08-04

08-4

December 10, 2008

VIA TELEFACSIMILE AND FIRST CLASS MAIL

Joseph A. McDonald
Law Offices of Joseph A. McDonald
1317 West Foothill Boulevard, Suite 146
Upland, CA 91786

Re:      Split Dollar Life Insurance Plans

Dear Mr. McDonald:

This responds to your letter of September 26, 2008. I apologize for the delay in addressing your request. You have asked whether Financial Code Section 15050 prohibits a credit union from offering split dollar life insurance plans to its executive officers. For the reasons stated below, we believe the answer is no.

As stated in your letter:

“Split dollar life insurance is typically part of a Supplementary Executive Retirement Plan. The credit union advances insurance premiums as loans to the executive; the parties expect the loans will be repaid from insurance proceeds, in which the executive assigns a collateral interest to the credit union. The life insurance funds retirement benefits. Thus, the parties split the dollars of the plan.

* * *

“In a split-dollar life insurance plan, the executive is the policy owner. The credit union advances the premiums, secured by the executive’s collateral assignment of a corresponding interest in the insurance proceeds. Upon the executive’s death, the insurance proceeds repay advanced premiums. If he dies before retirement, the balance goes to his life insurance beneficiaries. Otherwise, during his retirement, the plan pays scheduled benefits to him; at his death, an amount is deducted from the insurance proceeds corresponding to the plan benefits distributed to him; and the balance, if any, goes to his beneficiaries.

“The premiums are advanced as loans to the executive. Typically, they bear low or no interest. Federal tax laws thus imputes to the executive, as income, either the applicable Federal interest rates, or the difference between that and the plan rate, and upon this imputed income is paid tax, by the executive, by the credit union as part of the compensation, or both.

“The executive is liable for these loans, and is personally at risk. For instance, if dismissed with cause, the executive would have to repay them. This on the one hand protects the credit union, e.g. in the event of misconduct by the executive, and on the other hand protects the executive, to whom the advances could be recognized as income if not made and treated as loans in compliance with taxation requirements.

“Should the paid-up value of the insurance rise to a sum against which the executive may borrow (i.e., a further benefit to him), the plan provides that he cannot do so to any extent jeopardizing the credit union’s security interest in the insurance proceeds.

“The credit union can defer accrual of its insurance-premium payments until the executive retires, which it may find financially advantageous. The executive does not have taxable income from the plan until he retires; and then only as he receives it, which is more favorable to him than a lump-sum effect of some other plans (e.g., under Internal Revenue Code Section 457).”

Financial Code Section 15050 governs obligations between directors, officers, members of the supervisory committee or members of the credit committee of a credit union (collectively referred to as “Insiders”) and that credit union. A close reading of Section 15050 reveals that one of its major tenets is to prevent Insiders from obtaining credit union loans products at a discount from what would otherwise be paid by members of the credit union. (See Section 15050(b).) Moreover, the law prevents one or more employees of the credit union from obtaining credit from the credit union at rates and terms better than those offered to other employees. (See Section 15050(e).) 

As described above, a split dollar life insurance plan is not created with the intent of establishing a standard creditor-debtor relationship between a credit union and its executive officer. In other words, the credit union is not making a loan to the executive officer for the purpose of buying an item or service. Rather, the insurance plan is intended as a retirement benefit for the executive officer. The plan is structured as a secured loan primarily as a method of deferring taxable income to the executive. Thus, the structure of such plans is not to purchase an insurance contract with loaned money, but to provide a compensation benefit that avoids taxation during the executive’s primary earning years while protecting the credit union from the loss should that executive die before retirement. Finally, we note that a split dollar life insurance plan is not a traditional credit union product such as a residential mortgage loan, home equity line of credit, or personal loan, all of which are available to members of the credit union.

In sum, a split-dollar life insurance plan: (1) is not a traditional credit union product offered by the credit union to its members; (2) is intended as a retirement benefit due to the executive officer’s employment; (3) does not create a “standard” debtor-creditor relationship between a credit union and its executive officer; and, (4) does not represent a transaction that provides the executive officer with a discount as compared to what any other member of the credit union would pay for the same or similar product. As we believe that Section 15050 was primarily designed to keep Insiders from receiving traditional credit union products at a discount, and since that rationale does not apply to the four elements of a split-dollar policy discussed above, we conclude that Section 15050 does not apply to split dollar life insurance plans.

Please be advised that the opinions and conclusions contained in this letter are based upon the representations in your letter and attachments. Any changes to the facts set forth in your letter may result in a different conclusion on the part of the Department.

If you have any questions regarding this matter, please feel free to contact me at (916) 322-1570.

Very truly yours,

KENNETH SAYRE-PETERSON
Acting General Counsel

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