IRS Private Ruling on Deferred Compensation May Give FCUs Options to Put More Cash in Their Executives' Pockets

MADISON, Wis. -Some are speculating that a recent IRS private ruling letter on deferred compensation plans may be the first promising step in giving federal credit unions the ability to offer a plan common in the for-profit world that could put more money in credit union execs’ pockets. The April 9 letter involves a FCU’s attempt to establish a non-qualified deferred compensation plan to provide benefits to an executive and whether Section 457 of the IRS Code provides rules regarding the taxation of such plans of eligible employers. In this specific case, the FCU could offer deferred compensation to the executive under a “for-profit model,” (a 451 plan) said Lawrence Gallagher, the attorney who represented the credit union. What’s really at stake here is whether credit unions will be able to offer deferred compensation plans to executives with more tax-friendly characteristics. For instance, if $100,000 were put into plans for a president of a bank and a president of a credit union and both vest in five years, 40% of that would disappear in taxes for the latter, said Gallagher. For the bank president the $100,000 would be there plus between 40-80% more. “It might make some job candidates think twice about taking the job with that credit union,” Gallagher said. CUNA Mutual Group is preparing an advisory for the nearly 1,000 FCUs that have their deferred compensation plans with the group, outlining the following options: the CU can “do nothing” and see what transpires from the IRS; request their own private letter ruling; request a revenue ruling which has broader implications or make changes to their existing plans based on the April 9 letter ruling, said Joe Tripalin, vice president of executive benefits, CUNA Mutual Group. “One thing we want to stress is should credit unions decide to change their plans, they should remember that any change does not affect NCUA’s rules and regulations,” Tripalin said. Meanwhile, to hone in on the broader implications of the use of a for-profit model would have on deferred compensation plans for federal credit unions, CUNA Mutual Group is seeking a revenue ruling from the IRS on the matter, said Dave Fowler, assistant vice president and associate general counsel. Unlike an IRS private letter ruling, a revenue ruling would have broader implications and could affect all federally-chartered credit unions, Fowler said, who added that CUNA Mutual has been following the deferred compensation issue with the IRS very closely over the past six months. According to the IRS, revenue rulings represent its conclusions on the application of the law to the pivotal facts stated in the revenue ruling and are considered precedent. “We started getting wind of the issue when IRS agents were out auditing credit unions and some would bring up the issue (of deferred compensation),” Fowler said. “The IRS responds to taxpayer requests, we are urging other (credit unions) to do the same thing.” Fowler also suggested credit unions might start thinking about unanswered questions (such as) what does a federal credit union have to do to change its plan and what kind of deadline are they working against in terms of when the executive will retire, Fowler said. The April 9 private ruling letter leaves state-chartered credit unions out in the cold and if broader guidance were to come from IRS, it might put them at a disadvantage when competing for top talent, Fowler said. Credit unions mulling over the decision to switch from a federal to a state charter or even vice versa might pull back the reins on conversion plans. Still, Tripalin said “if we were to get better guidance from IRS on who can use 451 rules, that would be an earthquake.It would be a tremendous change in what they have to offer today,” Tripalin said. David Hilton, president of D. Hilton Associates, Inc., a management consulting firm which designs deferred compensation plans for a number of credit unions, is not so convinced that the IRS private letter ruling will lead to anything substantial. “If you read the letter carefully, it kind of alludes to the IRS viewing this federal credit union as a government entity,” which can not use 457fs,” Hilton said. “We know that NCUA and every state regulators say that 457fs are okay.” Hilton acknowledged that the ruling is “complicated” and there would be “significant impact” if the IRS gave the green light for credit unions to alter how they offer deferred compensation plans. [email protected]