Healthcare Representative Experiences

Client: Major West Coast Healthcare System

Challenge: The Board and several key executives realized their growing SERP account balances created two problems. The executives were concerned they would immediately lose 50% of the accrued values to taxes at the moment of vesting. The client was concerned about the potential for negative public reaction when the Form 990 reported the large SERP payouts. The client was approached by a firm suggesting loan regime split dollar (LRSD) as a way to resolve both problems.

S&P Role: We first assisted the client in evaluating the legal and tax aspects of LRSD. We then worked with the accountants to determine the proper financial reporting and Form 990 reporting of the arrangement. The financial reporting converted the SERP liability into a growing asset (receivable that accrued interest), and the Form 990 reporting would avoid reporting a large SERP distribution at vesting. Finally, we worked with the client’s internal counsel and legal counsel for executives to draft the legal documentation for the arrangement.


Client: Healthcare Compensation Consultant

Challenge: The client was being asked more frequently to render reasonableness opinions on total compensation packages that included loan regime split dollar (LRSD). Many argued that nothing should be included as compensation from LRSD because the arrangement was “noncompensatory” (i.e., the participants paid interest on the employer’s premium loans at the IRS rate, so there is no employer value being provided).

S&P Role: We explored the background to the intermediate sanction regulations and determined that entirely excluding LRSD from the evaluation was unlikely to be supported by the IRS. We then developed and analyzed three different methods for valuing LRSD—the SERP replacement approach, the grossed-up SERP replacement approach, and the cost approach. We explored the advantages and disadvantages of each approach, recognizing that different approaches might be warranted in different situations.


Client: Major Healthcare Provider

Challenge: The Chief Executive Officer contemplated early termination or possible force-out. However, he found the termination provisions of his various benefit plans confusing and at times inconsistent, leaving him unsure of the impact such terminations would have on the promised benefits.

S&P Role: At the client’s request for assistance, we reviewed all of the plans to ascertain the implications of early termination, either voluntary or involuntary without cause. We created a table outlining the dif­ferent termination scenarios and the benefits the CEO would receive in each. The table simplified com­plicated provisions so that the CEO could make employment decisions with full knowledge of the impact on his benefit plans. We created timelines showing relevant dates for force-out elections and benefit vesting.


Client: Large Health System

Challenge: The client sponsored a SERP for a key executive. The client and executive expected that the SERP benefit would vest and be payable at age 62. As the executive approached age 62, the client discovered that the SERP document instead called for age 60 vesting and payment. Having missed the age 60 payment, the client had violated Section 409A, exposing the executive to a 20% penalty on all deferred compensation accruals.

S&P Role: We determined that the Section 409A operational failure qualified for correction under the IRS operational failure procedures. This allowed the executive to limit the 20% penalty to the specific amount that should have been paid, and not to all of his deferred compensation accruals. We also determined that although the employer could not credit interest to the amount that should have been paid at age 60, it could reimburse the 409A penalties and interest on the late taxes (subject to reasonable compensation limits). The reimbursement would be taxable income, but it would also be permissible for the employer to gross up the penalty and interest payment for taxes.


Credit Union Representative Experiences

Client: Large East Coast Credit Union

Challenge: The client had received proposals from three different providers for installing a loan regime split dollar (LRSD) plan. The proposals varied significantly from each other: single vs. multiple policies; whole life vs. universal life policies; term loan vs. demand loan; accrued interest vs. paid interest vs. imputed interest; single life vs. joint life policies, to name a few of the differences. The client had no idea how to evaluate the proposals, how to compare them to each other, and how to determine which best matched to the client’s objectives.

S&P Role: After learning the client’s objectives and priorities, we interviewed each provider to assure we fully understood the proposals. Based on our experience with LRSD, we developed design specifications that best met the client’s objectives and priorities (e.g., term loan with interest accrued and paid from the policy death proceeds). We then provided the specifications to each of the providers and asked them to demonstrate how they would propose funding the arrangement. This allowed the client to evaluate each proposal based on cash flow requirements, insurer carrier strengths, mortality charges, investment risks and other key financial factors knowing each proposal was aimed at the same target. Once the client selected a provider, we created the legal documents for the arrangement.

Client: Multiple Credit Unions

Challenge: Many of our credit union clients had difficulty understanding where on the Call Report (Form 5300) to report life insurance held to fund their employee benefit plan expenses. The oral guidance we had received from NCUA over the years was that insurance was properly reported on the Statement of Financial Condition on line 32c (all other assets) and not as a line 12 investment. However, the instructions to line 32 continued to state: “Report any assets used to fund employee benefits in the Investment Schedule on page 1 of the Call Report.”

Additional support for reporting insurance on line 32c came with the Call Report for [insert first call report quarter with new line 20 reporting]. The NCUA added line 20 to Schedule B asking for more detailed reporting of assets held to fund employee benefits. Line 20c referred to life insurance as “Other Assets” as opposed to Securities or Other Investments.

S&P Role: In a conversation with the NCUA on other topics, we thanked them for the clarification that line 20c brought to the life insurance reporting rule. We were surprised that the representative we spoke with said that was not their intent. We explained the compounded confusion credit unions would now have if life insurance was treated as an Other Asset on line 20, and as an investment for line 12 and 32c purposes. Whether in response to our input or for other reasons, the NCUA in the Call Report for Q1-2015 removed from line 32c the instruction to report assets funding employee benefits on line 12. Clients can now with confidence report insurance funding employee benefits on line 32c.


Client: West Coast Credit Union

Challenge: An examiner concluded a credit union could not use its benefits consultant that brokered the insurance funding its benefit plan to also provide administrative support services under the plan. The examiner told the credit union its consultant had a conflict of interest, and required the credit union to hire a different firm for that purpose.

S&P Role: We had a call with the credit union to understand more about the examiner’s concerns, and reviewed written correspondence from the examiner. With no specific credit union guidance on the topic, we shared provisions from the Interagency Statement on the Purchase and Risk Management of Life Insurance provided by banking regulators (and recognized by the NCUA national office as helpful guidance). We explained that the credit union’s approach was supported as a best practice in the Interagency Statement. We contacted the examiner directly but were not able to resolve the problem. We then wrote and submitted an opinion letter request to the NCUA national office. We discussed the issue with representatives there who agreed with our position, and intervened to help the examiner understand the banking guidance and why it made good business sense for credit unions to follow as well. The regional examiner changed his mind and allowed the benefits consultant to provide administrative support services for the benefit plan, as desired by the credit union’s board.


Client: Large Southwestern Credit Union

Challenge: The credit union desired to install a loan regime split dollar arrangement for key executives, and contacted its legal counsel (large law firm) to assist it in getting the required approval from the state’s regulators. Although this firm had vast experience in many areas, it had not had significant exposure with split dollar arrangements or in working with state regulators to get benefit plans approved. In response to the law firm’s initial request, the credit union was told it could not move forward with the proposed benefit plan design and funding for a variety of reasons.

S&P Role: After being contacted by the credit union and its benefits consultant, we reached out to the law firm to propose some ways in which we could work together to educate the regulators on the plan design and regulatory impact, and to get the plan design and funding approved. We helped the large-firm lawyers understand that we had addressed the issues with many credit unions and state regulators across the country, and that it made the best sense for us to take the lead on communicating the benefits and regulatory issues to the regulators.

We contacted the state regulators who had denied the original request and clarified the issues they needed to address. We drafted a parity request letter (with review and comments from the other firm) that summarized the plan design, its investment implications, and described the state and federal regulatory support for moving forward with the plan design approved by the credit union’s board. After significant effort in working with the large firm and communicating the issues with the state regulators, the state approved the plan design and its funding.