Nonqualified deferred compensation for federal credit unions

[7806akp]

I have read earlier posts regarding the possible inapplicability of Code section 457(f) to federal credit unions, and these earlier posts seem to suggest that no nonqualified deferred compensation plan can be maintained (under any section of the Code) by federal credit unions. Regardless of whether section 457(f) applies, shouldn't a federal credit union be able to maintain a deferred comp plan subject to Code section 409A? If 457(f) does not apply, does that mean no deferred comp plan may be offered? Is there any section of the Code that anyone can provide that indicates a federal employer cannot provide a nonqualified deferred comp plan?

[Mark Whitelaw]

I’ll let the legal members address if you “could”. I’ll comment from a value – math perspective if you “should”.

For most … healthy individuals earning $50,000+ and performing “white-collar” roles in the workplace … NQDC / 409A does not make economic sense ... for the individual or their employer.

As you may be aware, institutionally priced life insurance (ILI) is the more popular cash management product used for COLI / BOLI funding of NQDC … an investment alternative utilizing the “life insurance” pricing and tax structure designed around those expected to live the longest … not a “protection” driven product.

You may not be aware that in 2002 we crossed a value line. Upper income white-collar individuals were living so long, driving ILI costs so low, that the ILI product evolved into a more efficient lifetime cash management value than the NQDC plan it was informally funding … more effective for the individual to personally own and manage the ILI policy as a personal investment or Roth alternative container.

The “math” that makes this a financial reality is similar to shopping at a member warehouse club. Assume you are trying to equal the value of a 401(k). The ILI separate account fees typically are about 35%-65% less than their mutual fund counterparts in a 40(k), Roth, rollover IRA, brokerage account, etc. Those discounts exceed the ILI insurance costs … the total costs are less than investing in mutual funds in other financial structures. (A+B) < C

The result is comparable or greater personal value from day one (ILI cash surrender values start at 100% of contribution), personally owned lifelong asset, greater cash management options than tax qualified plans and supplemental life insurance protection with $0 added cost … less you need to go out and “buy” to protect your family. And for the employer, no costs, liabilities or administrative responsibilities … simply validate the individual’s employment, compensation and role for ILI risk pool qualification. The employer is not acting in a “sponsor” role … merely validating individual employment as they do every day for car loans, mortgages, etc.

Superior personal financial value today is driven by individual career achievement … not where you work.

Following is a link to our piece on the evolution of longevity driven total cash management … not intended as promotion of our ILI administration firm, but education of the “Economics of Longevity”.

http://www.valleyviewconsultants.com/Overv...0Management.pdf

And as medical science continues to extend longevity ... the ILI value increases for the ILI risk pool participants.

For those that have made the career and life choices to qualify for the ILI risk pool … high tax rates and qualified plan caps are … irrelevant. That’s simply today’s “math”.

Take care - Mark