NASHVILLE, Tenn. -
That was the message from several industry experts at CUNA Mutual Group's 12th Annual Discovery Conference. According to John Moreno, director of client service and marketing for MEMBERS Capital Advisors, the concept of Total Benefits Pre-Funding is one way credit unions can address escalating employee benefit costs while maintaining the level and quality of their current benefit plans.
Moreno told the group that pre-funding of benefits expenses allows for the use of otherwise impermissible investments and has the potential to provide a higher rate of return than short-term rates.
This is a relatively new practice for credit unions, based on expanded interpretation of NCUA regulation 701.19, which allows this practice for federal and state credit unions that follow NCUA rules.
CUs that participate in the program have the ability to better control costs for ongoing and increasing employee benefit obligations, are open to an expanded scope of permissible investments, have the flexibility to move assets as needed and have the potential to generate a higher rate of return.
Another way to lower benefit costs of key executives is split-dollar life insurance, which can be structured to provide executives with tax-advantaged retirement cash flow while lowering the total benefit cost to the CU.
According to John Swenson, executive benefits specialist for CUNA Mutual Group, the program is primarily a tax-efficient funding vehicle structured to solve for income with the employer and executive agreeing to split both the cost and benefits of a permanent life insurance policy.
Under the plan, the credit union pays the annual premiums, which are considered a no-interest loan to the executive. The credit union is repaid from, and secured by, either the policy's death benefit or its cash surrender, or both. The executive is taxed on imputed interest annually at the applicable federal rate. Meanwhile, the cash value grows tax deferred and the executive has access to excess cash values. As it's designed, there is low impact on the credit union's financials.
"Structured as a loan, split-dollar is a tax-advantaged alternative to Internal Revenue Code Section 457," said Swenson. "Split-dollar life insurance provides tax-free cash flow while also providing supplemental life insurance. This is a low-cost way to provide an additional executive benefit at a time when retaining experienced executives is an issue faced by credit unions."
