Written by Donald B. Susswein, Virginia Lee, and Joseph Weiner
Due to the recent rise in market interest rates, some banks are considering canceling bank-owned life insurance and reinvesting the proceeds (net of taxes) into new BOLI insurance with higher yields. One of the Big Four accounting firms suggested that such “cancellation and redeployment” transactions could call into question the deferred tax treatment of not only new policies but also existing policies that have not yet been canceled. did. How realistic is this concern?
As tax and financial products professionals with experience working on similar issues, we looked at the issue from our own professional perspectives. Our views are not necessarily our own.
Donald Susswein
From the broadest perspective possible, our analysis compares the financial and regulatory accounting treatment of BOLI and corporate-owned life insurance with the treatment of traditional debt securities, including securities classified as “held to maturity” or “available for sale.” We compared.
virginia lee
Our research and analysis concludes that accounting authorities and regulators may view the economics of BOLI as similar to the economics of traditional bonds classified as “held to maturity.” I am. HTM securities are not periodically revalued based on temporary fluctuations in market prices. This is because temporary fluctuations may not be significant for securities held to maturity.
joseph wiener
BOLI insurance is similarly valued at its stated surrender value, regardless of changes in market interest rates, and typically against potential future tax costs if you decide to cancel your BOLI insurance. There is no need to record a deferred tax liability. The conclusion of an insurance contract before the death of the insured. This tax benefit is only available if the BOLI policy is “expected” to be held until the insured’s death, a concept somewhat similar to that of a “held-to-maturity” bond . However, the exact meaning of the “expectations” test is unclear and is less developed than HTM standards for traditional debt instruments.
Most importantly for HTM securities, if a bank sells a particular portion of its HTM securities or reclassifies that particular portion as “available for sale,” accounting and regulatory standards will impose a “taint” on the bank’s entire HTM bond portfolio. ” will be imposed. In that case, the Bank’s former HTM securities may not continue to be classified as such (even those securities that may ostensibly meet the HTM criteria on their own) and the potential for adverse accounting consequences. There is. The “contamination” could disappear in a few years, once the legitimacy of banks’ classification policies is reestablished.
Our complete analysis and investigation does not yield any conclusions as to what current financial or regulatory accounting standards require. The paper states that accounting authorities or regulators seeking reasonable ways to apply, clarify, or reform existing “expectations” standards should It concludes that there is a good chance that the “contamination” rule should apply. Current “expectation” standards for BOLI and COLI policies related to “surrender and redeployment” transactions. That could create an effect similar to what one of the Big Four companies has already suggested may be needed now.
Donald B. Susswein is a tax attorney and president of RSM US. Please contact us at (email protected).
Virginia Li is a certified public accountant and partner at RSM US. Contact her at (email protected).
Joseph Wiener is a tax attorney and senior manager at RSM US. Please contact us at (email protected).
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