The National Credit Union Administration (NCUA) recently published proposed rules intended to bar financially troubled federally insured credit unions from providing golden parachute payments to executives terminating employment and all federally insured credit unions from making certain prohibited indemnification payments.
The proposed limitations on golden parachute payments do not apply to financially strong credit unions and also include specific exceptions that are intended to permit payments under bona-fide long-term deferred compensation and retirement plans established prior to any financial troubles such as supplemental executive retirement plans and top-hat nonqualified deferred compensation plans. The proposed regulations would apply only to plans implemented on or after the effective date of the final regulations and would only apply to existing plans if and when they are renewed or modified.
The proposed regulations also prohibit all federally insured credit unions, regardless of their financial condition, from reimbursing legal and similar professional expenses to an executive that has incurred a civil monetary penalty, has received a cease and desist order, or who has been removed from office (the prohibited indemnification payment provision). However, there are some situations described in the regulations under which indemnification payments are permissible.
The NCUA states that the proposed regulations are being developed in an effort to assure that the NCUA and the National Credit Union Share Insurance Fund (NCUSIF) are utilizing assets as effectively as possible. In addition, the new rules are intended to help insured credit unions distinguish between improper golden parachute payments and legitimate employee severance payments.
Golden Parachute Payments. The limitations apply to “golden parachute payments.” A golden parachute payment is a payment or an agreement to make a payment by a credit union to an executive that is contingent upon the executive’s termination of employment, and is received when the credit union making the payment is financially troubled as defined below. The proposed rules are designed to eliminate certain types of payments made to executives of credit unions who may have contributed to the financial troubles of the credit union. The limitations do not apply to payments “pursuant to qualified retirement plans, nonqualified bona fide deferred compensation plans, nondiscriminatory severance pay plans, other types of common benefits, state statutes and death benefits.”
Troubled Credit Unions. The golden parachute limitations only apply if the credit union is financially troubled. A credit union will be considered to be troubled if it is insolvent, undercapitalized, under conservatorship, rated CAMEL 4 or 5 (or state equivalent), or is subject to a proceeding to terminate or suspend share insurance, or otherwise deemed to be in a troubled condition as defined in §701.14(b)(3) and (4).
Bona Fide Deferred Compensation Plan Exemption. The proposed regulations indicate that credit unions may “continue to provide legitimate deferred compensation plans, including supplemental retirement benefits and nonqualified deferred compensation plans, consistent with normal business practices.” In the case of a bona fide deferred compensation plan, the plan must have been in place for at least one year before the credit union became financially troubled. No plan amendment made within that one year time period can increase the benefits under the plan. Further, the executive must have a vested right in the benefit at the time of termination, and there cannot be any discretionary acceleration of benefits. Although not clearly stated, the prohibition against “discretionary acceleration” suggests that nondiscretionary accelerations of vesting upon involuntary termination of employment without cause, for example, under pre-established plan provisions, should be permissible. All such plans must be properly accounted for with the appropriate liability accrual, and permissible payments are limited to the accrued liability.
Nondiscriminatory Severance Plan Exemption. Severance benefits up to twelve months salary may be provided under a “nondiscriminatory severance plan” which applies to all employees of a credit union who meet reasonable and customary eligibility requirements. The definition acknowledges that benefit levels may be different for different tiers of executives but requires that the covered group must consist of not less than 33% of all employees.
Additional Golden Parachute Exceptions. The proposed regulations also provide the following additional exceptions to the golden parachute limitation:
- The proposal includes an exception to permit a troubled credit union to hire and promise golden parachute payments to competent management to assist in returning the credit union back to financial health.
- The regulations would permit severance payments of up to twelve months salary in certain circumstances involving the merger of a troubled credit union. Such a merger must be without assistance from, and at no cost to, the NCUA.
- The regulations contain a general exception permitting golden parachute payments when the NCUA Board determines such a payment is permissible. However, language in the proposed regulations state that the Board’s consent or approval of a golden parachute payment in the event of a liquidation or conservatorship will not in any way bind or obligate any liquidating agent or conservator.
In each of these instances, the credit union must receive written permission to allow such a benefit in advance of making the payment. When applying to the NCUA for approval to utilize one of the listed exceptions, the credit union must demonstrate that the executive receiving the payment was not responsible for the troubled condition of the credit union due to fraudulent acts or omission, breach of trust or fiduciary duty, or insider abuse which caused the credit union to become insolvent, be appointed a conservator or liquidating agent. In addition, the credit union must show that the executive did not violate any applicable federal or state laws or regulations, or the criminal provisions of the United States Code.
Prohibited Indemnification Payment. The proposed rules also prohibit certain indemnification payments. A prohibited indemnification payment is any payment, or agreement to make a payment, to reimburse an executive for any civil penalty, judgment, or other liability or legal expense resulting from an administrative or civil action by the NCUA or state regulatory authority that results in a final order or settlement pursuant to the executive being assessed a civil monetary penalty, is removed from office, or is made subject to a cease and desist order.
Summary. The proposed rules do not eliminate a credit union’s ability to utilize strategic benefit plans to compensate executives. In fact, the proposed regulations state that since credit unions are not able to offer equity-based incentive compensation, given their tax-exempt nature, deferred compensation plans remain an important tool for credit unions to attract executive talent in a competitive marketplace. However, it is important to be sure that benefit plans are properly designed and administered, so as to assure that the promise made to the executive can be delivered.
At this time the new rules are only in proposed status and are subject to change and further clarification. This ALERT is not intended to provide legal advice but is merely a brief summary of recent developments which may warrant your attention. For more information, please contact Marla Aspinwall of Loeb's Executive Compensation Group.
Circular 230 Disclosure: To ensure compliance with Treasury Department rules governing tax practice, we inform you that any advice contained herein (including any attachments) (1) was not written and is not intended to be used, and cannot be used, for the purpose of avoiding any federal tax penalty that may be imposed on the taxpayer; and (2) may not be used in connection with promoting, marketing or recommending to another person any transaction or matter addressed herein.