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Split-dollar life insurance agreements have been part of the credit union executive compensation landscape since 2005, and recently they’ve been getting more popular as a way to reward and retain top executives.
According to the 2018 CUES Executive Compensation Survey, almost 29% of credit unions offered CEOs split-dollar life insurance, more than a 50% increase from the 2016 survey. CUNA Mutual Group internal statistics show our collateral assignment split-dollar life insurance assets under management increased more than 60% from year-end 2015 through 2018.
Why are split-dollar agreements gaining traction now? The answer to that requires a bit of background.
In Brief: What Is a Collateral Assignment Split-Dollar Agreement?
According to the online NCUA Examiner’s Guide:
Split-dollar life insurance is an agreement in which a credit union employee (typically a senior executive) and the credit union “split” the “dollar” an insurance policy provides. Split-dollar insurance is not a type of insurance policy, but an agreement that can apply to any cash value policy (as opposed to term policies).
The most prevalent split-dollar arrangement for credit unions is the collateral assignment split-dollar. In this agreement, the credit union pays premiums on a cash value life insurance policy written on an executive. The premium payments are a loan to the executive (which is why these agreements are also called “loan regime split dollar”).
In turn, the executive assigns all or some of the death benefit and/or cash value to the credit union to repay the loan, including interest.
The policy in a CASD agreement is structured to generate enough cash value that the executive can withdraw some of it as a supplementary retirement benefit.
The agreement itself is a contract that spells out how the policy will be administered, what happens if the executive leaves the credit union or is terminated, and many other variables. The contracts are complicated and require attorneys with experience in this arena.
These agreements contain many more nuts and bolts, but that’s a basic overview. To understand how these CASD agreements evolved, a mini-history helps.
A Brief History of Split-Dollar in Credit Unions
In 2005, CUNA Mutual Group brought split-dollar plans to market after securing a legal opinion from the National Credit Union Administration that allowed these plans for federally chartered credit unions. For many years before that, split-dollar arrangements had been used for corporate executives, but a change in tax law in 2003 made them less favorable in that sphere.
The tax change—and the fact that commercial businesses have many other options for structuring executive compensation plans—largely pushed split-dollar agreements out of that market.
For credit unions, however, split-dollar life insurance was becoming more attractive.
One reason is that credit unions were consolidating into larger organizations, with executive salaries and bonuses growing commensurately. And this trend created a retirement income gap for more executives.
These gaps open when the combination of traditional pensions, 401(k) plans and Social Security can no longer generate enough retirement income to replace 60 to 80% of an executive’s final average annual working income. To reach that replacement percentage—the standard that many retirement planning experts recommend—credit unions needed new options.
For some, 457(b) and 457(f) plans could close that gap. But CASD has some unique advantages:
- • Credit unions book the insurance premium payments as an asset; it’s a loan that will be repaid and can earn interest.
- • If the executive makes withdrawals from the policy’s cash value, that money is income tax-free. The death benefit is also paid income tax-free to the credit union and/or to the executive’s named beneficiaries.
- • The plans can be a diversifier from mutual funds, stocks, and other market-based investments that are typically found in such retirement plans as the 401(k).
- • CASD agreements typically create a long-term incentive to retain top-performing executives. Some policies generate enough cash value for executives to use some of it before as well as after retirement.
New Excise Tax Boosts Interest in Split-Dollar
As part of the Tax Cuts and Jobs Act of 2017, credit unions must pay a 21% excise tax on annual executive compensation in excess of $1 million to any one of their top-five paid executives.
Some supplemental executive compensation plan payouts, such as a vesting event from a 457(f) plan, can boost an executive’s compensation above the $1 million threshold, triggering the tax on the credit union. Distributions from a CASD policy are not subject to that tax.
As a result, some credit unions are opting for split-dollar agreements over options that would result in excise tax liability.
The excise tax adds one more incentive for split-dollar agreements to continue evolving to meet credit union needs. And inevitably, as demand for these products grows, so will the number of providers.
Be sure you work with providers that have extensive experience and a long track record of proven results with these agreements.
John Pesh, CCE, is a director of executive benefits for CUESolutions platinum provider CUNA Mutual Group, Madison, Wisconsin. For more information about becoming a CUESolutions provider, please email kari@cues.org.
