SERP Accounting

[david rigby]

In the Guide to Implementation of Statement 87 (often referred to as the Q&As), item 11 mentions that, if the plan sponsor has COLI policies which are used to fund a non-qualified plan, "...the accounting for those policies should be in accordance with..." FASB Technical Bulletin 85-4.

Any change that would modify this answer?

[GBurns]

I would say that although there has been nothing that I have seen FASB or otherwise, I would not follow 85-4 or anything elsse blindly considering that the treatment stated has not stood the challenge of the IRS our the Courts.

There have been a number of rulings that have pointed out that most of the COLI plan designs are not acceptable. The ownership of the asset, the deductibility etc etc are all now subject to questioning. 85-4 etc were all based on what has now turned out to be fallacious thinking therefore each case should be evaluated separately and not under anything general.

[Guest LeeNunn]

Item 11 of the FAS 87 Implementation Guide is an accounting issue, not a tax issue. In general, companies account for COLI according to FASB Technical Bulletin 85-4, whether the COLI finances a benefit plan or not. Usually, there's no formal connection between the COLI financing and the benefit. Part of the confusion stems from the use of the word "fund."

GBurns is correct in warning against following anything blindly. A second possibility for accounting for COLI is accounting for it as a plan asset (e.g. VEBA owned life insurance). Here the policy "funds" the benefit in the accounting sense of the word. Also, see EITF Issue 93-3, described in item 36 of the FAS 106 Implementation Guide.

A third possibility is the use of COLI in a split dollar arrangement accounted for as a below market term loan under APB 21.

Lastly, a COLI policy might meet the definition of a derivative used in a hedging transaction accounted for under FAS 133. This is not the same as COLI with embedded derivatives as discussed in the Derivatives Implementation Group.