Secular Trust [402(b)] (nonexempt Trust)
Definition of "Secular trust [402(b)] (nonexempt trust)"
Non qualified plan of deferred compensation whose goal is to compensate key employees without having to provide similar benefits to rank and file employees. The trust is irrevocable, and funds placed in it are protected against claims made by the company's creditors. Even though funds in this trust are not in the employee's possession, they are deemed by the Internal Revenue Service to have been constructively received by the employee. The company is allowed to take an income tax deduction for the funds it contributed to the trust, even though these funds have not been distributed to the employee while he or she has current taxable income. At the time funds from the trust are actually distributed, the employee is taxed only to the extent that these distributions are from earnings of the trust or from current trust income, which will allow the employee to pay taxes owed as the result of the company's contributions to the trust. The employer is not taxed on the trust income: the employee pays all taxes on this income. For example, assume that the company is in the 34% tax bracket and contributed $40,000 to the trust on behalf of John Employee, who is in the 28% tax bracket. The result is that John Employee will have an $11,200 tax liability ($40,000 x 28%) and the company will incur a $13,600 tax deduction ($40,000 x 34%). In order that John Employee will have the necessary funds to pay the taxes owed, the company usually will bonus him the $11,200 required, which of course is tax deductible as a business expense for the company.
Popular Insurance Terms
Legislation passed in California that establishes procedures applicable to any worker who incurs a job-related injury. This act has far-reaching implications for workers compensation ...
Insurance policy sold by nonadmitted insurer. ...
Method of calculating the life insurance policy's cash surrender value (CSV) not contingent upon the calculation of the policy's reserve such that the CSV will approximate the asset share ...
Formal process of setting aside funds on a mathematical basis to provide deferred income benefits. ...
Exchange of a new policy for one already in force. ...
Condition in which life insurance sales increase at a rate greater than the general rate of growth of the economy. As a society moves from an agriculture-based economy to an industry-based ...
Table charting relative costs of a group of cash value life insurance policies derived by using the net cost method of comparing costs (traditional net cost method of comparing costs; net ...
Loss occurring by accident or chance, not by anyone's intention. Insurance policies provide coverage against losses that occur only on a chance basis, where the insured cannot control the ...
Claim by the pension benefit guaranty corporation (PBGC) against an employer for reimbursement of the PBGC's loss (for a terminated plan) up to 30% of the net worth of the employer. If this ...
Have a question or comment?
We're here to help.