Board Succession Planning

The volunteer spirit that feeds credit unions is an important lifeblood of the movement. But as boards plan for succession, they also need to be able to demonstrate why someone would want to serve. For credit unions that cannot permissibly compensate directors, benefits such as conference travel and health insurance can be a significant part of that value proposition.

Offering benefits can help make board service more attractive to existing and prospective directors. Providing that value in a compliant and reasonable manner, however, is critical to protecting the institution and avoiding unexpected tax consequences for its volunteers.

For credit union CEOs, the question becomes how to offer meaningful board benefits while managing potential risk. Understanding those considerations can help institutions evaluate what they offer, communicate it more clearly, and hopefully motivate the right person to sign on for service.

Establishing the Ground Rules

States have been experimenting with compensation for directors for many years, leading to a stable regulatory framework for paying directors in those states. Yet in other states, and for federal credit unions, legislatures have not followed suit.

In these institutions, alternatives to direct compensation have become an entire cottage industry. Conference travel, cruises, teambuilding experiences, and dinners abound. These benefits require attention to both what is permitted and what is reasonable.

Understanding board benefits requires understanding both credit union regulatory rules and tax rules. The requirement that costs be “reasonable and proper,” and determined by a board to be “necessary or appropriate,” offers limited guidance when assessing NCUA rules or similar state rules. Neither does the standard of “reasonable” health or accident insurance. Reasonableness has both an objective and a subjective perspective: a board decides what is appropriate, but the NCUA reserves the right to second-guess.

Reports have begun to spread that NCUA examiners may soon be focusing on board-level expenses. This, combined with NCUA attention to succession planning, makes it especially useful to review how benefits are provided and explained.

Assessing Travel and Meeting Expenses

For business travel and board meetings, this gives some latitude. Boards should assess expenses through two lenses:

• Purpose and member benefit. Is the expense appropriate for accomplishing official business, and is there a member benefit?
• Affordability and comparability. Are expense levels comparable to those at similar institutions, and can the credit union afford them?

Travel budgets and strategic planning expenses that are comparable to those at similar institutions, and which don’t break the income statement, are generally safe ground.
Providing travel to comfortable strategic planning locales, and communicating that benefit, can be a selling point for potential volunteers. Travel to credit union advocacy and educational events can be as well.

Providing Health Insurance Benefits

For health insurance, there is an important practical problem: group health insurance will generally not cover directors. Accordingly, health insurance provisions are usually reimbursement-based.

Providing a monthly cap under which directors can select the coverages they need and get reimbursed can benefit directors at different life stages. A retiree could obtain a Medicare supplement, while a working director could cover the employee portion of an existing work-based health plan. Both could obtain dental or vision coverage. Health insurance can sometimes even include long term care insurance!

The amount a credit union spends on health insurance does not need to be linked to what it spends on employees, though that could be an important comparison to consider. Recall that reasonableness of the provided coverage remains one of the regulatory tests.

Accounting for Tax Implications

For tax purposes, it is important to remember, and remind officials, that not all benefits permitted by financial institution regulators are tax-free. IRS rules can impose some important limits. Sometimes NCUA and state regulators follow IRS rules when interpreting whether something is “reasonable.” In other circumstances, IRS rules can be a surprise. Examples include:

• Spousal or guest travel is almost always taxable income for the director, even if it is permitted under credit union rules.
• Conventions or conferences on cruise ships have specific tax rules, with international cruises being entirely taxable income.
• International travel likely has tax implications when more than 25% of the time is spent on personal activities and the volunteer is outside the U.S. for more than seven consecutive days.
• First-class airfare is sometimes taxable, and other times not.
• Health insurance for directors is subject to tax reporting, but directors may also be able to take personal deductions offsetting the income.

Maintaining records of expense reimbursements that allow for proper 1099-NEC reporting can be important to remaining compliant.

Bringing Value and Compliance Together

If your credit union were reviewed for these issues, would you be ready? Implementing permissible and reasonable practices now can help you manage risk while better communicating your value proposition to existing and prospective directors.

Travel and meeting expenses should support official business and member benefit at an affordable and comparable cost. Health insurance arrangements should account for directors’ different coverage needs. Across these benefits, clear communication about tax implications and appropriate record-keeping can help avoid surprises.

With the NCUA expecting discussion about succession planning, boards need to be able to explain why someone else might want to join them. Benefits are one part of that answer. A thoughtful and planned approach to board benefits can help CEOs make service more attractive while protecting the institution and its volunteers from avoidable compliance and tax surprises both now and in the future.

Tim Oppelt is a partner at SW&M, where he leads the firm’s Corporate Governance and Chartering practice groups. He advises financial institutions, particularly credit unions, on governance, regulatory examinations, field of membership, and other complex legal matters. A frequent speaker at national conferences and trainings for senior executives, compliance professionals, and attorneys, Tim has also co-produced educational manuals on board meeting procedures, information security, and mergers.