allocated vs unallocated insurance contracts

[Guest m thom]

A P/S plan purchases life insurance contracts for individual participants. Each contract has a cash surrender value. I am trying to determine how to report these on 5500 and financial statements. Based on SOP 94-4, it seems fairly clear to me that contracts for current life insurance coverage are allocated contracts and are not plan assets. On the other hand, the SOP also states that some of these (allocated) contracts may also include unallocated side or auxiliary funds, which ordinarily would be considered plan assets. Could the CSV be considered unallocated side or auxiliary funds? Should it be reported or omitted?

[Guest mo]

While I am no expert, I have always taken the position that because the cash value would ordinarily go with the policy if you were to transfer the ownership of the policy, it is part of the allocated contract. Where I have seen a combination is on larger defined benefit plans at insurance companies. Many times the insurance company will move the retired life and term vested liabilities to allocated contracts, but still keep active participants in an unallocated mode.

[BeckyMiller]

In the definition section to the AICPA Audit Guide on EB plans, it states that an allocated contract is "a contract with an insurance company under which related payments to the insurance company are currently used to purchase immediate or deferred annuities for individual participants."

Paragraph 7.28 of the Guide specifies that funds in "an unallocated contract may be withdrawn or otherwise invested."

The basic difference is the settlement of the obligation. Where the life policy may be liquidated or funds may be borrowed from it, it is typically classified as an unallocated contract and will be reportable as a plan asset. It is where the obligation of the plan has been effectively settled by transferring the obligation for future benefits to the insurance company that the contracts will no longer be reported as plan assets.

The concept for financial reporting purposes is different than the classification used in preparing the Schedule A. See footnote 54, Chapter 7 of the AICPA Audit Guide on EB plans.