Provisions added to the Internal Revenue Code (the Code) by the Pension Protection Act of 2006 (the PPA), which went into effect on August 17, 2006, could impose adverse tax consequences on executives of publicly traded companies who are participants in a nonqualified deferred compensation plan where a rabbi trust has been established in connection with the deferred compensation plan. A "rabbi trust" is a grantor trust established to protect nonqualified deferred compensation benefits from certain kinds of risk of nonpayment. The adverse tax consequences will apply if assets are transferred to a rabbi trust while a qualified pension plan within an employer's control group is "at risk" as defined under the PPA.[1] These restrictions are currently applicable and are important for companies to keep in mind during a period of declining pension asset values.

As a result, companies that maintain one or more nonqualified deferred compensation plans with associated rabbi trusts need to know whether there are qualified defined benefit plans within their control group, and the PPA-funded status of each such plan. The terms of the nonqualified deferred compensation plans, rabbi trusts, and third-party service provider arrangements should also be reviewed to ensure that adverse tax consequences for covered executives are not inadvertently triggered.