The effectiveness of a Split Dollar Plan looks at both the meaningfulness of the plan to the executive and the appropriateness of the plan for the credit union while optimizing the financial impact of the plan.
Targets the goal and intent of the credit union by structuring notes, products, and provisions to create employment separation scenarios that yield the desired retention & retirement benefit.
Optimizes financial impacts to the credit union by structuring notes, products, and provisions including cost of funds recovery that minimizes opportunity cost given the target benefit.
Maximizing effectiveness begins with understanding the unique goals of the credit union with respect to retaining senior management. By determining the intent of the plan and desired impact under each scenario the optimal combination of note structures can be selected to ensure plan success. Questions such as “when to use one type of note or another?” or “what product is best?” derive from the goal and intent of the plan established by the credit union while maximizing the effectiveness of a retention and retirement benefit for each dollar invested. Our process, and ultimate design, adheres to important best practices of the NCUA, follows IRS guidelines, and avoids the following:
The use of a key-person life insurance component, beyond retirement, to enhance investment returns to the credit union. The NCUA expressly prohibits the use life insurance in this manner (OGC Op. 98-1202 DTD 02-25-1999).
In determining the interest rate on the employee loans, the NCUA explicitly outlined that a CU may use cost of funds in determining an appropriate rate of return, but is expressly prohibited from recovering opportunity costs on the money it invests to fund an employee benefit (OGC Op. 04-0453 DTD 11- 24-2004).
Any requirement in the Split Dollar Agreement, for the credit union to provide additional funding in order to meet a target benefit, would convert the plan from a tax qualifying Split Dollar Loan agreement to a 457(f) plan. It also potentially would bring financial statement accounting into new areas, providing for future potential liabilities.
Understanding that these are complex solutions, our philosophy is to take the time to educate the board, so that every person responsible for the decision, is able to make a fully informed one. We utilize a participating whole life insurance product as the funding vehicle. Due to the long-term nature of these programs, the insurance company chosen is a crucial decision for the board. We utilize MassMutual, NY Life, Guardian Life and Penn Mutual.
Securities, investment advisory, and financial planning services offered through qualified registered representatives of MML Investors Services, LLC, Member SIPC (www.sipc.org). O.M. Financial Group, LLC is not a subsidiary or affiliate of MML Investor Services, LLC, or its affiliated companies. Supervisory Office: 101 Federal Street, Suite 800, Boston, MA 02110. Tel: 617.439.4389. Products and services offered are: NOT A CREDIT UNION DEPOSIT • NOT NCUA INSURED • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY • NOT GUARANTEED BY THE CREDIT UNION • MAY GO DOWN IN VALUE.