Regulatory Update

AFRs for July 2015

The IRS published the applicable federal rates for July 2015. Now that both the January and July rates are known, we can calculate the blended AFR for 2015 (it's 0.44%).

The July rates are:

  • Short Term: 0.48%

  • Mid Term: 1.77%

  • Long Term: 2.74%

Our chart of the historical rates can be found here.

“Anticipated” Section 457(f) Regulations

Section 457 of the tax code governs the taxation of nonqualified deferred compensation plans sponsored by tax-exempt employers. It divides plans into two categories:

  • “Eligible deferred compensation plans” that limit annual deferrals (no more than $18,000 in 2015) and that meet a variety of limitations similar to qualified plans are subject to 457(b); and
  • All other plans. These other plans are governed by section 457(f). Common names for these plans are SERPs, Capital Accumulation Accounts, and Retention Payment Plans.

NAFCU Services | Compensation and Severance Plan Rule Changes May Impact Your Credit Union

Upcoming IRS regulations may require changes to your nonqualified deferral plans and severance plans. Kirk and Jim explain more on the NAFCU Services blog.

Soft caps.

Yesterday we described how TRA 2014 would lump taxable with tax-exempt employers for deferred compensation limits. Today, the reverse is true.

Currently, certain types of publicly traded employers may deduct up to $1,000,000 of compensation paid to their CEOs and other officers. Tax-exempt employers have only "reasonableness" limits on executive compensation, and the prohibition of private inurement for certain organizations (e.g., hospitals). A deduction cap wouldn't make sense for them, because they are tax-exempt.

But TRA 2014 would provide a new incentive for tax-exempt employers to limit executive compensation. It adds an excise tax of 25% on compensation (including benefits) over $1,000,000 to any of the employers' five highest paid executives each tax year. This tax would be paid by the employer.

Paying an executive more than $1,000,000 will be expensive. The mechanisms vary between taxable and tax-exempt employers, but the overall result — a disincentive to pay more than $1,000,000 in compensation — would be the same.

Welcome to our world.

Under the recently published draft of the Tax Reform Act of 2014 (“TRA 2014”), taxable employers would learn first hand what their tax-exempt siblings have to deal with when paying their executives. Tax-exempt employers have long operated under §457(f) of the tax code, which taxes deferred compensation as soon there is no substantial risk of forfeiture. In 2005, §409A brought some of these regulations to taxable employers, along with some stiff penalties for non-compliance.

But TRA 2014 includes a new §409B that would lump taxable and tax-exempt employers together under rules similar to §457(f). Any non-qualified deferred compensation would be taxable as soon as it is not subject to a substantial risk of forfeiture. Section 409A — and its penalties — would be repealed, and §457(f) would be negated.

While TRA 2014 is only a draft with an uncertain future, it gives us an idea of what tax reform might look like, and how the deferred compensation landscape might change.

Life insurance update for state-chartered credit unions in Indiana

Good news for state-chartered credit unions in Indiana. On March 6, 2012, Indiana simplified the process for credit unions to buy life insurance to fund employee benefit plans. New Subsection (c) of Indiana Code § 28-7-1-9 provides

  • (c) Subject to any limitations or restrictions that the department or a federal regulator may impose by regulation, rule, policy, or guidance, a credit union may purchase and hold life insurance as follows:
    • (1) Life insurance purchased or held in connection with employee compensation or benefit plans approved by the credit union’s board of directors.
    • (2) Life insurance purchased or held to recover the cost of providing preretirement or postretirement employee benefits approved by the credit union’s board of directors.
    • (3) Life insurance on the lives of borrowers.
    • (4) Life insurance held as security for a loan.
    • (5) Life insurance that a federal credit union may purchase or hold under 12 C.F.R. 701.19(c).

We understand that the Credit Union Division will still require credit union boards to strictly adhere to the guidance contained in the Interagency Statement on the Purchase and Risk Management of Life Insurance that is applicable to banks and savings associations. Among other things, Indiana boards must:

  • Limit the investment to 25% of capital, unless the credit union’s board approves a higher level. Credit unions exceeding this level should expect close scrutiny on examination.
  • Review policy performance at least yearly.
  • Use vendors (brokers, consultants, agents) and insurers that have a long-term commitment to the industry.

Comparing 2011 Form 990 to 2010

The IRS 2011 Annual Report & 2012 Work Plan reports:

FY2011 marked the end of the three-year phase-in of the redesigned Form 990. [T]his means the lead-up time is over, and the redesign has begun to pay off by providing us with more information about exempt organizations. This allows us to use data analytics and build risk models that will guide our work and greatly improve our ability to support high standards of transparency and stewardship among exempt organizations.

Consistent with this statement, Form 990 for reporting 2011 activities has few changes in its compensation reporting requirements compared to 2010. Here is a comparison of the 2010 and 2011 forms.

Defined Benefit Retirement Plan

2010 Form 2011 Form
Report increases in actuarial value Report net of increases and decreases in actuarial value

W–2 Compensation

2010 Form 2011 Form
Use box 5 (Medicare wages) unless zero, in which case use box 1 (gross wages) Use the greater of box 1 or box 5

Short Deferrals

2010 Form 2011 Form
Report as deferred compensation any amount earned in a year that is not paid by the end of the year Do not report as deferred compensation any amount paid within 2½ months after end of the year

Benefit Reporting Table

2010 Form 2011 Form
Gives instructions for reporting 70 different benefits Adds instructions for reporting gift cards (as taxable compensation) and “disregarded benefits” (e.g., working condition fringe benefits) (not reported)

Governance:

Has the organization provided a copy of this Form 990 to all members of its governing body before filing the form?

2010 Form 2011 Form
Answer “yes” if the organization emailed the board a link to a password protected web site to review the form Adds:  Answer “no” if all the organization did was tell the board that the form is available upon request.