WASHINGTON – Deferred compensation plans at federal credit unions have been officially put on the IRS priority list and guidance on how they're administered could come by next June. Given all that's gone on of late with executives and their retirement plans, or lack thereof, the IRS guidance could represent a sea change in how credit unions think about CEO compensation. CUNA and CUNA Mutual Group met with IRS officials on Aug. 26 to discuss the plans. The meeting mainly came as a result of an April 9, 2004 IRS private letter ruling which said that a FCU could not offer a 457 deferred compensation plan to one of its executives. The IRS responded to a FCU's inquiry about establishing a non-qualified deferred compensation plan and whether Section 457 of the Internal Revenue Code (IRC) applied to such a plan. In its response, the IRS determined that the federal credit union was a "federal governmental instrumentality" and, therefore, is not an eligible employer. As a result, the IRS concluded that the credit union could not offer a Section 457 plan."The purpose of our meeting was to determine what is needed to resolve the question of what rules apply to federal credit union deferred compensation programs," said CUNA General Counsel Eric Richard. The pivotal meeting comes at a time when some credit union boards are playing catch-up with retirement plans for their CEOs. Surprisingly, some very large credit unions are not providing adequate, if any, retirement or pension plans. Some compensation experts say boards will have to make up for that void with very large contributions years in the years leading up to the CEO's retirement. This has already been seen in Oregon where for example one CEO had over a million dollars contributed to a 457 in one year. Eligible employers – including tax-exempt organizations as well as state and local governments – can offer highly compensated executives deferred compensation plans under Section 457 of the IRC, Richard said. Many federal credit unions use the plans to attract and retain talented executives. Since the mid-1980s, FCUs have offered such plans but the tax code changed that required them to be in accordance with Section 457 of the IRC. The April private letter was silent about what rules would apply to the credit union's deferred compensation plan, said Kathy Thompson, CUNA senior vice president and associate general counsel for compliance. Plans at state-chartered credit unions are not being questioned, she emphasized. "If federal credit unions cannot offer deferred compensation plans under Section 457, then it seems the logical alternative would be to let federal credit unions offer deferred compensation plans under Section 451 of the IRC," Thompson said. Section 451 is the IRC provision applicable to the deferred compensation plans offered by "for-profit" employers, Thompson said. Depending on the guidance coming from the IRS, executive compensation plans at credit unions are poised to turn a monumental page in how they're set up and administered. Indeed, a 451 plan provides greater flexibility than a 457 plan in that there is no annual dollar contribution limit, and participants have more flexibility in taking distributions which affects when taxes must be paid. If FCUs are not subject to Section 457, this would mean that they would be able to offer discounted mutual fund options to their employees, according to CUNA. The meeting revisited all of these parameters and IRS officials have placed the issue on its official priority guidance plan, said Dave Fowler, CUNA Mutual Group associate general counsel. That plan includes a list of upcoming projects for the next year and guidance is expected by June 30, 2005. Guidance could come in the form of a revenue ruling, which would apply to all FCUs. Following the IRS private letter ruling, CUNA Mutual sent out an advisory to the 1,000 FCUs for which it administers compensation plans with several options including requesting a revenue ruling. For now, credit unions can proceed as usual."Based on our meeting, it's much clearer that FCUs should not be reluctant to set up 457 plans," Fowler said. "The IRS has made it clear that credit unions should not rely on that private letter ruling. Until more formal guidance comes out, credit unions should feel free to set up 457 plans." [email protected]