Proper Accounting for BOLI and SERPs

Transcription

1 Proper Accounting for BOLI Jeff Ziliani, CPA Chief Financial Officer, BFB Gallagher Kirk Sherman, JD Partner, Sherman & Patterson, Ltd. Agenda 1. BOLI Definition Accounting & Servicing 2. SERP Definition Accounting & Servicing Key Plans 3. Red Flags 4. Q&A 1

2 About BFB Gallagher Focused on nonqualified plans for highly-compensated individuals in nonprofit organizations 400+ nonprofit clients Coast-to-coast offices Plan audit, design, implementation and ongoing service Regulatory compliance and due diligence requirements for nonprofits About Sherman & Patterson, Ltd. Assists clients in designing, documenting and administering their executive compensation arrangements Monitors legal developments and works with IRS, NCUA and state regulators on compliance 600+ tax-exempt clients Headquartered in Minneapolis, Minnesota 2

3 Definition of BOLI? BOLI Bank Owned Life Insurance A form of life insurance purchased by banks where the bank is the beneficiary, and/or owner. This form of insurance is a tax-free funding option for employee benefits. Note: Also available for Credit Unions, sometimes referred to as Business Owned Life Insurance or CUOLI Credit Union Owned Life Insurance. BOLI Accounting & Servicing Authoritative Literature 12 U.S.C governs investments held to fund employee benefit plan obligations. Under this provision, a credit union may hold otherwise impermissible investments if the investment is directly related to the credit union s obligations or potential obligations under an employee benefit plan, and the credit union holds the investment only so long as it has such actual or potential obligations. 3

4 BOLI Accounting & Servicing Additional Considerations Currently, no formal ruling on limit of BOLI investment Common industry concentration threshold 25% equity BOLI is typically purchased/bundled when implementing a SERP to offset the additional expense. However, they are independent from each other from a legal/tax/accounting perspective. Note: If the SERP is terminated, the BOLI does NOT have to be sold as long as there are other benefit obligations that can be offset. BOLI Accounting & Servicing Accounting Credit Union owns insurance policy Records premium payments as Other Asset Growth in policy cash surrender value reported as Other Operating Income Servicing Do I know how much the investment is as a % of equity? Did I record the transaction correctly? How do I know the change in the cash surrender value? 4

5 Call Report Schedule B, Line 20 (701.19) 9 Definition of SERP SERP Supplemental Executive Retirement Plan A nonqualified retirement plan for key company employees, such as executives, that provides benefits above and beyond those covered in other retirement plans such as IRA, 401(k) or nonqualified deferred compensation NQDC plans. 5

6 Key Plans 457(b) 457(f) Split Dollar 83 Bonus Human capital investment Attract talented individuals Retain those with material impact Reward by sharing in the success Several plan options for different goals 457(b) Plan Features Pros Cons Employer or employee funded benefit $18k deferral limit (or 2X catch up limit) Immediate vesting Predictable expense Plan ends at Executive s termination Option for cost recovery investment Now Vesting Distribution IRS limits can make accruing a meaningful benefit difficult General creditor 6

7 457(b) Plan Accounting & Servicing Accounting Credit Union records an expense to Total Employee Compensation and Benefits each year to accrue annual contributions Earnings on contributions are based on the Executive s allocation among offered investment options (similar to 401(k) plan) Contributions and earnings grow tax-deferred 100% vested at all times Servicing Are total contributions within annual limit or catch-up limit? Do I know what the current and future accrual is to record? Is the frequency that I am recording the accrual consistent with our accounting policy / other accruals? Can I purchase annuities and/or institutional insurance to mitigate expenses? Call Report Schedule B, Line 20 (701.19) 7

8 457(f) Plan Features Pros Cons Employer funded benefit Predictable expense Unlimited (reasonable) accruals Vesting date Accruals end at Executive s termination Option for cost recovery investment Legal promise with associated ongoing expense and liability General creditor Now Vesting Distribution 457(f) Plan Accounting & Servicing Accounting Credit Union records expense as Total Employee Compensation and Benefits to accrue for the intended benefit Payment of benefit reduces the Accounts Payable and Other Liabilities account Forfeiture of plan causes reversal of accrual / expense Servicing Do I know what the current and future accrual is to record? Is the frequency that I am recording the accrual consistent with our accounting policy / other accruals? Can I purchase annuities and/or institutional insurance to mitigate expenses? 8

9 Call Report Schedule B, Line 20 (701.19) Split Dollar (Loan Regime) Credit Union pays premiums on a life insurance policy Executive owns. Policy is collaterally assigned to Credit Union to secure its rights. Funding treated as loan by IRS, but reported as an Other Asset. 9

10 Split Dollar (Loan Regime) Policy value grows over time. Executive borrows from the policy tax-free during retirement to supplement retirement income. Split Dollar (Loan Regime) Credit Union is repaid premiums PLUS interest from the policy death proceeds. Remaining death proceeds allocated between Credit Union and Executive s beneficiaries, per the legal agreement. 10

11 Split Dollar (Loan Regime) Features Pros Cons Executive owns life insurance policy, which is collaterally assigned to the CU No promised benefit Built in cost recovery Long term commitment Tax free income through policy loans and death proceeds Vesting date for retention Benefit caps possible Vesting flexibility No general creditor risks Split Dollar (Loan Regime) Accounting & Servicing Accounting Recording Split Dollar Loan: Dr. Other Asset Cr. Cash Accruing Interest: Dr. Other Asset Cr. Other Operating Income Loan Value Adjustment (EITF 06-10): Dr. Misc. Operating Expense Cr. Other Asset Servicing For state charters, does my state have restrictions or exceptions to Split Dollar plans and/or the related accounting? Is the plan being recorded correctly on my books and on the call report (and Form 990 for state charters)? Is the policy performing based on expectations? Do I need to implement a recourse agreement? 11

12 Call Report Schedule B, Line 20 (701.19) Split Dollar (Endorsement) Features Pros Cons Credit Union owns life insurance policy Portion of death benefit endorsed to Executive No Executive cash value interest Policy cash value is an asset to Credit Union Built in cost recovery Low cost death benefit coverage Executive taxed annually on the term cost of the death benefit 12

13 Split Dollar (Endorsement) Accounting & Servicing Accounting Policy cash value reported under All Other Assets Growth in cash value recorded as Other Operating Income Executive to be taxed annually on the value of the term cost of the death benefit protection Excess death proceeds are paid to the Credit Union Servicing Is Executive aware of annual taxation? Is Executive aware of no access to or control of the policy? Do I receive timely reports? Do I have access to the policy cash value? Call Report Schedule B, Line 20 (701.19) 13

14 83 Bonus Credit Union pays premiums on Executive-owned life insurance policy. Credit Union retains no interest in the policy or its values. IRS treats premium payment as additional taxable compensation. At or after termination, Executive can access policy values to supplement retirement income. 83 Bonus Features Pros Cons Employer pays premium on life insurance policy Executive owns Credit Union can pay Executive a tax gross up Policy loans to supplement retirement income are tax free Predictable expense Premiums end at Executive s termination Tax free access to cash value by loan from policy Option for separate costrecovery investment Ongoing expense and bonus commitment Requires calculation of bonus/gross up to cover taxes No built in Credit Union cost recovery 14

15 83 Bonus Accounting & Servicing Accounting Premium payments and bonuses are expensed through Compensation Expense and reported through payroll in the period when paid Servicing Does my payroll provider know how to properly report this transaction? Is the bonus / gross-up amount correct? Can the Credit Union purchase annuities and/or institutional insurance to mitigate expenses? Call Report Schedule B, Line 20 (701.19) 15

16 Red Flags No independent due diligence materials Working with inexperienced vendors not familiar with industry High investment concentration levels Poor accounting practices Lack of knowledge about the plan and the funding Not looking at other alternatives Red Flags No updated investment policy Investment policy is boilerplate language Benefit levels that are out-of-line with similar positions at similar credit unions Poor board involvement and/or communication No thorough annual review Benefit investments with high surrender charges 16

17 Thank You! Jeff Ziliani, CPA, Chief Financial Officer BFB Gallagher ext. 213 Kirk Sherman, Partner Sherman & Patterson, Ltd September 21 Webinar Total Rewards for Credit Unions Disclosures Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Kestra IS and Kestra AS are not affiliated with BFB Gallagher (BFB), Arthur J. Gallagher & Co. or Gallagher Benefit Services, Inc. Please note that all investments are subject to market and other risk factors, which could result in loss of principal. Fixed income securities carry interest rate risk. As interest rates rise, bond prices usually fall, and vice versa. Mutual funds and ETFs are sold by prospectus only. Before investing, investors should carefully consider the investment objectives, risks, charges and expenses of a mutual fund or ETF. The fund prospectus provides this and other important information. Please contact your representative or the Company to obtain a prospectus. Please read the prospectus carefully before investing or sending money. 17