A CU Times review of CEO compensation at the 55 largest state-chartered credit unions revealed that more than half of them could be paying the 21% excise tax.

“And then you have to look at the question of, how will they [the IRS] gather the data to be able to know whether to apply the excise tax?” he said. “And that is going to require all credit unions to have to submit the salaries and compensation of their highest paid executives to the IRS really for the first time for federal credit unions, and there will be a new look at it even for state credit unions because previously there was no excise tax to be assumed.”

To find out how many of the largest state-chartered credit unions pay their CEOs in excess of $1 million, CU Times reviewed IRS 990 documents that state-chartered credit unions are required to file annually with the federal agency. Among the top 100 credit unions, by assets, 55 credit unions are state-chartered and manage assets ranging from $2.3 billion to $37 billion. The 990 documents report each credit union's financial information, including how much executives received in W2 wages, incentives and deferred compensation.

A review of the publicly-available 990 forms from 2015 or 2016 showed at least 14 credit unions pay their CEOs more than a $1 million in W2 wages. The compensation ranges from a little more than $1 million to $7 million.

An additional 11 CEOs received more than $1 million and up to $2 million in W2 wages combined with their deferred compensation plans. What's more, five additional CEOs received more than $800,000 or more than $900,000 in W2 and deferred compensation in 2015 or 2016. Assuming these five CEOs earned up to or beyond their job performance expectations, many of them most likely reached $1 million or more in W2 wages and deferred compensation.

That means 30, or more than half of the CEOs of the 55 largest state-chartered credit unions in the nation, may be paying the 21% excise tax.

That total CEO number, however, is expected to be considerably higher when the CEOs of federal credit unions are included, assuming that the approximate same number of federal credit unions pay their CEOs more than $1 million in W2 compensation or more than $1 million in W2 and deferred compensation.

In addition, these credit unions and others are paying dozens of senior executives six-figure salaries as well as deferred compensation. The excise tax will apply to the credit union's five highest compensated executives going back to 2016 who earned $120,000 or more, according to Triscend, which provides executive benefit, compensation and succession planning services for credit unions. The Dallas-based company formed a partnership with Dollar Associates in January.

Alexandria Staron, vice president at Triscend, said a credit union could have more than five highly-compensated employees from 2016 and 2017, and any of them that made more than $1 million would be required to pay the 21% excise tax.

What's more, when it comes to deferred compensation, the probability that credit unions will pay the new tax increases. This is because many credit unions provide cliff vest deferred compensation plans as they help retain executive talent for 10 years or more, Staron explained.

Even if an executive's W2 base compensation and incentive plan is well under $1 million, their deferred compensation plan can push the W2 compensation hundreds of thousands of dollars above the million-dollar threshold after the deferred compensation plan becomes vested.

For example, if a CEO is making $800,000 in W2 compensation when the deferred compensation plan reaches $800,000 and becomes vested after 10 years of service, the executive's total W2 compensation in that 10th year would amount to $1.6 million. That means the credit union would be required to pay the 21% excise tax on the $600,000, which would total $126,000.

One way to circumvent the excise tax is to pay the executive deferred compensation every two years, instead of every 10 years, Staron said.

“So the same total benefits are paid to the executive … but the executive would never surpass that million dollar threshold,” she said. “We are seeing a move to some of these shorter vesting cycles, which has the advantage of the credit union of minimizing or potentially avoiding altogether the excise tax exposure. However, these [shorter vesting] plans are not as retentive. The executive obviously is getting the deferred compensation more regularly, but the incentive to stay for the full 10 years doesn't exist in the way it does with the cliff vest structure.”

A second area that is not getting much attention from credit unions, Staron said, is that the excise tax can also be applied to executives who receive lump sum parachute or severance payments because of a merger or termination. For executives who are considered a highly compensated employee, there is the potential for excise tax exposure if those severance or parachute payments are in excess of three times their base amount.

The base amount is defined as a five-year average of W2 wages.

“In the event there's a parachute payment in excess of three times [the executive's] base amount, it seems that an excess parachute payment exists to the tune of anything over one times the base amount and those dollars are subject to the excise tax of 21%,” Staron said.

For example, if one of your senior executives makes a base wage of $250,000 and received a parachute payment of $750,000, the excess parachute payment would total $500,000, requiring the credit union to pay the IRS $105,000.

This means the 21% excise tax has the potential to reach deeper into a credit union's executive team, Staron said. She noted a recent industry study showed about 40% of credit unions at $150 million and up in assets offer severance packages to one or more of their executives and that percentage rises to about 62% for credit unions that manage assets of $1 billion or more.

Many non-profit organizations are looking at loan regime split-dollar plans because they are considered to be non-compensatory for purposes of the new excise tax, but they need to be set up correctly.

“Structuring a loan regime split dollar plan in such a way that it is truly, safely and soundly non-compensatory is very important in putting together these plans, and there are a variety of different ways in which you can design these plans to give you a high level of confidence, and in some cases, a guarantee that that will in fact occur,” Dale K. Edwards, co-founder and principal at Triscend, said. “So we encourage you to work with a firm that has the right technical expertise. Evaluate all of the various design options. Understand the risks. Understand the implications of the design. Stress test the design and because of the long-term nature of this plan, engage a third-party administrator who has the experience to monitor the plan.”

Additionally, a 162 bonus plan is another option that's not commonly talked about, Edwards noted.

“The basic idea here is to make the compensation payments on an annual basis. That would be obviously extremely effective in managing the excise tax threshold,” he explained. “But there are ways in which you can do these types of arrangements, in which you have multiple asset options that are far more retirement benefits-oriented. There are also design options where you can still accomplish a bit more of the retention objectives than you might normally see in a restructured 457(f) plan.”