Secular Trust Arrangements

Secular Trust Defined A secular trust is a nonqualified deferred compensation arrangement that immediately and substantially vests plan participants with a beneficial interest in assets (including money) which are transferred or set aside from the claims of creditors of the transferor and/or service recipient, for example, in a trust, escrow account or other means that is treated as a grantor trust for Federal tax purposes. Accordingly, for Federal tax purposes, the amounts transferred or set aside, and trust income are currently taxable to the plan participant.

PA PIT Taxation of Secular Trust Arrangements Amounts transferred or set aside for the benefit of employees. General rule. For taxable years beginning after December 31, 2004, any amount transferred to or set aside in a secular trust for the benefit of an employee (or the employee’s beneficiary) and any earnings allocable thereto are currently taxable to the employee as compensation. Programs covering retirement. Notwithstanding the rules of IRC §§ 83 and 402(b), employer payments for programs covering retirement established for the benefit of the employer’s employee(s) are excludible from personal income tax until actually or constructively received by the employee. However, for taxable years beginning after December 31, 2004, the earnings on any amounts transferred to or set aside in a secular trust for the benefit of an employee are currently taxable to the employee as compensation. Amounts transferred or set aside for the benefit of independent contractors, directors, and similar service providers. For taxable years beginning after December 31, 2004, any amount transferred or set aside for the benefit of an independent contractor, director, or similar service provider and any earnings allocable thereto are currently taxable to the independent contractor, director, or service provider as compensation. For purposes of this Clause: An employee is an individual from whose wages an employer is required under the Internal Revenue Code to withhold Federal income tax. A program covers retirement if it provides a specific distribution rule in the case of an employee’s retirement from service such as, for example, where the plan provides for a qualified annuity upon retirement. A program that has substantially the same distribution rules in the case of an employee’s voluntary termination of employment before reaching retirement age or service does not qualify. A qualified annuity is defined at 61 Pa. Code § 101.1 to be an arrangement under which the payee is entitled to equal, or substantially equal periodic payments, paid at least annually, for any of the following periods: The life of the participant, or, if applicable, the joint lives of the recipient and recipient’s designated beneficiary; The life expectancy of the participant, or, if applicable, the joint life expectancies of the recipient and recipient’s designated beneficiary; or A period of at least 10 years.