As more credit unions use non-qualified deferred compensation plans (NQDC) to recruit, retain, and reward CEOs and other top executives, regulations relating to a common component of supplemental executive retirement plans (SERPs) may change soon.
The Internal Revenue Service is expected to issue final rules for Internal Revenue Code Section 457, following the issuance of proposed final regulations on June 22, 2016. If the final rules are issued in 2017, they could go into effect as early as Jan. 1, 2018.
Many of the proposed rules clarify circumstances under which a NQDC plan could be subject to taxation or even penalties.
A well-designed NQDC plan is unlikely to leave an executive or retiree subject to unexpected taxes or penalties.
However, to exercise due diligence, credit unions should maintain a consistent oversight process, which includes regular reviews of existing plans.
Here are three strategies credit unions should consider to ensure appropriate oversight for both efficacy and compliance:
1. Establish a formal review process
Setting up deferred compensation agreements is a complex process for boards and executives. Once they sign an agreement, it’s tempting for all involved to step away from the process until it’s time to work on another executive’s plan.
You should review existing plans annually, and involve legal counsel, an accountant, and the plan provider.
Key issues to review include:
• The participant’s employment status. Is the executive still doing the same job? Have any issues arisen with the executive’s performance or future plans? How does the plan fit into the overall compensation package?
Plans may need to be updated to keep pace with or reflect changes to any of these concerns.
• Performance of underlying investments. Are the underlying investments providing adequate support to offset the plan costs? Are they projected to provide the right level of liquidity to support the plan payouts?
Adjustments may be necessary if investments are underperforming.
• The plan provider. Is the provider informed of any changes or updates that may affect the plan, such as regulations, accounting changes, or taxes? Verify the provider remains financially stable and committed to the ongoing support of the plan.
Also, if the provider isn’t responsive to your needs or hasn’t administered the plans transparently, let them know.
2. Formalize a structure for NQDC leadership and expertise
Even if you have a go-to staff person or board member for deferred compensation issues, consider establishing a board NQDC committee.
Many boards already have a compensation committee; consider including oversight of these plans into that committee’s purview.
In addition to hands-on experience working with deferred compensation plans, the committee should stay up-to-date with industry educational offerings.
3. Prepare for potentially more rigorous audits or examinations
NCUA examiners are increasingly knowledgeable and experienced in reviewing these plans. As a result, they may be more rigorous in reviewing deferred compensation plan documentation, not only for thorough due diligence at plan inception but also for ongoing oversight.
Work with your NQDC provider to conduct appropriate due diligence when setting up a plan, and establish a process for ongoing monitoring and oversight of both the plan and the underlying investments.
Examiners will expect the credit union to both document and demonstrate adherence to these guidelines.
There’s nothing in the proposed rules that should stop you from implementing NQDC plans now—it’s too important a tool in today’s marketplace to wait.
Just be sure you have expert guidance from people who know the proposed rules backwards and forwards.