Non-Qualified Deferred Compensation Accounting

[jsepe@amica.com]

Our company has a non-qualified deferred compensation plan and we are looking for guidance on how to properly account for the change in the deferred compensation liability. Should the change in liability be expensed and if so, should it be expensed as Salaries, Employee Relations and Welfare, or something else?

[Lisa]

Hello,
There are various types of nonqualified deferred compensation plans. Guidance associated with these plans can be found in the following SSAP?s.

SSAP 11 ? Postemployment Benefits and Compensated Absences paragraphs 13 to 15. This guidance is associated with Deferred Compensation Arrangements Accounted for Individually.
To the extent the terms of a contract attribute all or a portion of the expected future benefits to an individual year of the employee's service, the cost of those benefits shall be recognized in that year. To the extent the terms of the contract attribute all or a portion of the expected future benefits to a period of service greater than one year, the cost of those benefits shall be accrued over that period of the employee's service in a systematic and rational manner. If elements of both current and future services are present, only the portion applicable to the current services shall be accrued.

SSAP 67 ? Other Liabilities ? Paragraph 8
Amounts withheld or retained by an entity as trustee or agent shall be recorded as a liability when the salaries or other compensation are expensed (paragraphs 8.a. and 8.b.) or the funds are received (paragraphs 8.c. through 8.e.). Examples of such occurrences are:
b. Amounts due under deferred compensation arrangements shall be accrued in accordance with the provisions of SSAP No. 92?Postretirement Benefits Other Than Pensions. Segregated funds (i.e., Rabbi trusts and similar arrangements) shall not be netted against the accrued liability unless the requirements of SSAP No. 64?Offsetting and Netting of Assets and Liabilities are met.

SSAP 92 ? Postretirement Benefits Other than Pensions ? Paragraph 34
As with other forms of deferred compensation, the cost of providing postretirement benefits shall be attributed to the periods of employee service rendered in exchange for those future benefits pursuant to the terms of the plan. That cost notionally represents the change in the unfunded accumulated postretirement benefit obligation for the period, ignoring employer contributions to the plan, plan settlements, and payments made by the employer directly to retirees. However, changes in that unfunded obligation that arise from experience gains and losses and the effects of changes in assumptions may be recognized as a component of net periodic postretirement benefit cost on a delayed basis. In addition, the effects of a plan initiation or amendment generally are recognized on a delayed basis.


All the guidance above support recognition of the expense to the period the employee service was rendered.

Per the annual statement instructions for Exhibit 2 line 2 it states:
Line 2 ? Salaries and Wages

Salaries and wages, in addition to virtually all direct payments of compensation to employees, should include all payments to directors for attendance at board or committee meetings.

Include: Salaries and wages, bonuses and incentive compensation to employees, overtime payments, continuation of salary during temporary short term absences, dismissal allowances, payments to employees while in training and other compensation to employees not specifically designated herein, except to the extent that allocation to other expense classifications is permitted and used.

Fees and other compensation to directors for attendance at board or committee meetings and any other fees and compensation paid to them in their capacities as directors or committee members.

Agency compensation other than commissions


Regards,

Lisa Mullen

[jsepe@amica.com]

Thank you Lisa! Also, just to confirm, since our company is a P&C insurer, would we include this expense on line 8.1 of the Underwriting and Investment Exhibit Part 3 - Expenses schedule (Salaries)? Could you also please send us the content of instructions for that line (or whichever one applies to P&C if not line 8.1)?

[Lisa]

Hello,

I apologize, your question was sent to the Life mailbox by mistake, but I believe the treatment of salary expense is reasonable for a P&C insurer as well. I can't really think of any justification that it would be different. Line 8.1 of the U&I Exhibit part 3, should include all salary, overtime and bonus compensation for all company employees, and the cost of temporary help services utilized. An exception is building maintenance salaries that are included in line 21, real estate expenses.

Regards,
Lisa Mullen