Answer the Deferred Comp 'What-ifs'

Content provided by CUNA Mutual Group through CUESolutions

Properly setting up a supplemental executive retirement/recruitment plan means more than running calculations and moving money into deferred income accounts, such as 457(f) and 457(b) plans, and setting up collateral split-dollar life insurance.

Using these vehicles to offer deferred compensation to executives and their families if certain agreed-upon eligibility and vesting conditions are met also involves creating an agreement that—among other things—answers a complex set of “what-if” questions. Here are just a few:

• What if the credit union merges and the executive’s position is eliminated?
• What if the executive voluntarily leaves before the end of the SERP agreement’s term? What if the departure is involuntary?
• What if the executive dies before the agreement term expires?

Because these plans are complex and subject to so many possible circumstances, the credit union and the executive should have separate legal counsel write answers to such questions into the agreement, before any contracts are signed.

Examples of “What-if” Situations

A CUES ebook, Non-Qualified Executive Benefits: A Guide for Credit Union Leadership, includes some examples of “what-ifs” that need to be addressed in SERP agreements:

• An executive with a collateral assignment split-dollar life insurance plan suffers a disabling illness and will not be returning to work. While negotiating the agreement, representatives for the executive and the credit union agree that if this happens, the vesting would be accelerated and the policy kept in force. This way, the executive can use any cash value as income sooner, and the agreed-upon death benefit remains intact for the executive’s beneficiaries.
• A CEO who has a substantial long-term deferred compensation plan is considering whether the credit union should merge with another. The CEO stands to lose a significant portion of the supplemental benefits should a merger be approved. Wouldn’t it be difficult to make an objective decision in that situation? The board should be careful about putting a chief executive in the situation of needing to decide between the best interests of the credit union and the fate of hard-earned executive benefits. By guaranteeing those benefits whatever the outcome of any merger discussions, the board gives the CEO the freedom to assess the merits of the merger and advise the board more dispassionately.
• If an executive is dismissed for cause or leaves the credit union voluntarily, the agreement for a collateral assignment split-dollar life insurance arrangement may require accelerated repayment of the associated loan. The executive may even have to give up the policy. If the policy’s cash value is insufficient to repay the loan, the executive may have to repay any shortfall. The repayment amounts can be substantial and may be considered as part of the retention incentive by the credit union. Executives who go into these plans must understand the potential consequences, especially in the short term until the cash values grow enough to repay the loan amounts.

These scenarios offer just a taste of the complexity SERP agreements can contain. Even so, these deferred compensation arrangements are becoming more popular with credit unions. They are one of the few tools our industry can use to compete with banks and other financial institutions in attracting and retaining the best talent.

John Pesh is an executive benefits director for CUESolutions platinum provider CUNA Mutual Group, Madison, Wis. For more information about supplemental executive compensation, read the CUES ebook, “Non-Qualified Executive Benefits: A Guide for Credit Union Leadership.” For information about providing content through CUESolutions, email Kari Sweeney, supplier relations manager.