Two strategies for strengthening executive compensation while staying flexible enough to accommodate your leadership continuity plan
Split-dollar life insurance is becoming a more popular executive benefit for credit unions. When executing these agreements, it’s important to consider the big picture by answering these questions:
- How will this split-dollar agreement fit into our overall leadership succession plan? Specifically, will it allow us to recruit, reward, and/or retain other executives in the near future?
- Will we have room under the National Credit Union Association’s regulatory cap on any non-703 investments?
According to NCUA 5300 data, assets for the most common split-dollar arrangement used in credit unions—“loan regime” or “collateral assignment split-dollar” life insurance—increased 120% percent from year-end 2015 through 2018.
A likely reason for this growth is that CASDs can help you retain top execs by providing them extra retirement income, income-tax free, while you add an asset (a loan to the executive for the life insurance premiums) instead of an expense to your books.
Under a typical CASD agreement, your loan is repaid with interest when the life insurance death benefit is paid out. As such, these are generally designed as long-term agreements, and you need to keep their long-term consequences in mind. Do this by following these two strategies:
1. Pay Attention To The Regulatory Cap For Otherwise-Impermissible Investments
Life insurance generally isn’t an allowable investment for credit unions under the Code of Federal Regulations, Part 703. But NCUA does allow life insurance to be used as a funding source for certain credit union programs, including executive/employee benefits and charitable donation accounts.
Certain bonds and securities fall into that same category. That is, despite not complying with Part 703, they can be used in some cases to fund executive/employee benefits and CDAs.
However, when investing in life insurance or any of these other instruments that otherwise wouldn’t be allowed by Part 703, remember that NCUA limits the total value of these non-Part 703 investments to 25% of your total assets. For CASDs, the amount of the loan the credit union gives the executive to pay the life policy premiums counts toward that 25%.
Most state regulations follow NCUA guidelines. So, if a CASD pushes your credit union over this 25% limit—or is in danger of doing so within a few years—you’re likely to get very close attention from the NCUA and/or state regulators.
NCUA also specifies that no more than 15% of your total assets should be invested with any single non-government obligor. In the case of a CASD, the obligor isn’t necessarily the split-dollar agreement vendor, it’s the carrier for the underlying life insurance policy.
This is why, if you will have more than one CASD in force, or if that may be the case in the future, you may need to have different options for insurance carriers—which brings us to the next big-picture strategy for CASDs.
2. Create Benefit Packages You Can Adjust As Needed
When negotiating a CASD agreement, consider your credit union’s overall leadership continuity situation.
For example, a single CASD that pushes you too close to the 25%/15% limitations mentioned above could make it more difficult for you to retain other high-performing executives. Instead of one large CASD, your credit union would gain more flexibility via some combination of 457(b) and 457(f) plans and a smaller CASD.
The 457(b) option doesn’t add to your non-703 investment total. And with 457(f) plans, you can use non-703 investments, such as corporate-owned life insurance—but if you’re too close to the NCUA’s limits, you can also fund it as an operating expense.
The 457 plan options also give you the flexibility to offer shorter-term rewards that will help you retain executives in your C-suite pipeline. A 457(f) plan, for example, can be designed to pay out at specific intervals. You could offer a younger executive three payouts that come four years apart, timed to coincide with such life events as kids going to college or paying off a home.
Communicate your leadership succession outlook with prospective CASD providers to make sure you’ll be able to adjust your benefits and product mix if/when you need to.
The CASD provider should be able to show you financial models that project how multiple options are likely to grow over time, given various market conditions. The model should also include your credit union’s projected net worth under the same conditions, so you can manage the 25%/15% limits.
Ongoing Oversight Is Critical
Especially if you are using multiple vendors for CASDs, 457 plans, etc., your leadership team and board will need to closely track these investments.
It’s prudent to review CASD and other executive benefit product performance quarterly and to do a deep dive with your provider(s) at least once a year. Review whether your executive team’s situation has changed over the past year, and whether your recruitment and/or retention needs have changed accordingly.
By taking this big-picture approach to CASDs and other executive benefits tools, you’re investing in the long-term leadership your credit union needs to succeed.
Andy Roquet is an executive benefits specialist for CUESolutions platinum provider CUNA Mutual Group, Madison, Wis. For more information about split-dollar agreements and other supplemental executive compensation, read the CUNA Mutual/CUES ebook, Using The Online NCUA Examiner’s Guide To Manage Employee/Executive Benefits Funding. To learn more about becoming a CUESolutions provider, email Kari Sweeney.