For more information about FMS, click here.
New choices in the marketplace, means banks and credit unions may struggle to maintain market share for their checking accounts. One solution is to update outdated free checking accounts to a fee-based model. This fee income strategy simultaneously increases revenue and delivers these value-added services to customers. Find out more from this short Thought Leader Video from the Financial Managers Society then click here where you can join one of our upcoming Fee-based Income webinars and learn more about this strategy for change from your friends at IZALE.
For more information about FMS, click here.
by Scott Richardson, CEO & President of IZALE
The Tax Cuts and Jobs Act of 2017 (TCJA 2017) ushered in lower corporate and individual taxes for most. However, some changes are not so good and have a disproportionate impact on tax-exempt organizations like a credit union.
Some background. Deductions for compensation as a business expense are available through Section 162(m) of the code. For many years, deductions for compensation that wasn’t performance-based compensation were limited to $1 million. (No surprise – the vast majority of organizations paid nearly all compensation above $1m as performance-based compensation, thereby preserving the deduction.) TCJA 2017 eliminated the exception for performance-based compensation. So, if a for-profit employer pays $2.5 million in compensation this year to their highest paid executive, the employer would not be able to deduct $1.5 million that exceeds the limit – effectively costing the employer 21% more in federal income taxes.
New excise penalty on Credit Unions. Since credit unions generally don’t have deductions, the loss of one isn’t that concerning. In order to have “equal” treatment of for-profit and non-profit employers, TCJA 2017 imposes a 21% excise penalty on non-profit employers on any compensation they pay to an executive that exceeds $1 million. (This only applies to the top 5 executives.) If your credit union pays $2.5 million to an executive in total W-2 compensation this year, that would cost the credit union an additional $315,000.
Disparate impact on Credit Unions. The problems stems with how supplemental executive retirement plan (SERP) benefits are taxed in a tax-exempt credit union vs. a for-profit employer like a bank.
Options. SERPs in a credit union (aka 457f plans) remain a strong planning option but more attention will have to be paid to design for new plans. THERE WAS NO GRANDFATHERING UNDER TCJA 2017, so existing arrangements may be causing your credit union some pain. IZALE Financial Group has worked with multiple institutions since the enactment of TCJA 2017 to restructure credit union SERPs (aka 457f plans) to reduce – even eliminate – the excise penalty. While not all plans can be restructured, if you have a 457(f) SERP we welcome the opportunity to do a no-obligation review and share ideas we have successfully implemented at your peers.
Contact your IZALE representative directly or email us to learn how we can assist your Credit Union with these changes.
We are proud so share this amazing opportunity to learn from Scott Richardson, CEO/Founder of IZALE Financial Group, plus his remarkable team Chris Richardson, Jonathan Barnes, and Phil Aderton as to why they are the go-to BOLI experts and why BOLI is a viable solution today for financial institutions to attract, reward and retain their key talent – their most valuable asset.
by Joe Tripalin, Senior Consultant, IZALE Financial Group
Concept: Credit unions today can choose to pre-fund all or part of their future employee benefit obligations by reallocating a portion of the credit union’s investment portfolio into an investment(s) that would normally be impermissible and use the earnings from this investment to offset their future employee benefit cost obligations. These types of investments are deemed appropriate because they are tied to future employee benefit costs. This concept does not impact where the employee benefits are purchased or the cost of the underlying benefits.
Background: Credit unions have been pre-funding certain employee benefits for many years. Examples include supplemental executive retirement programs (executive benefit plans), pre-funding of defined benefit pension plans, and post-retirement health care programs. In these programs, credit unions have used a variety of investment vehicles to serve as the funding source, most of which would not be available for credit union investments except for the fact they are tied to future employee benefit obligations.
In 2006, the NCUA was asked if other ERISA employee benefits could be pre-funded under NCUA Rule 701.19(c). NCUA answered in the affirmative that any ERISA based future employee benefit obligation could be pre-funded using what would normally be impermissible investments as long as the credit union exercised prudence regarding the safety and soundness of the investment along with the amount invested. The NCUA did not issue an Opinion Letter ruling on this concept, but indicated that previous NCUA Opinion Letters dealing with the use of impermissible investments tied to employee benefits including Opinion Letter 06-0817, gave guidance this issue.
Program Goals: There are a number of goals often associated with utilizing a pre- funding program:
IZALE Financial Group
As an independent firm, we’re driven by close client relationships. For you, that means that our technical expertise is yours to rely on.