Three Nonqualified Plan Strategies Credit Unions Can Utilize for Employee Retention

In a National Council of Nonprofits survey, 72% of the more than 1,600 respondents cited salary competition as their biggest challenge to employee recruitment and retention.[1]

Nonprofit and tax-exempt organizations face the same challenges as their for-profit counterparts when it comes to finding ways to recruit, reward, retain and provide supplemental retirement income to key executives. Offering nonqualified benefits above salary, bonuses and traditional qualified plans can be an effective way to meet these objectives.

However, not all nonqualified plans are the right fit for every business. Credit unions often use 457(f) Supplemental Retirement, Executive Bonus 162 and Split Dollar plans, which, when properly structured, support the goals of both the organization and the executive.

How a 457(f) Plan Supports the Interests of Credit Unions and Their Employees

A 457(f) nonqualified deferred compensation arrangement is a nonqualified retirement plan that allows a credit union to supplement the retirement income of its select management group or highly compensated employees.

Employers can contribute to a plan that is then paid to the executive at retirement. There is no limit on the amount of money that can be deferred on behalf of qualifying executives. Executives, as plan participants, can also contribute to the plan, choosing to invest up to 100 percent of their compensation.

The plan includes a written agreement between the credit union and each eligible executive to pay benefits when the executive retires, dies or becomes disabled. Deferred amounts and the earnings on those amounts are employer assets and subject to the claims of general creditors.

The agreement also contains conditions that the executives must meet before benefits will be paid. These requisites provide credit unions, as the plan sponsor, an added level of control. And the flexibility to defer unlimited compensation helps make 457(f) plans an effective strategy for attracting and retaining key executives.

Executive Bonus 162 Plans as a Credit Union Retention Strategy

An executive bonus plan allows a credit union to provide permanent life insurance coverage to key executives using after-tax dollars. Insurance policies are owned by the executives and are paid for by the credit union through cash bonuses.

The executive has all ownership rights of the policy, including the right to name beneficiaries and to access the cash value of the policy. Executive Bonus 162 plans are not subject to administration costs, IRS approval, 457 or 409(A) regulations and are generally simple to administer.

When designed for retention purposes, Executive Bonus 162 plans may include a written agreement with the executive defining specific qualifying events that will trigger the release of the executive from the agreement. These caveats can help inspire the executive’s loyalty to the company.

How Does a Split Dollar Plan Encourage Employee Loyalty?

A split dollar arrangement is a plan in which a life insurance policy’s premium, cash values and death benefit are split between two parties. These types of plans may be used as an executive benefit to encourage employees to remain with the credit union.

In a split dollar plan, the executive maintains control; however, there is an added benefit of potential cost recovery to the credit union through the split-dollar arrangement. In a split dollar arrangement, the credit union pays the premiums on a life insurance policy owned by the executive and receives a collateral assignment interest in the policy equal to the total premiums paid.

The premium payments are treated as loans by the IRS, and the executive is taxed on the imputed interest on the loans. In some instances, a credit union can also use a split dollar plan to fund the replacement of a valuable executive.

Key Takeaways for Credit Union Leadership

Benefits can play an important role in credit union executive compensation programs. Credit Unions should consider working with a skilled executive benefit consultant or advisor who can guide their board leadership and senior executives on the design and documentation of the overall retirement package. The process calls for a thorough analysis of the credit union’s existing retirement package, from both a current perspective and with reasonable compensation growth assumptions on a go-forward basis, to develop a reliable expected retirement income replacement ratio projection (RIRR).

Equipped with an accurate understanding of current benefits provided, an executive benefits consultant can complete internal and external peer analysis to determine appropriate replacement levels based on position and years of service. To learn more about the critical support an executive benefit consultant can provide, contact executivebenefitssolutions@onedigital.com

To learn more about other executive benefits strategies, we invite you to read: How the OBBB May Impact Your Organization’s Executive Compensation Limits, Deferred Compensation Plans for Retaining Valued 1099 Independent Contractors and Reasons to Reevaluate Your Rabbi Trust.

Source:
[1]National Council of Nonprofits, "2023 Nonprofit Workforce Survey Results"

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