Accounting treatment of expenditures for a
non qualified pension plan("Rabbi Trust")
DRAFT
THIS
DRAFT SHOULD NOT BE RELIED UPON FOR ACADEMIC, SCIENTIFIC, LEGAL OR OTHER USES.
THIS DRAFT CONSISTS OF UNVETTED, UNVERIFIED STATEMENTS THAT COULD CHANGE AT ANY
TIME.
Assumed Conditions
Authoratative Literature
Fincncial Accounting
Standards Board's (FASB) promgulates its standards through Finanial Accounting
Standards (FAS). FAS No. 106, APB 25 and SFAS 123. For tax purpses the plan's
expenditures are not qualifying until the employee withdraws the vested
amounts. However, for GAAP purposes these expenditures may qualify as expenses.
Discussion
Based on the circumstances
described, the defined contribution non qualifying plan can be expended in the
period in which it is funded by defining the contribution amount for services
already rendered by the participants. According to FAS 106, the eligibility of
a participant to receive the benefit determines the accrual period.
Consequently, if the
eligibility is based on past performance, the accrual is a period cost. Past
performance could be any indicator that is related to the effort by the
employee or key manager. Examples include time spent working for the Company or
indicative ratios or actual accomplishement that are set forth in the trust
instrument. There are some ways to provide discretionary in a defined
contribution plan: for example, creating a minimal threshold for available cash
or a minimal return on current assets ratios, etc. Such designs may allow the
company to avoid an under-funding status. The accrual of GAAP reporting is
appropriate even if the participant-employee continues to provide services
beyond the date of eligibility.
Computing Deferred
Compensation Expenditure
Although APB 25 and SFAS 123
describe methods of computing the deferral these standards do not apply
directly to the question of the recognition period of these fringe benefits.
APB 25 and SFAS 123 apply in computing an underfunded non qualifying plan. An
funded non qualyfing plan may recognize the actual contribution made as its
expense, in a manner described above.
Recognition and
Disclsoures
Recognition of funding the
fund may be classified as fringe benefit. Further disclosure should be made in
the notes to the financial statements which should include the funding status
of the trust, any under funding accruals or deferrals, the underlying
assumptions or disclosure of the discretionary nature of the plan, and
additional pension data.
Because of a temporary
difference between tax and GAAP recognition of expenses, a deferred tax
liability or deferred tax asset may need to be recognized as well. A deferred
tax liability may be appropriate when state or local tax are based on
compensation. Because the tax recognition of expenditures is appropriate only
when the employee draws the vested funds from a non qualiying plan, the state
tax based on compensation will be higher at the period in which that withdrawal
commences. A deferred tax asset may be appropriate because the deferred tax
expenditure for the same compensation may yield a qualified expense for tax
purposes which reduces taxable income. Although the scenario described in this
paragraph may lead to a cancellation in material respects of the deferred tax
liability to the deferred tax asset, these computations should be made and
disclsoure rules consulted regarding the appropriateness of netting the two
items.
Conclusion
A Company starts a non
qualified defined contribution pension plan ("Rabbi trust") that will
be able to recognize the these expenditures as fringe benefit for GAAP relaeted
purposes. The company contribution for a past preformance of an employee or key
manager will render the contribution completley vested at the date of
contribution. The qulifiaction of the expense for tax purposes may give rise to
a deferred tax asset or liability (or both). Providing key indicators in the
trust instrument may allow a defined contribution trust to avoid an under
funding status.
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Yigal Rechtman ©
2004