What Your Attorney & Auditor Wish You Knew About Executive Benefits..

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1 What Your Attorney & Auditor Wish You Knew About Executive Benefits.. Attracting Quality Developing Loyalty Embracing Leadership 1255 West 15th Street, Suite 830; Plano, TX /

2 About Maria Kell Maria Kell worked for 25+years at financial institutions ranging from DeNovo to $11 Billion in assets. Her expertise in Mergers and Acquisitions, Audit, Lending, Credit, Accounting and Retail Banking gives her a broad, holistic perspective, enabling her to provide innovative solutions to her clients needs. Why Maria Kell? 25+ Years Experience Risk Management Solutions Expert Trusted Advisor Dedicated to Service Maria has also spent over ten years designing and implementing Executive Incentive Compensation plans for a diverse group of lines of business and organizations. As an executive at a $1.3 billion dollar credit union, she also created and managed Sales and Incentive Compensation for eight years. Maria advises organizations on qualified and non-qualified benefits as well as Corporate-Owned Life Insurance (COLI). Maria earned a Bachelor of Science degree from Texas A&M University and is a CERTIFIED FINANCIAL PLANNER. Why BCC? Long-term Relationships Anticipates Clients Needs Educates Clients Seeks Creative Strategies Value-Centered Focus A core group of professionals with more than 250 years combined experience assisting over 600 financial institutions nationwide, BCC helps clients achieve their financial goals and enhance member value.

3 About Kelly Earls As a founder of BCC, Kelly brings to his clients a high level of solution-based knowledge derived from his degrees in accounting, business and law. With such expertise, he has advised hundreds of financial institutions on executive and director benefits, including effective nonqualified executive compensation plans. In addition, he educates institutions on the appropriate uses of Corporate- Owned Life Insurance (COLI) to help offset nonqualified benefit plan expenses. Why Kelly Earls? 19 Years Experience in Benefits JD & CPA High Integrity Trusted Advisor & Resource Client-Centered Approach Why BCC? Long-Term Relationships Anticipates Clients Needs Educates Clients Seeks Creative Strategies Value-Centered Focus Kelly also works with clients to provide ongoing regulatory support for any planning the credit union is currently considering or has implemented. He will visit with regulators to gain approval and answer questions they may have regarding the plans and fund vehicles the credit union may be using. Kelly received a bachelor s degree in accounting, a master s degree and a law degree from Texas Tech University. He holds both his CPA license and law license in the State of Texas. A core group of professionals with more than 250 years combined experience assisting over 600 financial institutions nationwide, BCC helps clients achieve their financial goals and enhance member value.

4 About Robert Flowers Robert has more than ten years of experience in the design, implementation and administration of tax qualified and non-qualified retirement and compensation arrangements, including significant experience with arrangements subject to Code section 409A. Robert's practice focuses on the corporate and regulatory representation of credit unions and other financial institutions. He advises financial institution clients on ERISA, tax and corporate law requirements concerning employee benefit and employee compensation matters. Why Robert Flowers? 10+ Years Experience Executive Benefit Design Expert High Integrity Trusted Advisor JD

5 Business Compensation Consulting Offering programs that are competitive is key to attracting and retaining officers and executives. Business Compensation Consulting (BCC) specializes in assisting financial institutions with the evaluation of their compensation programs. With BCC s help, businesses identify deficiencies in their current programs and create customized plans to fill these gaps. BCC s team of consultants and service personnel have over 25 years of experience, working with more than 600 businesses nationwide. They assist their clients with achieving their financial goals and enhancing member value. BCC has developed strategic relationships with highly-rated insurance carriers and national accounting and law firms that specialize in Corporate-Owned Life Insurance (COLI) and benefit plans.

6 Capabilities, Products & Services Compensation Consulting Executive Benefits Director Benefits Benefit Expense Offset/COLI Administrative Services

7 Compensation Philosophy Who is most valuable? Who is your competition? What is your succession plan? How do you attract, reward, & retain staff?

8 Compensation Regulatory Guidance NCUA Examiner s Guide pg Policies & Practices a. Defined b. Performance Standards c. Performance Evaluation Reasonableness a. Responsibilities b. Size c. Location d. Circumstances (financial health & profitability)

9 Executive Benefit Plans Deferred Cash Plans 457(b) & 457(f) Plans Split Dollar Plans

10 Collateral Assignment Split Dollar Executive is owner of insurance policy Credit Union makes loans to Executive for premium 1 payments Executive assigns policy to Credit Union as collateral for loan Executive borrows from policy to supplement income during retirement Loan is repaid from policy s death benefits 1 Non-Preferential Loans (NCUA OGC Op )

11 Split Dollar Loan Arrangements Below Market At Market Interest Rate Short-Term AFR Long-Term AFR Loan Repayment Can be any time Greater than 9 years Loan Type Demand Term Recourse Yes No Imputed Interest Executive Responsible None Risk Variable Rate Policy Performance

12 Funding Benefit Plans Mutual Funds Annuities Corporate-Owned Life Insurance (COLI)

13 OCC Interagency Statement Effective & ongoing senior management oversight Establishing COLI policies & procedures Pre-purchase analysis of risks & rewards Post-purchase risk assessment Annual risk assessment & management review Does it apply you?

14 Code Section 409A Primer Why do we have 409A? To what does 409A apply? General overview of 409A requirements

15 Why Code Section 409A? Scattered tax law & doctrines Enron Gather various rulings & doctrines into one place Codify case law & IRS rulings into one place Address impact of deferred compensation on failing companies Eliminate another run for the money event

16 To what does Code Section 409A apply? Deferred Compensation Legally binding right today to compensation received in a later year Deferred compensation exists even if the right to receive the payment is subject to a condition or a risk of forfeiture No deferred compensation if the right to receive the payment may be unilaterally reduced or eliminated by the employer

17 What is Deferred Compensation? Traditional deferred compensation elective deferred compensation, Salary Continuation Agreements, Executive Supplemental Retirement Plans, etc. Incentive Pay Agreements Settlement Agreements Employment Agreements Change in Control Agreements Stay-Put or Stay-Pay bonuses

18 What is NOT Deferred Compensation? Short-term Deferrals 2½ months Separation Pay Agreements (Employment Agreements that meet certain requirements) Welfare Plans Qualified retirement plans (401(k), ESOPs, profit sharing, etc.)

19 Key Concepts of Code Section 409A Written Document Election Timing Elections to defer compensation Elections on time & form of payment Payment Timing Limits payment of deferred compensation to six identifiable events Eliminates former in-service distributions with hair cut provisions Acceleration of payment generally prohibited

20 Deferral Elections Must be made by December 31 st of prior year Once made, with very few exceptions, elections are irrevocable for the tax year Changes (start, stop, increase, or decrease) are generally not effective until the beginning of the next tax year Exception is unforeseeable emergency (financial hardship)

21 Payment Elections Unless set forth in the agreement, elections as to time & form of payment must be made at the outset Once made (or if set forth in the agreement), no changes to time and form of payment unless the change meets very strict requirements Election must be made at least 12 months before the payment is to begin (except for payments upon death, disability, change of control or termination of employment) Election cannot be effective for 12 months (if ineffective, original election or form and time applies election to change is void) Must defer receipt of payment for at least 60 months from the time it would otherwise have been paid (except for payments upon death, disability or unforeseeable emergency)

22 Six Permissible Payment Events Specified date (not a specified event) Separation from service Death Disability Change of control Unforeseeable emergency

23 Changes to Payout Terms Generally no acceleration of payment date (you can accelerate vesting) Generally no delay of payment Short-term delays Administrative impracticability Employer insolvency Disputed amounts Loan covenants and other

24 Failure to Comply with Code Section 409A Income Taxes Penalties Acceleration of income taxation event for employee May owe taxes with no cash to pay the taxes (except cash 20% excise tax on amount included in taxable income Additional interest assessment

25 Code Section 457(f) Applies to credit union deferred compensation plans Must comply with 409A requirements discussed previously Accrued amounts are immediately taxable when vesting is attained, regardless of whether the amounts are distributed The credit union must meet it s obligation to payout the promised benefit amount regardless of the performance of the underlying asset

26 Use of Consultants NCUA Examiner s Use of Consultants page 7.25 & 26 Vendors that provide services at no cost to the credit union Responsibilities of Consultants vs Credit Union

27 Regulatory Guidance National Credit Union Administration 12 C.F.R Benefits for Employees of Federal Credit Unions 12 C.F.R Investment Policies Examiner s Guide pg Executive Compensation Examiner s Guide pg Director s Conduct OGC Op (02/27/04) Funding Employee Benefits OGC Op (11/24/04) Cost Recovery with Life Insurance OGC Op (01/13/05) Split Dollar Life Insurance OGC Op (12/01/06) Funding Employee Benefit Plan Obligations Under OGC Op (01/19/07) Non-Preferential Loans Supervisory Letter (10/07) Evaluating Third party Relationships NCUA Call Report Form & Instructions NCUA Risk-Based Capital Proposal Interagency Guidelines OCC Interagency Statement Purchase & Risk Management of Life Insurance OCC Interagency Statement Deferred Compensation Agreement Accounting

28 Regulatory Guidance State of Texas Credit Union Department Permitted Investments RB Guidance on Investing to Fund and Employee Benefit Plan Obligation Directors Internal Revenue Code IRC Section 457 (b) & (f) Deferred Compensation Plans IRC Section 7872 Split Dollar Loans IRC Service Notice Tax Treatment of Collateral Assignments IRC Section 7872(e)(2) IRS Blended Rate Financial Accounting Standards Board ASC 715 Compensation Retirement Benefits FASB Technical Bulletin No Accounting for Purchase of Life Insurance

29 Questions? Maria Kell, CFP Cell Kelly Earls, CPA, JD , ext 100 Robert Flowers, JD