only be used to pay non-qualified plan benefits. Since employees have an absolute right to their account balances, contributions to the trust provide an immediate tax deduction for the employer, while employees are taxed immediately on all money credited to their respective trust accounts, and on any trust earnings in the future. Subsequent benefit payments to employees are tax-free and do not need to be as large as payments from a rabbi trust, which are fully taxable. Since the contributions to a secular trust are considered after-tax employee contributions, these non-qualified plan benefits are protected against bankruptcy.


Glenn G. Geiger Company, Inc.
22 Grove Street | Darien, CT 06820
Tel: (203) 202-9233