Executive Benefits: A 360o View of Administration ...bfbbenefit.com/images/uploads/compensation_surveys/NAFCU_Execu… · A 360o View of Administration, Accounting, and Regulatory

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Executive Benefits:

A 360o View of Administration,

Accounting, and

Regulatory Compliance

Rich Brock, Burns-Fazzi, Brock

Jeff Ziliani, Burns-Fazzi, Brock

James Patterson, Sherman & Patterson, Ltd.

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Your Presenters

Rich Brock, Principal at Burns-Fazzi, Brock, has more than 30 years of

experience in the financial services and accounting industries with an

emphasis on executive benefit plans. Rich is based in Charlotte, NC.

[email protected], 877-332-2265 ext. 202

Jeff Ziliani is the Chief Financial Officer at Burns-Fazzi, Brock and has

been an active CPA since 2002. Jeff previously worked as an Audit Senior

Manager in the Assurance and Business Advisory Services Group at

PricewaterhouseCoopers. Jeff is based in Charlotte, NC.

[email protected], 877-332-2265 ext. 213

Jim Patterson is a partner with Sherman & Patterson, a law firm focusing

in the areas of tax (e.g. 409A and 457(f)), nonqualified deferred

compensation and employee benefits. Jim has worked closely with state

credit union regulators in the 47 states that have state credit union

charters, as well as regulators at the National Credit Union Administration.

Jim is based in Maple Plain, MN.

[email protected], 763-479-2699

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Agenda

What’s happening in the market today

• Overview and trends

• NCUA Rules: Benchmarks

Retention plans

• Administration

• Accounting

• Legal

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The Market Today

What’s happening NOW

• Talent Search/Movement

• Emphasis on Compensation Competitiveness

• Executive Development and Retention

• Due Diligence

• Confusion about the “Rules”

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“Fair and Reasonable” Pay in Total Executive

Compensation

• Information and comparison on peer groups or “persons with

similar responsibilities and duties in other insured credit unions

of similar size, in similar locations and under similar

circumstances”

NCUA Rules: Benchmarks

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Credit Union Retention Plans

Deferred Compensation

• 457(b), 457(f), and 409A

Welfare Benefit

• Split Dollar

Section 162 Bonus

• Deferred Compensation and Welfare Benefit

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Deferred Compensation: 457(b) and 457(f)

Nonqualified Plans (Top Hat Plans) provide exemption from most of the funding, participation, vesting and disclosure requirements imposed on qualified plans.

• Deferred Compensation falls under ERISA for the Top Hat Plan Exemption

• Tax-Exempt corporations fall under Section 457 of the IRS Code. Plans include:

457(b) - Capped annual contribution by employer or employee; vested; taxed as withdrawn

457(f) - No limit on annual contribution; no vesting; taxed when substantial risk of forfeiture lapses

• Deferred compensation plans must comply with (or be exempt from) 409A

• NCUA regulations for reasonableness and informal funding apply

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Executive 457 Plan | Benefit Summary Report

Hypothetical Illustration

• The report indicates the total projected benefit, including “Lump Sum” or the projected benefit length (in years)

and the total and net cash distribution after taxes.

• “Death benefit” is a guarantee from the employer to provide the specific cash benefit to designated beneficiaries.

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Executive 457 Plan | Participant Plan Design Summary

Hypothetical Illustration

• Preretirement provisions apply up to the assumed 12/30/2029 retirement date (age 65).

• Involuntary Termination: The benefit will be equal to the liability account balance on the termination date.

• Termination for Good Reason: The benefit will be equal to the liability account balance on the termination date.

• Termination Due to Change in Control: The benefit will be the present value of the remaining unpaid distributions, assuming a 5.00% discount rate.

• Termination Due to Disability: The benefit will be the present value of the remaining

unpaid distributions, assuming a 5.00% discount rate.

• Termination Due to Death: The benefit will be the lump sum of the remaining unpaid

distributions.

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Executive 457 Plan | Impact on Earnings Hypothetical Illustration

• Assumes asset acquisition of $10,000,000 on 1/1/2015.

• Assumes benefit expenses starting January 2015.

• “IMPACT SUMMARY” reflects annual and cumulative gains or losses from “ASSET GROWTH INCOME” less “BENEFIT EXPENSES”.

• “Projected Asset Value” is based on illustrated data or specified growth formulas provided to Burns-Fazzi, Brock by the applicable asset companies. The report values are based on values using current earnings assumptions (NOT GUARANTEED), and likewise interpolated to approximate report ending period values.

• “Cumulative Asset Yield” is calculated from the asset values on the cash flow dates to the

“Projected Asset Value” on the report ending date.

• (12) The values are subject to the “Direct Relationship Test” under 701.19, such that additional

benefits (e.g., 401(k) match, health expenses) may be needed to offset the additional income.

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Executive 457 Plan | Asset Account Entry Report

Hypothetical Illustration

• Call Report Instruction 1: Based on discussions with NCUA representatives, their intended reporting to record the asset value of the investment is under “12. All Other Investments (Account Code 766)” on page 1. However, until the instructions are further clarified, reporting under “32. Other Assets-c. All Other Assets (Account Code 009C)” on page 2 would also seem compliant.

• Call Report Instruction 2: The entry to record asset growth is “Non-Interest Income Year-to-Date-13. Other Operating Income (Include unconsolidated CUSO Income) (Account Code 659)” on page 5.

Burns-Fazzi, Brock does not practice law or accounting, and does not provide legal, tax or accounting advice. The information above is provided for your consideration based on our understanding of the current rules and guidance that apply. Please consult your professional tax and accounting advisor for official information.

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Executive 457 Plan | Benefit Accounting Entry Report

Hypothetical Illustration

Burns-Fazzi, Brock does not practice law or accounting, and does not provide legal, tax or accounting advice. The

information above is provided for your consideration based on our understanding of the current rules and guidance

that apply. Please consult your professional tax and accounting advisor for official information.

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Welfare Benefit: Split Dollar

Welfare Benefit Plans involve benefits for executives such as life, health, disability, long-term care and post-retirement medical.

• Executive Split Dollar falls under ERISA for claims and review procedure.

• The Executive owns the policy, so the IRS treats the premium payment as a loan.

• The “loan” is nonrecourse to the Executive and the Executive’s estate, but the Credit Union’s recovery is secured by collateral assignment of the policy’s cash values and death proceeds.

• The interest rate is locked in at the long-term applicable federal rate when the premium is paid.

• The interest compounds and is paid from the policy death proceeds, eliminating all taxable income to the Executive during life.

• The Plan conforms to applicable Treasury Regulations (§§ 1.61-22 and 1.7872-15) and NCUA guidance (OGC Opinion 05-0117 and 06-0924).

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Split Dollar Plan | Sample Executive Summary

Hypothetical Illustration

• The corporate recovery component and the executive tax-free death benefit are based

on death benefit proceeds projected at age 84.

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Split Dollar | Impact on Earnings Hypothetical Illustration

• (5)* Booked Collateral: The booked collateral is the lesser of the loan balance or the total asset value (cash value modeling not used).

• (7)* Death Benefit Corporate Recovery are likewise based on the current assumptions (NOT GUARANTEED), and likewise interpolated to approximate report ending period values.

• “IMPACT SUMMARY” reflects annual and cumulative gains or losses from “Annual Collateral Increase” less “EXPENSES”.

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Split Dollar | Accounting Entry Report

Hypothetical Illustration

• “Officer Loan Receivable” account should be classified as an Other Asset on the Credit

Union’s books. However, according to NCUA, collateral assignment split dollar life

insurance arrangements should be reported on the Call Report as a Note Receivable in

“Other Assets” SHOULD NOT be reported on the Call Report under “Loans to Officials.”

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Section 162 Bonus Plan

Section 162 Bonus Plan is a payment into a life insurance policy that the executive owns. Although referred to as “Section 162 insurance” the benefits are actually taxable to the executive under Section 83 of the tax code. The plan is also likely classified as a “payroll practice” that is exempt from ERISA. NCUA regulations for reasonableness and informal funding apply.

Key Components

1. The Credit Union pays premiums on a life insurance policy owned by the Executive.

2. The premiums are taxable to the Executive as paid.

3. The Credit Union bonuses the Executive the taxes due on the premiums, grossed up to cover tax due on the bonus as well.

4. Premiums and tax bonuses cease at the Executive’s termination of employment.

5. Through an optional restrictive endorsement, the Credit Union can prevent the Executive access to policy values until retirement.

6. In retirement, the Executive determines when and how to access policy values. Taking loans from the policy would be tax free so long as the policy does not lapse during the Executive’s lifetime.

Observations

• Taxation of this plan is under Section 83 of the tax code.

• The Board determines how much premium to pay from year to year.

• With the Executive owning the policy, accumulating values are protected against a Credit Union financial failure.

• Following termination of employment, the Credit Union will not contribute any premiums.

• The Credit Union can choose to offset the cost through the use of institutional insurance or annuities (using restrictive endorsements required to make it an ERISA plan)

• Premiums and bonus are expensed as paid. No liability accrues on the books.

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Section 162 Plan | Executive Policy Illustration Hypothetical Illustration

• (3) Policy Premium: Premiums paid into the executive’s policy are taxable income to the executive as paid.

• (4) 35% Tax Liability Bonus: This expense covers the participant’s income tax liability, grossed up because this additional bonus is also taxable. Bonus = Premium * 35% / (100% - 35%)

• (5) Annual Benefit Expense = -(3) - (4)

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Section 162 Plan | Impact on Earnings Hypothetical Illustration

• Assumes asset acquisition of $10,000,000 on 1/1/2015.

• “IMPACT SUMMARY” reflects annual and cumulative gains or losses from “ASSET GROWTH INCOME” less “BENEFIT EXPENSES”.

• “Projected Asset Value” is based on illustrated data or specified growth formulas provided to Burns-Fazzi, Brock by the applicable asset companies. The report values are based on values using current earnings assumptions (NOT GUARANTEED”, and are interpolated to approximate report period ending values. “Available Death Proceeds” are likewise based on current assumptions (NOT GUARANTEED), and likewise interpolated to approximate report ending period values.

• “Cumulative Asset Yield” is calculated from the assert values on the cash flow dates to the “Projected Asset Value” on the report ending date.

• Column 12 - The values are subject to the “Direct Relationship Test” under 701.19, such that additional

benefits (e.g., 401(k) match, health expenses) may be needed to offset the additional income.

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Section 162 Plan | Asset Accounting Entry Report

Hypothetical Illustration

• Call Report Instruction 1: Based on discussions with NCUA representatives, their intended reporting to record the

asset value of the investment is under “12. All Other Investments (Account Code 766)” on page 1. However, until

the instructions are further clarified, reporting under “32. Other Assets-c. All Other Assets (Account Code 009C)”

on page 2 would also seem compliant.

• Call Report Instruction 2: The entry to record asset growth is “Non-Interest Income Year-to-Date-13. Other

Operating Income (Include unconsolidated CUSO Income) (Account Code 659)” on page 5.

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Section 162 Plan | Accounting Entries

Hypothetical Illustration

• Entry #1 - The insurance premium paid on the policy owned by the executive is expensed (debit) to the

appropriate expense account with an offset (credit) to cash when paid.

• Entry #2 - The entry related to the cash bonus paid to the executive should be provided by your payroll

processor. The amount shown in this illustration is based on the executive’s hypothetical tax rate of 35%. The

payroll processor will be able to calculate the exact bonus amount based on the executive’s specific tax situation.

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Supplemental Reading

Regulatory and Legal Benefits Update

Q1 2014 Call Report – BOLI and Split Dollar

Reporting Clarifications

Expansion of Interagency Statement Among State

and Federal Regulators

Split Dollar Primer

Plan Comparison

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Save the date!

BFB Executive Benefits Learning Series

Thursday, February 24

2:00 pm ET

Registration opens soon at

www.nafcu.org/BFBwebinars

Questions?

Rich Brock

Burns-Fazzi, Brock

[email protected]

www.BFBbenefit.com

Jeff Ziliani

Burns-Fazzi, Brock

[email protected]

www.BFBbenefit.com

Jim Patterson

Sherman & Patterson

[email protected]

www.splawfirm.net

Burns-Fazzi, Brock is the NAFCU Preferred Partner for Executive Benefits and Compensation

Consulting Services. More educational resources are available at www.nafcu.org/BFB.