ICBA - Publications - Agencies Provide Guidance for Deferred Comp, BOLI

Agencies Provide Guidance for Deferred Comp, BOLI

APRIL 2, 2004


Agencies Provide Guidance for Deferred Comp, BOLI

The banking agencies have issued guidance to banks on how to account for those deferred compensation arrangements that are commonly known as "index retirement" plans or "revenue neutral" plans.

Index retirement plans typically provide participants with benefits that are tied to the difference between the returns a bank earns on an investment (typically bank-owned life insurance or BOLI) and the returns the bank would have earned on some hypothetical investment they would purchase as part of normal operations. The spread or "excess earnings" is contributed to participant accounts, in essence keeping the bank financially "neutral."

Many banks that have these plans have only expensed post-retirement excess interest as it is credited and paid, essentially on the presumption that these amounts are not reasonably ascertainable prior to retirement. However, according to the Interagency Advisory on Accounting for Deferred Compensation Agreements and Bank-Owned Life insurance, the post-retirement excess interest is reasonably ascertainable and should be expensed prior to retirement. As a result, many banks may have significantly under-accrued for these benefits.

Therefore, banks that have index retirement plans should review them to make sure they have been accounted for properly. If a bank has materially understated its plan liabilities, the bank may be required to amend its prior Call Reports. In any case, all adjustments and prior period changes must be disclosed in the March 31, 2004 Call Report.