Employee Benefits for Federal Credit Unions

These procedures only apply to FCUs. When examining a federally insured, state-chartered credit union, use the FISCU exam procedures.

If a FCU offers employee benefits not required by law, exam staff must determine the type and risk associated with the benefits provided. To identify employee benefits, exam staff can request a list of the benefits offered and benefit participants from the credit union. Additionally, exam staff may identify employee benefits by reviewing (list is not comprehensive):

• Board minutes
• Audit reports
• Management contracts
• Employee benefit policies
• Employee manuals
• Financial statements for liabilities and other obligations such as post-retirement benefits

Some employee benefit plans, such as qualified pension plans, are off-balance sheet. Even though these plans may not be reflected as a liability on a credit union’s financial statements at a certain point in time, the credit union is still exposed to some financial risk if the plan becomes underfunded.

1. For any employee benefits adopted or changed since the last exam:

   1. Review the credit union’s analysis and rationale for offering the benefit.
   2. Determine that employee benefits were properly approved and that the approval process is free of conflicts of interest.1 Credit union officers should recuse themselves from deliberation and voting on senior executive benefits for which they are the primary beneficiaries.
   3. Ascertain whether the board considered the credit union’s financial condition and any laws or regulations that govern employee benefits before adopting them.

2. Review the credit union’s quantification of the cost of the employee benefits. 2 This should exclude social security taxes, other taxes, required health care payments, and other federally mandated employee benefits.

   1. The method and documentation used to quantify employee benefits varies based on the type of benefit plan offered. Possible items to review include, but are not limited, to:

      • Valuation reports from third-party providers
      • Reasonable projections prepared by the credit union
      • Actuarial reports for pension plans and other post-retirement benefits
      • Invoices and expense reports

   2. Ensure the credit union accounts for employee benefits in accordance with GAAP, and report these properly on the Call Report. NCUA regulation § 741.6(b), Consistency with GAAP, requires federally insured credit unions with assets greater than $10 million to comply with GAAP unless a lower threshold is established by state law for state-chartered institutions. Typically, exam staff should:

      • Review any contracts that obligate the credit union to provide certain benefits, to identify any benefits which need to be recorded on the credit union’s financial statements.
      • Review the funding status of pension plans and ensure they are reported on the credit union’s financial statements, as necessary.
      • Determine if any underfunded pension plans pose a safety and soundness concern to the credit union.
      • Ensure that management has identified any pending litigation related to employee benefits, and has accounted for it properly.
      • Review CPA audits, when applicable, to evaluate compliance with GAAP.

      See Accounting for more information related to accounting for employee benefits.

3. In conjunction with an overall review of the credit union’s earnings, assess whether the credit union can afford the kind and amount of employee benefits offered given its size and financial condition. Exam staff’s review of earnings should be consistent with NCUA Supervisory Letters 06-01, Evaluating Earnings and 09-03, Reviewing Adequacy of Earnings.

   1. Evaluate the long-term cost of benefits related to the credit union’s current earnings and future earnings capacity.
   2. If the credit union has negative earnings as a direct result of the employee benefits, exam staff should reflect this in the credit union’s Earnings and Management CAMELS component ratings. Exam staff should consult with their supervisor before recommending any specific remedies.
   3. When evaluating the affordability of senior executive benefits, consider the entire benefits package, which may include salary, retirement benefits, and additional benefits (such as club membership, company car, monthly stipend). Exam staff should ensure the credit union’s board prevents potential conflicts of interest by applying enhanced oversight for senior executive benefits.

4. Assess whether the kind and amount of employee benefits offered are reasonable given the credit union’s size, financial condition, and the duties of the employees. (See § 701.19(a), General authority.)

   1. Generally, exam staff do not review individual compensation packages of credit union employees unless the credit union is experiencing significant earnings weaknesses and compensation costs are one of the primary causes, or there are indications of excessive or unsafe total compensation packages.

   2. If it is necessary to review total compensation packages for senior executives, exam staff should review the credit union’s:

      • Analysis that demonstrates the benefits granted are reasonable (in amount and scope) given the duties of the employee(s). The analysis should include results of total compensation surveys for similar institutions conducted by the credit union or its agent.
      • Related internal policies and procedures.

 

Investments that Fund Employee Benefits for Federal Credit Unions

These procedures only apply to FCUs. When examining a federally insured, state-chartered credit union, use the FISCU exam procedures.

If a FCU funds employee benefits using investments, exam staff must determine the type and risk associated with the investments. To identify such investments, exam staff can request a list from the credit union.

Additionally, exam staff may identify such investments by reviewing (list is not comprehensive):

• Board minutes
• Audit reports
• Call Reports
• Investment schedules and reports
• Financial statements

For any otherwise-impermissible investment3 An “otherwise-impermissible investment” is one which does not comply with NCUA regulation Part 703 (or Part 704, for corporate credit unions). used to fund an employee benefit(s) exam staff will:4 If all investments are compliant with Part 703 (or Part 704, for corporate credit unions), exam staff will review investments as part of a normal risk-focused exam.

1. Determine the type and risk of the investment(s) acquired to fund the employee benefit(s). (See more information about insurance products typically used as investments to fund employee benefit plans.)

   1. When a federally insured credit union’s exposure to otherwise-impermissible investments exceeds 25 percent of its net worth and the risk is not borne by one or more beneficiaries,5 For example, in a 457(b) plan, the credit union fully funds the plan and the beneficiary bears the risk related to changes in the value of the plan. Exam staff should include split-dollar loans when calculating this percentage. exam staff must expand the examination scope of review.
   2. If a credit union’s exposure to otherwise-impermissible investments is less than 25 percent of net worth, exam staff may opt in to the expanded examination scope as part of a risk-focused exam.6 Excluding review of a credit union’s due diligence from the risk-focused exam procedures does not eliminate a credit union’s need to conduct proper due diligence in accordance with safety and soundness.
2. Ensure the credit union conducts adequate pre-purchase analysis for any investments used to fund employee benefits. For more information, see §§ 703.4, Recordkeeping and documentation requirements and 703.6, Credit analysis; and NCUA Letter to Credit Unions 10-CU-18, Investment Due Diligence.
3. Ensure the credit union conducts post-purchase analysis for any investments to fund employee benefits at least annually. Post-purchase analysis should be appropriate for the amount and complexity of the investment.
4. Review the credit union’s exposure to single non-governmental obligors. Individual exposures in excess of 15 percent of net worth are generally considered unsafe and unsound. They may result in required corrective action and/or a downgrade in the credit union’s CAMELS or risk ratings unless there are sufficient mitigating factors.

An example of a mitigating factor is if a part of the risk is carried by the beneficiary of the employee benefit, and not the credit union, such as a 457(b) plan. Another example is if part, or all, of the exposure is insured by the FDIC.
Another example is where the executive assumes the risk for the amount above 15 percent. Furthermore, for credit unions that entered into employee benefit agreements before this guidance was issued and where the exposure to net worth is expected to drop below 15 percent within the next 36 months examiners will generally not take exception.

5. Review the credit union’s concentration of any non-investment grade investments. A concentration greater than 25 percent of net worth is generally considered unsafe and unsound and may result in required corrective action and/or a downgrade in the credit union’s CAMELS or risk ratings unless there are sufficient mitigating factors.7 An example of a mitigating factor is if part of the risk is carried by the beneficiary of the employee benefit, and not the credit union (such as a 457(b) plan) or the credit union has high net worth in relation to balance sheet risk.

Non-investment grade exposures include non-investment grade bonds, or similar investments, equities, commodities, real estate, hedge funds, or other similar investments.

While a concentration of non-investment grade investments that is greater than 25 percent of net worth is generally considered unsafe and unsound for most credit unions, there may be instances when concentrations less than 25 percent of net worth are unsafe and unsound for a particular credit union based on the other risks present within the credit union. For example, non-investment grade investments under 25 percent of net worth may be considered unsafe and unsound if the credit union has a low level of net worth or if it has elevated credit risk on other parts of its balance sheet.

6. If the credit union invests in an insurance product, ensure that the credit union properly established an insurable interest on the insured individual(s) when the policy was purchased. Also, review the breakout of CSV of insurance products, including the amounts for:

   1. Non-employee benefit investments
   2. General plans covering a group of employees
   3. Senior executive retirement plans
   4. Split-dollar life insurance arrangements
   5. Key-person insurance
   6. Loans taken out against the policy, if applicable

7. Confirm that otherwise-impermissible investments are only used to fund qualifying employee benefits.8 The preamble to the final rule states that the FCU’s “...records should reflect that the FCU purchased the investment exclusively for the purpose of funding the employee benefit obligation.” See “Organization and Operations of FCUs; 12 CFR Part 701; Final Rule,” 68 Federal Register 23025 (April 30, 2003).

   1. Otherwise-impermissible investments to fund employee benefit plans must only be used for benefits that meet the definition of “defined benefit plan” and “employee benefit plan.” 
   2. Determine if the investment product(s) meets the direct relationship requirement. In particular, ensure that the:
   • Credit union properly quantifies the qualifying employee benefits using reasonable and supportable methods and assumptions. The credit union may need to use consultants or vendors with the requisite expertise to develop key actuarial assumptions, when applicable.
   • Expected investment return does not exceed the projected cost of the qualifying employee benefit(s). (Cost of funds may be included in the projected cost; see NCUA Opinion Letter 04-0453.)
   • Investment(s) has a predictable return over the time horizon associated with the benefit to offset the benefit obligation costs or the asset is fully matched to the corresponding liability.

Last updated September 25, 2017