In response to these cutbacks, some companies set up nonqualified plans to replace the lost benefits. Nonqualified plans are generally far more flexible than qualified plans in the range of benefits that can be offered, and are subject to fewer restrictions. Two co-owners of a company employing ten workers, for instance, could include just themselves if they so desired, thus avoiding the cost of providing retirement benefits to an entire work force. Nonqualified plans have several drawbacks, however. First and foremost, employers don't receive any current tax deduction for contributions.
Deductions are only available to the employer when funds are actually paid to the employee.
Furthermore, no guarantee can be given to employees that the benefits will actually be there when they retire. Generally, a nonqualified plan is essentially an unsecured promise by the employer to make payments at some future date. Rabbi trusts are irrevocable trusts into which the employer contributes the plan assets, which are managed and distributed by the trustee, such as a bank trust department. While these trusts do not protect the assets against the claims of general creditors if the employer becomes insolvent, they generally do offer protection in the event of a corporate takeover, change in management, or other event which could undermine the collectibility of the benefits. Since there is no requirement that nonqualified plan assets be held in trust, many companies pay nonqualified benefits out of general corporate assets as they come due.