Consult with a professional advisor about your particular situation.

Are insurance benefits provided to board members considered taxable income? The answer is largely “yes,” but also, “it depends.”

“The general rule under the tax code is something provided in return for services rendered is taxable income to the recipient (board member),” says R. Scott Richardson, JD, CLU, ChFC, president/CEO, IZALE Financial Group, a CUES Supplier member in Elgin, Illinois. “However, insurance benefits can be treated differently.”

Richardson explains that while the value of accident and health insurance is not taxable for employees, it will likely be taxable for board members. 

“There are narrow exceptions where it would not be taxable income,” so consulting a tax advisor is worthwhile, he says.

In the case of life insurance, rather than take out a formal policy, credit unions can promise to pay a benefit (out of pocket) upon a board member’s death, in which case the beneficiaries would report the amount as ordinary income. The CU is essentially acting as its own insurance.

However, in the event of a policy paid for by the CU, Richardson reports there is a choice: “Either the board member reports the ‘economic benefit’ of the coverage as income each year, resulting in an income-tax-free benefit, or the board member does not report economic benefit, resulting in a benefit subject to ordinary income taxes.”

Life insurance is generally income-tax free except when someone else pays for it, in which case there’s some “economic benefit” to the board member, he explains. If the board member owns the policy but premiums are paid by the CU, the premiums paid by the CU equal the economic benefit and are taxable income. If the CU owns the policy and allows the board member to designate a beneficiary, then the right to designate the beneficiary is the economic benefit. If the board member reports the value of that economic benefit each year as taxable income, then death proceeds received would be income-tax free. If the board member does not report the value of the economic benefit each year, then death proceeds would be subject to ordinary income tax.
With long-term care insurance, Richardson notes that any benefits received under a qualified policy are not taxable, though the premiums likely would be. “Since board members are not employees, they would be treated as ‘self-employed’ for income-tax purposes.”

Jim Patterson, partner with Minneapolis-based law firm Sherman & Patterson, similarly notes that directors are under different tax rules than employees. “… directors are not subject to some of the tax benefits that employees get,” he said. “In the case of long-term care insurance, for instance, if that were provided to an executive employee of the credit union, it can be done so on a tax-free basis. But for directors, who are not employees, that would be considered taxable income.”

Even if these benefits are taxable, Richardson says there are still advantages for both the board member and the credit union. “First, paying taxes on $1 of reportable income requires much less cash flow than paying the $1 of premium out of pocket. Second, there are pricing discounts and underwriting concessions available to groups that can be the difference between being affordable and attainable versus not.”

Richardson concludes with advice to consult with tax professionals “to understand the full implications.”

Diane Franklin is a freelance writer based in Missouri. This article published with expressed permission from CUES

Despite lower corporate tax rates and a narrower spread between traditional bank-eligible investments and Bank/Business-Owned Life Insurance, BOLI continues be a powerful asset for your balance sheet. The earnings are competitive for the risk and accrue without any tax provisions. The book value is stable - rising interest rates won't result in mark-to-market adjustments like with bonds. At its core it's still life insurance and we've seen firsthand how the life insurance proceeds have provided invaluable benefits to an insured officer's family as well as to the institution.
 
BOLI crediting rates have remained somewhat stable since the beginning of 2018, and programs that deliver 3% or more yield out of the gate are readily available. While those rates have remained stable, market rates have moved generally upward even if in fits and starts. As of March 25, the 10-year Treasury bond was a mere 3 bps higher yield than the 13-week Treasury bill (with an inversion with shorter duration); the result is about 75bps-100bps of spread between 10-year Treasuries and BOLI. That's down from the historical average of over 200bps. That narrow spread has many institutions re-evaluating their inforce BOLI or delaying their next purchase of it. The thought goes that until there is greater reward for the risk of going longer, stay short.  
 
Ignoring the immediate lost earnings from staying on the sidelines, trying to time entry to the markets is challenging to say the least. What if instead of measuring your BOLI returns against fixed-income assets like bonds, you could measure them against an equity-index? Before you get too far on the ledge - we're not talking about exposing cash value to an index; cash values will always have stable book value treatment. What we're talking about is a transparent way to determine the crediting rate by measuring the change in an index, most commonly the S&P 500.
 
"Indexed Universal Life" or IUL has been available on a retail basis for more than 20 years, and in 2018 IUL accounted for almost 30% of permanent life sales. While widely available on a retail basis, it wasn't until recently that IUL became available with a single-premium, 100%-beginning-cash-value design associated with BOLI.

With IUL, the carrier offers a "floor" or minimum crediting rate (along with full book-value treatment) and a "cap" or maximum crediting rate that can flow from the change in the index.  

• If the index is negative or below the floor, your crediting rate is the floor.  
• If the index is greater than the cap, your crediting rate is the cap.  
• If the index is in between, your crediting rate is the index.

While your crediting rate from month-to-month will vary between the floor and the cap, when back-tested against 50 years of actual S&P performance, IUL has impressive results. The table below shows the current floor and cap for two carriers that offer IUL BOLI. One is decidedly more conservative than the other in its design, however, the expected rewards may be worth the "less conservative" design.

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.

Just launched today, the experts at IZALE share in less than 4 minutes why executive benefit plans are an integral part of attracting, rewarding, and retaining top talent for financial institutions today.

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.

• For example, assume a for-profit employer has promised a SERP benefit of $100,000 for 20 years. As long as the SERP benefit remains an unfunded liability of the for-profit employer, the executive owes income tax only on each payment as it is received despite being fully vested in the benefit upon retirement.
• In the tax-exempt world of credit unions, however, the executive owes income tax immediately upon vesting in the SERP benefit. The amount of tax is based on the net present value of the payments, which could result in a significant, immediate tax bill. To avoid a crushing cash flow burden on the executive from this timing difference (i.e., $100,000 of annual payments with a current tax bill of $500,000+), almost all SERPs in the tax-exempt world are paid in a lump sum. While having a lump sum is helpful to the executive, now under TCJA 2017 that results in W-2 compensation in a year that can very easily exceed $1 million. 

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.