Pay Attention to New Golden Parachute Rules
Review compensation plans and D&O protection.
NCUA issued new rules in June 2011 regarding “golden parachute” payments for “troubled” credit unions.
Regardless of whether your credit union falls under that definition, you should thoroughly review your executive compensation and directors and officers (D&O) liability insurance, reports Credit Union Directors Newsletter.
The agency initially developed golden parachute and indemnification rules in response to the corporate financial crisis. Originally, these rules weren’t intended to apply to natural-person credit unions.
But NCUA included all federally insured credit unions in the regulation to safeguard the National Credit Union Share Insurance Fund.
The rules, which took effect June 29, 2011, are designed to prevent executives and officers who may have contributed to a credit union’s troubled condition from receiving improper indemnification, or payments, contingent upon an executive’s termination of employment.
The new rules also clarify the distinction between disallowed golden parachute payments and legitimate severance agreements and other compensation.
Here are answers to some common questions about the new rule.
Q: When is a credit union considered “troubled” for the purposes of this rule?
A: “Troubled” means the credit union is insolvent, in conservatorship, deemed by a regulator to be in a troubled condition, or rated composite CAMEL or Corporate Risk Information System (CRIS) 4 or 5.
Q: The rule makes an exception for “bona fide” deferred compensation plans. What are they?
A: “Bona fide” refers to reasonable deferred compensation plans typical in credit union executive compensation packages.
Credit unions, as tax-exempt organizations, can’t offer equity-based incentive compensation, and NCUA recognizes that deferred compensation plans are an important tool for credit unions to attract executive talent in a competitive market.
The rule permits troubled credit unions to continue providing legitimate deferred compensation plans, including supplemental retirement benefits and nonqualified deferred compensation plans.
For example, 457(f ) accounts are allowed if a vested right to payment occurs before termination of employment or by reason of death, disability, or termination without cause. Most 457(f ) arrangements are structured to avoid the rule. Eligible 457(b) accounts are specifically excluded from the rule.
But the rule does contain limitations to these bona fide payments. Credit unions can’t accelerate vesting or make other amendments within 12 months of when they become troubled.
Q: The new rule allows “nondiscriminatory” severance plans that aren’t considered golden parachutes. What makes a plan “nondiscriminatory”?
A: To qualify as “nondiscriminatory,” a severance pay arrangement must apply to all credit union employees who meet “reasonable and customary eligibility requirements.”
The plan can have different levels of severance so long as each level covers at least 33% of all employees. A credit union can’t adopt or enhance the severance plan during the 12 months preceding the date the credit union became troubled.
Q: Are any other pre-existing benefits still allowed for executives of troubled credit unions?
A: Yes. Certain qualified pension or retirement plans under Section 401 of the Internal Revenue Code, and certain death and disability payments are allowed.
Q: Can a troubled credit union offer a golden parachute arrangement to an executive hired to help the credit union return to solvency?
A: Credit unions must have NCUA preapproval to hire and pay a golden parachute to competent management who will assist in the financial recovery efforts, or when a merger is involved.
Along with the indemnification restrictions that took effect with the golden parachute rules in 2011, NCUA is considering other aspects of executive liability and compensation. As a result, it’s critical to protect your credit union’s leadership team and board with the broadest indemnification possible.
Consult a qualified attorney to help you construct your indemnification agreements. And have the attorney review your indemnification provisions to ensure they align with the new rules.