Charitable Donation Accounts 2016

John Pesh, CCE Photo
Director of Executive Benefits
CUNA Mutual Group

4 minutes

change jarFor credit unions, donating money to charities isn’t just a humanitarian act; it’s an investment in making your communities better places to live. And as a result of December 2013 National Credit Union Administration rule changes described in more detail below, you can now make these donations from a charitable donation account that uses otherwise impermissible and potentially higher-yielding investments to generate the funds.

The advantage of doing so is twofold:

1. Instead of subtracting donations from your operating income, they’ll be drawn from CDA earnings that typically outperform traditional credit union investments. You may be able to substantially increase charitable giving and increase your positive impact on those in need.

2. Up to 49 percent of the CDA’s earnings can be channeled to your credit union as a new source of income. *Credit unions must distribute a minimum of 51 percent of the CDA’s total returns to charities at least every five years.

The NCUA’s December 2013 amendment of §703 and §721 opened the door for federal credit unions to contribute to CDAs using investments that previously didn’t comply with these rules. Many states have already allowed their state-chartered credit unions to do the same, and that trend is likely to continue.

The change means credit unions can invest CDA funds in such instruments as corporate bonds and securities, which couldn’t be used for that purpose before. If this sounds familiar, it’s because NCUA made a similar change to §701.19 in 2003, allowing similar investments for pre-funding employee benefit obligations.

These rule changes are designed to give credit unions the flexibility to increase investment earnings without undue risk, while ensuring that the majority of the earnings are donated to charity. Key requirements for CDAs include:

  • The aggregate annual investment in a CDA is limited to 5 percent of a credit union’s net worth.
  • Assets in a CDA must be held in a separate custodial account or special-purpose trust.
  • Donations must be to approved, tax-exempt 501(c)(3) charities.
  • Accounting for CDAs must follow GAAP principles.

NCUA also requires that credit union boards document their policies relating to CDAs, to clearly show how they will adhere to regulations, and to establish their investment strategies and risk tolerances.

Managing CDA Risk

Think of a CDA as a hybrid investment, designed for safe but potentially higher-yielding earnings than the certificates of deposit and U.S. government-backed securities that comprise traditional credit union capital investments. It’s a way of mitigating interest-rate risk, especially in our current low-interest environment.

Effectively managing the asset allocation within your CDA portfolio is essential to success. The strength of a CDA strategy, after all, is in the ability to actively manage the portfolio day to day. Some credit unions find that having a dedicated CDA provider helps them quickly respond to changing market conditions to maximize the yield on their investment.

Even a relatively conservative return of 5 percent on a CDA can make a big difference in your ability to support your chosen charities. Say you invest $1 million for a year in a CDA that earns a 5 percent return (the sum of interest, dividends, and capital gains) and $1 million in a CD that earns 1 percent. You can choose to contribute a minimum of $25,500 to a charity from the CDA—and retain $24,500 as income. Alternatively, your contribution from the CD earnings would be a maximum of $10,000, with no income.

And with the CDA, you also have the option of donating the entire $50,000.

The difference between the two investments in this scenario, of course, is that while a 5 percent return on a CDA may be a conservative projection, it’s not guaranteed. But keep in mind that you’re not obligated to maintain a CDA for a full year—you can cancel it at any time as long as you contribute at least 51 percent of any earnings to a qualified charity.

Increase Contributions—and Your Community Profile

Charities need money, of course, but they can also benefit from greater awareness of their cause within the communities you serve. As you increase your monetary pledge, take some steps to make that money work harder:

  • Choose a CDA provider that gives you the flexibility to donate to any 501(c)(3) organizations you choose.
  • Choose charities closely aligned with your mission.
  • Work with the leaders of your chosen charities on a public relations campaign surrounding your donation, to encourage other local businesses and individuals to contribute.
  • Focus the awareness campaigns on the personal stories of those whose lives the charity has improved.
  • Ask your employees which charities are closest to their hearts. Help organize employee volunteer activities and events that show your commitment of time and effort—not just money.

There are so many possible wins through CDAs that only start with the potential to increase your charitable donations and your income. The benefits also include providing a new way to support employee volunteerism; boosting awareness of your chosen charities; and enhancing your credit union’s status not only as a community leader, but also as a great place to work and do business.

John Pesh is director of executive benefits at CUES Supplier member and strategic provider CUNA Mutual Group, Madison, Wis. For more information about CDAs, contact him at 800.356.2644, ext. 665.8223.

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