Murphy’s law says that anything that can gowrong, will. Recently, some have applied Murphy’s law to what’sknown as a collateral assignment split dollar supplementalretirement plan. Having helped credit unions nationwide establishCASD SERPs, I think the recent critiques are extreme and misleadingand that a more balanced picture is needed.

In a CASD SERP, a life insurance policy is purchased by a creditunion executive and his employer pays the premiums. Those premiumpayments are treated as loans to the executive. The executive signsa note for the premium advances, but repayment will almost alwayscome from the policy death benefit, on which the credit union holdsa lien, so that the credit union incurs little or no out-of-pocketcost in providing the retirement benefit. Upon retirement, theexecutive borrows against the policy’s cash value an annual amountthat is projected at the outset, but ultimately is determined bythe investment performance of the insurer.

Because CASD SERP benefits take the form of policy loans, theyare nontaxable to the executive, so a CASD SERP benefit goes 30% to45% further in after-tax purchasing power than other types ofretirement benefits of the same amount.

Critics say yes, if all goes according to plan, CASD SERPs workvery well but then ask what happens if various potential problemsoccur. Let’s look at some of the more frequently cited risks ofCASD SERPs and assess from experience their likelihood and ways tomitigate the supposed harm:

The life insurance policy doesn’t achieve the investmentresults forecast. As with any retirement investment, poorperformance is bad news. In our experience, however, CASD SERPs areless vulnerable than other types of SERPs to investment risksbecause CASD SERPs almost always include guaranteed minimuminvestment returns, backstopped by the insurer’s own substantialcapital, providing protection against market volatility, and, as apractical matter, the investment expertise and diversification ofmajor life insurance companies will outperform the stock and­fund-picking skills of individual credit unions. Indeed, many ofour clients’ CASD SERPs have enjoyed returns above 8% in recentyears.

Something causes the CASD SERP to terminateprematurely. One critique against CASD SERPs is that theycan crash and burn financially if the covered executive’semployment ends prematurely, before their benefits are fully vestedor before the accumulated policy cash value equals total premiumspaid. If managed properly, a CASD SERP will weather a ­prematureemployment termination with no loss to the credit union or theexecutive except for the executive’s loss of unvested benefits. Ifthe executive’s employment ends prematurely, different scenarioscan result, as described below.

Executive dies before retirement. In this case,the CASD SERP will pay the executive’s designated beneficiary aspecified death benefit and the credit union will be repaid allpremiums paid, often plus an additional key man death payment.There are no financial complications here and the SERP simplyends.

Executive is fired for defined cause. In thisrare scenario, a CASD SERP will typically deny the executive allvested benefits and make the credit union the sole owner of thepolicy. The credit union will have several options, including earlypolicy surrender, retention/continued funding of the policy untilcash surrender value exceeds premium investment or reuse of thepolicy for another key employee. None of these scenarios shouldcause the credit union any financial loss.

Executive’s employment ends early for otherreasons. Here, the consequences will depend upon the termsof the plan but usually will involve splitting the CASD SERP, wherethe executive receives a policy equal to their vested benefit andthe credit union gets a policy for the rest. If the executive wasfired without cause, the credit union usually will be ­required topay the executive’s vested percentage of all future remainingpremiums, but if the executive quits early, the credit union oftenwill have no further obligation to pay premiums but might choose todo so as a favorable investment and best way of ensuring eventualrepayment of all its premium payments without the need to pursuethe executive on their note. How an early employment terminationaffects the executive and the credit union will vary based upon thespecific facts, but in our experience all involved parties willcooperate to avoid any financial loss, other than the unavoidablecost to the executive of losing future, unvested benefits.

Accounting issues. If a CASD SERP is designed(as most now are) to include both recourse, interest-bearingpromissory notes from the executive and an automatic accelerationof any premium payments coming due after the executive retires,there should be no adverse accounting effects of a CASDSERP.

CASD SERPs are available to all federal credit unions withoutprior regulatory approval and to most state charters, whetherautomatically under parity powers or in other cases with priornotice to, or application to and approval by, the regulator. In allcases, a CASD SERP is subject to ongoing safety and soundnessregulatory oversight, requiring credit union board due diligence inselecting the insurance company, properly sizing the premium costand benefits and monitoring the ongoing investment performance ofthe SERP.

Steven Eimert is a partner and chair of the credit unionpractice at Sherin and Lodgen LLP.

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