ALEXANDRIA, Va. – NCUA recently clarified which categories fall under deferred compensation as they relate to involuntary liquidations. At issue was a request from Lawrence G. Gallagher, a Chicago-based attorney, who sought clarification on payout priority of deferred compensation claims in involuntary liquidations. Gallagher asked if deferred compensation constitutes "wages and salaries" as that term is used in NCUA's regulation regarding payment priorities in involuntary liquidations. In a Nov. 18 opinion letter, NCUA said deferred compensation is not "wages and salaries" but is in the same payment category with general creditors. NCUA said it has the authority to place FCUs and FISCUs into liquidation and as the liquidating agent for an insolvent, federally-insured CU, it succeeds to all rights, titles, powers and privileges of the credit union by operation of law. "The FCU Act specifically provides for NCUA as liquidating agent to determine claims against the credit union, prescribe by regulation procedures for the determination of claims, and make a distribution of credit union assets," wrote Sheila Albin, NCUA Associate General Counsel. NCUA's obligation to pay insured deposits exists under legal authority that is separate and apart from its role as liquidating agent, Albin wrote. When paying creditor claims in an involuntary liquidation, NCUA as liquidating agent adheres to payout priorities established by regulation, which parallels the FDIC's regulations, Albin pointed out. Unsecured claims against the liquidation estate are prioritized in nine categories, Albin wrote. The first four categories cover administrative costs and expenses of the liquidation; wages and salaries, including vacation, severance, and sick leave pay; taxes due and owing; and debts due and owing to the United States, including NCUA. The fifth category is for general creditors and secured creditors to the extent their respective claims exceed the value of their security for those claims. The sixth through ninth categories cover claims of owners of capital and the NCUSIF. Albin wrote that Gallagher was particularly interested in which category claims for employee deferred compensation would fall. "For purposes of this discussion, "deferred compensation" generally refers to a promise made by an employer to make remunerative payment(s) to an employee in a subsequent or ensuing taxable year of the employee, regardless of whether the employee's rights to that payment are vested or nonvested," Albin said. Claims for employee deferred compensation fall into the fifth category for general creditors and secured creditors to the extent their respective claims exceed the value of their security, she wrote. Employee deferred compensation does not fall into the second category, which includes claims for wages and salaries, including vacation, severance, and sick leave pay. "NCUA's long standing view is that the second category pertains only to current wages and salaries, and does not include deferred compensation," Albin emphasized. Interestingly, Gallagher is the same attorney that represented a FCU wanting to establish a non-qualified deferred compensation plan and sought guidance from the IRS on whether Section 457 of the Internal Revenue Code applied to such a plan. In an April 2004 private letter the IRS determined that the FCU was a "federal governmental instrumentality" and, therefore, was not an eligible employer and could not offer a Section 457 plan. [email protected]

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