Opinion  Selected Opinion 09-026

Date:	05/03/2010
Organization:	Division of Banks
Docket Number:	09-026

Whether a state-chartered credit union may offer a split dollar life insurance program to its executives

Robert K. Rusch
Associate General Counsel
CUNA Mutual Group
P.O. Box 391
5910 Mineral Point Road
Madison, WI 53701-0391

Dear Mr. Rusch:

This letter is in response to your correspondence with related documents of December 1, 2009 to the Division of Banks (the “Division”) on behalf of CUNA Mutual Group (“CUNA”) in which you request whether a state-chartered credit union “may offer a split dollar life insurance program to its executives.”  The provisions of General Laws chapter 171 and in particular, section 25 governing group insurance, are implicated by your request.  Your letter details a split dollar life insurance program for executives of credit unions.  You note that the Division has previously considered a split dollar life insurance arrangement involving directors.  The Division ruled in that case that the program presented to it would be a form of compensation and would therefore violate the provisions of General Laws chapter 171, section 20.  Said section 20 prohibits compensation being paid to directors of a state-chartered credit union. You now request the Division to consider the split dollar life insurance program which would be offered to executives and not directors.

Please be advised that your letter was given internal consideration by the Division during its review of proposed amendments to the Division’s regulation at 209 CMR 50.00: Parity with Federal Credit Unions (the “Parity Regulations”).  Although this letter finds that your proposal is not authorized under current statutes governing state-chartered credit unions, your proposal may fall within the authority of pending amendments to the Parity Regulations, as set forth herein at the end of the statutory analysis of your request.    

Your letter states that the specific type of split dollar life insurance offered by CUNA Mutual Group is known as Collateral Assignment Split Dollar Life Insurance (“Collateral Assignment Insurance”).  CUNA Mutual Group, as described in your letter, was formed in 1935 to serve the “insurance needs of credit unions and credit union members.” Among the wide range of products and services it provides are various executive benefit programs.

According to your letter, the Collateral Assignment Insurance contract is entered into between the executive and the credit union.  Under the contract, the credit union agrees to make a series of loans to the executive who purchases an insurance policy and, as stated by you, for efficiency purposes, to apply the loan proceeds to the premiums on that policy as they become due.  The executive executes a Promissory Note setting forth his or her obligation to repay the loans.  The executive, as the owner of the policy, may assign the policy proceeds to another party.  Under the split dollar life insurance arrangement, the executive agrees to make such assignment, giving the credit union a security interest in the policy proceeds up to the amount of any and all Collateral Assignment Insurance loans made to the executive.  In this manner the credit union is assured of getting its principal back.  The interest payments on the loans are foregone but, pursuant to tax law, the foregone amounts are treated as income to the employee and reported annually on the employee’s W-2.  The credit union pays the executive employee a bonus to cover the estimated taxes on the foregone interest.

Massachusetts General Laws chapter 171, section 25 (“Section 25”) provides, in pertinent part, that:

“A credit union may provide group life insurance, group accident and health insurance or group medical, surgical or hospital insurance or benefits or all or any combination thereof, for its employees, officers, and directors. “

In a prior opinion, the Division stated that “a credit union may only provide those insurance benefits delineated in the statute…”  Although that interpretation was based on Section 25 as it existed prior to its amendment in 2004, such opinion would nevertheless continue to be the position of the Division. Your letter acknowledges that the Collateral Assignment Insurance “does not use group insurance.” 

It appears from your letter that you argue that the insurance is not being offered by the credit union and that the credit union is only providing compensation allowing the executive to purchase the insurance on their own.   You further base your argument on the proposition that the insurance is not purchased using credit union assets. To support your position, you break the transaction into four essential parts and conclude that since none of the parts use assets of the credit union to buy insurance then the transaction is compensation, not insurance.

The Division is greatly troubled by this argument.  The Division believes that the credit union is too heavily involved in the mechanics of the program to consider that it is simply providing credit.  In the view of the Division, the totality of what the credit union is doing is providing the insurance to the executive.  Factors that the Division considered in forming this opinion included the following: (1) the credit union provides money that goes to the insurance company by way of a loan to the credit union officers for the sole purpose of buying insurance; (2) the premiums on the insurance purchased by and for officers of the credit union are paid by the credit union as part of the loan agreement; (3)  because there is no interest rate on the loan to purchase the insurance there is imputed income to the executive and the tax for which is paid by the credit union in the form of a bonus to the executive to be used for tax purposes; and (4) the credit union gets repaid for all of the funds it expends for the insurance from the death proceeds or surrender of the policy for its cash value.  In substance, the credit union is providing insurance and not simply a loan. The terminology used in your letter, as well as the provisions of the related documents submitted, all support, in the Division’s view, the conclusion that the credit union has structured a transaction to provide insurance to one or more of its operating officers.  Accordingly, it is the opinion of the Division that such product is not permissible, since the insurance being provided is not of the type permitted by Section 25 and therefore cannot be offered by the credit union. 

The Division appreciates your detailed analysis and the distinctions you made relative to a prior opinion that focused on an insurance program solely for directors.  The Division also respects the need for credit union operating officials to be fairly compensated and understands the benefits to a credit union or any organization by being able to retain effective, competent, professional management.  That is not the issue here.  As regulated entities, credit unions must live within the statutes that govern them or seek amendment to those statutes applicable to the matter at hand.  Whether during the course of an onsite examination or review of an opinion request, the Division must rule on the facts presented in light of those applicable statutes. Similar to an examination, you have broken the transaction into separate and distinct component parts.  It remains the Division’s role, as in an examination, to take those components and rate it as a composite whole.  For these reasons delineated above, the Division has concluded that the collateral assignment split dollar insurance program offered by CUNA Mutual Group is insurance and is subject to group insurance requirements for employees, officers and directors as set out in section 25 of chapter 171 of the General Laws.

This denial of your request is based upon the governing statute.  However, as you are aware, during the pendency of your request, the Division has proposed amendments to the Parity Regulations which would provide certain authorities not in statute to state-chartered credit unions that receive prior approval from the Division.  One proposed amendment would authorize approved state-chartered credit unions to provide additional types of benefits as part of employee benefit plans and would also authorize the credit unions to make investments that would otherwise be impermissible in order to fund said employee benefit plans.  The pending amendment to the regulation and your prior request had been the subject of a telephone conversion, as well subsequent e-mails from you. 

The proposed amendments to the Parity Regulations were filed with the Legislature on April 29, 2010 pursuant to General Laws chapter 171, section 6A, which requires Legislative review by the Joint Committee on Financial Services of such regulations before they become final.  Said section 6A requires that the Legislature be given 90 days for such review.  Subject to this Legislative review, the Division anticipates filing the regulations with the Secretary of State in early August, which would result in the regulations coming effective on August 20, 2010.  As of that date, state-chartered credit unions, upon submission of appropriate applications and the approval of the Division, would be authorized to engage in this activity.  To the extent that CUNA’s Collateral Assignment Insurance would fit under the pending amendment for Benefits for Employees of Credit Unions at 209 CMR 50.06(3)(f), it would be available to state-chartered credit unions which meet the eligibility requirements of the Parity Regulations, file the necessary documents and subsequently receive the approval of the Division.  A copy of the proposed amendment is enclosed.

Additionally, it remains the longstanding position of the Division not to pass upon a product or service offered or proposed to be offered by any regulated or other entity.  Accordingly, this letter, in whole or in part, does not in any way represent an endorsement of or support for the program as described in your letter.

The conclusions reached in this letter are based solely on the facts presented.  Fact patterns which vary from that presented may result in a different position statement by the Division.

Sincerely,

Joseph A. Leonard, Jr.
Deputy Commissioner of Banks and General Counsel