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Accounting treatment of expenditures for a non qualified pension plan("Rabbi Trust")




Assumed Conditions

  1. A Company starts a non qualified defined contribution pension plan ("rabbi trust") that will be funded annually by year-end. The questions are about the issues of:
  2. The trust is expected to be fully funded at year end.
  3. The non qualyfying plan instrument allows for funding of a trust that is not recognized as expense for tax purposes until the following conditions are met:

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.


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.


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

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