Accounting For Investment Contracts: Allocated Versus Unallocated Funding Arrangements
A financial reporting issue for employee benefit plans (primarily 403(b) and 401(k)plans), affecting the plan accounting for both insurance and annuity contracts for individuals is determining whether the contract is an allocated or an unallocated funding arrangement. This determination is significant, because under generally accepted accounting principles for employee benefit plans:
- Allocated contracts are excluded from plan assets (i.e. treated as participant distributions) and
- Unallocated contracts are considered assets of the plan.
In March 2010, in a response to a request by TIAA CREF for an opinion, the DOL issued advisory opinion 2010-01A.
This advisory opinion states that only contracts that meet all of the following conditions can be considered allocated contracts (and therefore be accounted for as participant distributions for financial reporting purposes):
- The insurance company or organization issuing the contract unconditionally agrees to provide a retirement benefit of a “specified amount” (i.e. the insurance company or organization assumes a “fixed dollar obligation”, whereby the plan has transferred risk for payment of the accrued benefit to the insurer).
- The contract amount must be provided to each participant, without adjustment for fluctuations in market value of the underlying assets of the insurance company or organization.
- Each participant must have a legally enforceable right to such benefits directly against the insurance company or organization.
In the case of this advisory opinion, the DOL concluded that TIAA CREF’s traditional annuity contract provided for market value adjustments and therefore did not meet the specified amount criteria, since the contract guaranteed only a minimum rate of return and the actual rate of return varied from year to year, based on changes in market value. In addition, the DOL concluded that any vesting requirements of such contracts were inconsistent with the definition of an allocated contract.
For plan years beginning on or after January 1, 2009, these contracts cannot be treated as an allocated contract for purposes of audited financial statements, submitted with Form 5500. Plan sponsors should consider this advisory opinion as part of their accounting for investments in such contracts.