Health Care Costs Are Part of Early Retirement Decision
Of the 30 employees at Autotruck Federal Credit Union, several of them have been working there at for least 25 years.
With 42 years of the service, Huston Reinle, president/CEO of the $84 million cooperative in Louisville, Ky., is among those who have been there the longest. Earlier this year, Reinle had a discussion with his board of directors about possibly coming up with a way to recognize those long-term staffers.
“One of things we discovered after talking with the employees facing retirement was how were they going to pay for health insurance,” Reinle recalled. “Our board was looking at what we could do that would not break the credit union and help those facing retirement.”
The solution came after talking with Andy Sheeter, founder and president of The Sheeter Group LLC, during the CUNA’s Governmental Affairs Conference in February. The Windermere, Fla.-based firm designs qualified and nonqualified benefit plans exclusively for credit unions.
Sheeter is in the final stage of putting in place a business-owned life insurance policy that will fund Autotruck FCU’s post-retirement health care plan for its long-time employees. Generally speaking, the way the policy works is a financial institution sets up the contract with a company that specializes in BOLIs and then makes payments into a specialized fund set aside as the insurance trust, according to Investopedia.
All employee benefits that need to be paid to particular employees covered under the plan are paid out from this fund. Through the BOLI, all premiums paid into the fund, as well as all capital appreciation, are tax free for the financial institution.
A BOLI can create an immediate positive yield for credit unions, Sheeter said. By taking money sitting in federal funds, for example, they can move that money into the policy and potentially earn between 4% and 5% in terms of a first-year yield. The shift could significantly increase their interest income, he added.
Employees at Autotruck who have at least 30 years of service, are 60 years old and have elected to retire at that age, are eligible to participate in BOLI, Reinle said. The credit union will provide health insurance for them for five years by paying for a single plan based on 2011’s costs plus a 7% inflation factor. Meaning, if an eligible employee were to retire today, Autotruck would reimburse them for what the credit union is paying now with an additional up to 7% for subsequent years.
Reinle said while it is normally impermissible for credit unions to invest in life insurance, if it is being used to offset income expenses, the NCUA has made an allowance for that exception. Essentially, a BOLI is used to help cover benefit costs, he noted. Sheeter said a BOLI must also meet other regulatory and accounting requirements that a credit union may not be aware of as they structure their plans.
“The economy has not been the best over the last four to five years,” Reinle said. “401k plans have deteriorated and people who thought they were going to retire have had to postpone that. We wanted to offer some level of comfort to the employees without putting the credit union at risk.”
Reinle uses himself as an example to provide further explanation. He said he will turn 63 this year. He’s not planning to retire until 2013, but if he were to move that date up, Autotruck would provide health insurance until he reached 65, the age when Medicare eligibility kicks in.
He pointed out that those who meet the BOLI requirements would still have to comply with Consolidated Omnibus Budget Reconciliation Act guidelines and that the credit union would pay those costs. COBRA gives workers who lose their health benefits the right to choose to continue those benefits provided by their group health plan for limited periods of time under certain circumstances such as voluntary or involuntary job loss, reduction in the hours worked, transition between jobs, death, divorce, and other life events, according to the Department of Labor.
Sheeter said BOLI has been around since at least the early 1980s and was originally created for community banks. He speculated that credit unions only started using the life insurance policies around 2001 simply because there were not that many companies offering executive benefit plans to the industry. Thirty-three credit unions have a BOLI in place through The Sheeter Group.
“One of the biggest things we’ve noticed, especially at the CEO level, is some of them want to retire before the age of 65,” Sheeter said. “A lot of them want to go out by 60 or 62 but one of the things hanging over their head is paying for health care.”