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Four Steps for Dealing with Excise Tax

female executive with burlap bag with money symbol in her hand
By Andy Roquet

3 minutes

No grandfather provision so far for deferred comp plans

May 15 was the first payment date for the 21% excise tax on annual executive compensation in excess of $1 million to any one of a CU’s top-five paid executives. The tax was part of the Tax Cuts and Jobs Act of 2017. For some credit unions, a deferred compensation plan payout in 2018 pushed an executive’s compensation above the $1 million threshold, triggering the tax. 

If your credit union is in that situation, you may have been hoping that deferred compensation plans put in place before the law was passed would be grandfathered. So far, that hasn’t happened. 

Industry advocates, including CUNA Mutual Group, have helped garner bipartisan support for a grandfather provision. But the House and Senate are at an impasse over larger tax reform issues, so it’s unlikely this type of change will come to a vote anytime soon. 

It’s best to assume the excise tax will be in effect for the foreseeable future. Here are four steps you can take to mitigate its impact:

1. Review the vesting dates and amounts for existing 457(f) plans.

Some 457(f) plans have multiple vesting dates, and others have just one. Some plans have specific payout amounts, and others pay out whatever the underlying investments generate over a given time. You need a clear picture of if and when a 457(f) vesting date or amount could trigger the excise tax.

Consult with your 457(f) plan providers to document each plan’s performance and current earnings projections. That’s a good idea anyway—you should be getting this type of update every year.

2. Carefully consider restructuring 457(f) plans. 

To minimize your CU’s exposure to the excise tax, you may be able to reduce recognized income from a 457(f) plan by increasing its vesting intervals. You’ll need qualified legal counsel to work through this type of change.

3. Look into split-dollar life insurance as an alternative or as a supplement.

Loan regime split dollar life insurance programs can provide retirement distributions for executives that isn’t subject to the excise tax. In this type of arrangement, the credit union pays the premium for a life insurance policy owned by the executive. But the payments are treated as loans.

Depending on how a plan is designed, the executive may be subject to income taxes on the loan interest, but it typically isn’t enough to trigger the excise tax on the CU. And if the executive withdraws money from the policy’s cash value, that amount also wouldn’t be included in the excise tax calculation.

4. Amortize the cost of the tax.

If you anticipate future excise taxes, seek accounting advice about the possibility of accruing the expense to spread it over multiple years, minimizing its impact to the credit union’s income statement in any given year.

This excise tax has put some executives and boards in a difficult spot. Execs don’t want their deferred compensation plans to cause their CUs undue financial stress. At the same time, boards want to offer compensation plans that attract and retain the best available leaders. With some careful planning and oversight, you can balance these concerns. 

Andy Roquet is an executive benefits specialist for CUESolutions platinum provider CUNA Mutual Group, Madison, Wisconsin. For more information about supplemental executive compensation, read the CUES ebook, Non-Qualified Executive Benefits: A Guide for Credit Union LeadershipTo learn more about becoming a CUESolutions provider, email Kari Sweeney.

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