Revenue Procedure 92-64 is the IRS guidance that gives employers a model trust document for holding nonqualified deferred compensation without pushing participants into current income tax. Adopt the model language verbatim, and the IRS will not treat the trust’s existence alone as constructive receipt or a taxable economic benefit to the executives who are promised the deferred pay. The arrangement is commonly called a rabbi trust, and the safe harbor works because the trust’s assets stay exposed to the employer’s general creditors.
Before 1992, employers had to seek individual private letter rulings on each rabbi trust arrangement. Revenue Procedure 92-64 replaced that case-by-case process with a standardized template. The IRS will still issue a private letter ruling, but only if the employer represents that its trust conforms to the model and contains nothing inconsistent with it.
What the Safe Harbor Requires
The core promise is narrow and conditional. If your trust document mirrors the IRS model language, participants will not be treated as having received income simply because the trust exists. The model must be adopted verbatim, not paraphrased and not “substantially similar.” Where the procedure offers alternatives, it labels them. Where it doesn’t, the language is fixed.
Minor variations to accommodate corporate needs are permitted, but only if they don’t conflict with the required provisions. A trust that departs from the model in any material way risks losing safe harbor protection entirely, and the consequence of losing it is immediate taxation of the deferred amount.
Provisions the Model Trust Requires
Section 5 of the revenue procedure contains the model document. A handful of its provisions define the tax character of the arrangement.
Revocability
The model gives employers five choices for how the trust handles revocability: fully revocable, fully irrevocable, irrevocable upon a change in corporate control, irrevocable after a favorable IRS private letter ruling, or irrevocable upon board approval. The change-in-control option is the most common in executive compensation arrangements because it protects participants if the company is acquired while leaving the employer flexibility during normal operations.
Change-in-Control Funding
Employers that select the change-in-control alternative also have to accept a companion mandatory funding provision. Once a change in control occurs, the employer must make an irrevocable contribution large enough to cover every participant’s accrued benefits as of that date. The specific deadline is filled in by the employer, but the model requires the contribution to happen “as soon as possible” after the triggering event. The rationale is straightforward: a new owner may have less incentive to honor deferred compensation promises made by prior management.
Creditor Access
The single most important provision states that trust assets are held separately from the employer’s other funds and used exclusively for the benefit of plan participants and general creditors. Participants have no preferred claim, no beneficial ownership interest, and only unsecured contractual rights against the employer. The document must state explicitly that all assets remain subject to the claims of the employer’s general creditors under federal and state law if the employer becomes insolvent. This is the language that prevents the arrangement from being treated as funded for tax purposes.
Trustee
The trustee must be an independent third party with corporate trustee powers under state law, such as a bank trust department. The employer cannot serve as its own trustee. The trustee holds broad investment authority and can invest in bonds, stocks, mutual funds, real estate, and other property without being bound by the prudent investor rule or the diversification requirements that apply to qualified plan fiduciaries. The trustee generally cannot invest in the employer’s own securities beyond a minimal amount held through common investment vehicles. Investment decisions rest with the trustee or its designee, never with participants.1Internal Revenue Service. Private Letter Ruling 200835034
Creditor Exposure Is What Buys the Deferral
The tax-deferred status of a rabbi trust depends on participants genuinely being at risk of losing their benefits if the employer fails financially. The model trust defines insolvency two ways: the employer is unable to pay its debts as they come due, or the employer is the subject of a pending proceeding under the federal Bankruptcy Code. Either condition triggers the creditor-access provisions.
Once the employer is insolvent, general creditors have a claim to the trust’s assets equal to the claims of plan participants. In a bankruptcy or liquidation, the trustee must treat trust assets as part of the pool available to all creditors rather than reserving them for executives. That is the trade-off: participants get tax deferral, and in exchange they accept that a corporate collapse could wipe out their benefits. Because participants hold only unsecured contractual rights, they receive no preferential treatment over vendors, lenders, or other creditors. The IRS views that exposure as proof the employee has no current economic benefit in the trust assets, and property is not treated as transferred for tax purposes until the participant’s rights are no longer subject to a substantial risk of forfeiture.2Office of the Law Revision Counsel. 26 USC 83 – Property Transferred in Connection with Performance of Services
Trustee Duties When the Employer Is Insolvent
Revenue Procedure 92-64 sets up a specific chain of communication for financial distress. The board of directors and the CEO have a duty to notify the trustee in writing once the employer becomes insolvent. The model does not fix a number of days but requires prompt notification after the determination is made.
Once the trustee receives that written notice, payments to plan participants must stop immediately. The trustee also has an independent obligation to halt distributions if it learns of insolvency through any other reliable source, even without formal notification from the board. During the suspension the trustee holds the assets for general creditors rather than participants. Payments cannot resume until the trustee has evidence the employer is no longer insolvent, or until a court directs how the assets should be distributed. Failure by the board or CEO to deliver the required notice can create liability for breach of the trust agreement, and payments made while the company was insolvent may be clawed back as preferential transfers in bankruptcy.
How Participants and Employers Are Taxed
The income tax treatment rests on two doctrines. Under the constructive receipt rule, income is not taxable until the taxpayer can actually draw on it without substantial limitations or restrictions.3eCFR. 26 CFR 1.451-2 – Constructive Receipt of Income Under the economic benefit doctrine, an employee has not received a taxable benefit from property that remains subject to a substantial risk of forfeiture. Because a compliant rabbi trust’s assets can be seized by creditors, both conditions are satisfied.
Participants report the deferred compensation as taxable income only in the year they actually receive distributions. The employer takes a matching deduction in that same year, not when contributions are made to the trust.4Office of the Law Revision Counsel. 26 USC 404 – Deduction for Contributions of an Employer to an Employees Trust or Annuity Plan and Compensation Under a Deferred-Payment Plan
The Trust Itself
Because the employer retains a reversionary interest and the assets remain subject to creditors’ claims, the rabbi trust is classified as a grantor trust. The employer, not the participant, reports all investment income, gains, and losses generated inside the trust on its own tax return. The trust does not file a separate income tax return as a taxable entity.5Internal Revenue Service. IRS Notice 2000-56
FICA Runs on a Different Clock
Income tax is deferred until distribution, but FICA is not. Social Security and Medicare taxes apply at the later of when the services are performed or when the participant’s right to the amount is no longer subject to a substantial risk of forfeiture. In practice this usually means FICA hits at vesting, not at payout.6eCFR. 26 CFR 31.3121(v)(2)-1 – Treatment of Amounts Deferred Under Certain Nonqualified Deferred Compensation Plans The existence of a rabbi trust does not change the FICA timing, and employers that miss it can face penalties and back-tax assessments years later.7Internal Revenue Service. Nonqualified Deferred Compensation Audit Technique Guide (Publication 5528)
Where Section 409A Overrides the 92-64 Safe Harbor
Congress added Section 409A to the Internal Revenue Code in 2004. Revenue Procedure 92-64 still governs the trust’s structure, but Section 409A adds restrictions on top. Following the model language perfectly is not enough if the arrangement violates any of these rules.
Offshore Trusts
If the trust’s assets are located outside the United States, the deferred compensation is treated as a taxable transfer of property once it becomes substantially vested, regardless of whether the assets remain available to general creditors. The only exception applies when substantially all of the services the compensation relates to were performed in the foreign jurisdiction where the trust is located.8Office of the Law Revision Counsel. 26 USC 409A – Inclusion in Gross Income of Deferred Compensation Under Nonqualified Deferred Compensation Plans
Springing Triggers Tied to Financial Health
A rabbi trust cannot restrict its assets to paying deferred compensation in connection with a decline in the employer’s financial health. Any provision that “springs” the trust into a more protective posture when the company’s finances deteriorate causes the deferred compensation to be treated as a taxable transfer, as of the earlier of the date the provision was added or the date assets actually became restricted. This applies even when the assets technically remain available to general creditors, and the IRS treats these springing trusts as a frequent audit target.7Internal Revenue Service. Nonqualified Deferred Compensation Audit Technique Guide (Publication 5528)
Restricted Periods for Covered Employees
Section 409A goes further for “applicable covered employees,” generally the CEO and the four highest-compensated officers listed in the proxy. Employers cannot set aside or transfer assets to a rabbi trust for these employees during any “restricted period” tied to the employer’s defined benefit pension plan. That includes any time the employer is in bankruptcy, any period the defined benefit plan is in at-risk funding status, and the twelve-month window beginning six months before the pension plan’s involuntary termination if the plan lacks assets sufficient to cover its benefit liabilities.8Office of the Law Revision Counsel. 26 USC 409A – Inclusion in Gross Income of Deferred Compensation Under Nonqualified Deferred Compensation Plans
Penalties
The consequences of a 409A failure land on the employee, not the employer. The participant must include the vested deferred compensation in gross income immediately. On top of that, tax for the year increases by 20 percent of the amount included, plus interest at the standard underpayment rate plus one percentage point, running from the year the compensation was first deferred or vested, whichever is later. For a senior executive with years of accumulated deferrals, the exposure is significant.
Parent-Subsidiary Arrangements
When a parent corporation establishes a rabbi trust for a subsidiary’s employees, the model language needs a specific modification. IRS Notice 2000-56 confirmed that the model trust still satisfies Revenue Procedure 92-64 if the trust assets are made subject to the claims of creditors of both the parent and the subsidiary, and any remaining assets revert to the parent when the trust terminates. Without this dual-creditor provision, the subsidiary’s creditors could argue they have no access to the trust, and the safe harbor could fail. In this structure, the parent is treated as the grantor and owner of the trust for tax purposes, so investment income flows through to the parent’s return even though the beneficiaries work for the subsidiary.5Internal Revenue Service. IRS Notice 2000-56
The Underlying Plan Still Has to Qualify
Revenue Procedure 92-64 governs the trust. It does not fix the plan the trust funds. A rabbi trust is almost always paired with a nonqualified deferred compensation plan that qualifies as a “top-hat” plan under ERISA, meaning it is unfunded and maintained primarily for a select group of management or highly compensated employees. Top-hat status is what exempts the plan from ERISA’s participation, vesting, funding, and fiduciary rules that would otherwise make the arrangement unworkable.9U.S. Department of Labor. Report of the ERISA Advisory Council on Top-Hat Plans Plan administrators must electronically file a top-hat plan statement with the Department of Labor, and each new plan requires its own filing.10U.S. Department of Labor. Top Hat Plan Statement Filing Instructions A properly drafted 92-64 trust attached to a plan that fails top-hat status will not deliver the outcome the parties expected.