ALEXANDRIA, Va. — NCUA recently said that federally-chartered credit unions are allowed to invest in impermissible investments to fund an actual or potential employee benefit plan obligation within limits.
In a Dec. 15, 2006 opinion letter, NCUA responded to a query on whether FCUs may use multiple investment vehicles to fund multiple, potential obligations where only one obligation, to the exclusion of the others, will result in a paid benefit. NCUA said “this investment strategy, where some investments are made but ultimately may not be needed to pay an employee benefit plan obligation, is permissible if an FCU can support the cost effectiveness of this strategy and manages the investments, including periodic divestiture to avoid over funding, so the investments are directly related to its obligations.”
An FCU may purchase an otherwise impermissible investment if it is directly related to the FCU’s obligation or potential obligation under an employee benefit plan and the FCU holds the investment only for as long as the FCU has an actual or potential obligation under the plan, wrote NCUA Associate General Counsel Sheila Albin.
The FCU asking for clarification had adopted an employee benefit plan for one of its employees that provided a benefit under retirement, death or disability. The plan calls for only one of these events, to the exclusion of the others, to result in a benefit being paid. To fund the plan, the FCU established an irrevocable grantor trust for the age-based retirement benefit, purchased a term life policy for the death benefit, and established an investment portfolio for the disability benefit after determining a disability insurance policy was not cost effective.