RISING HEALTH INSURANCE PREMIUMS AND EMPLOYEE BENEFIT OBLIGATION (EBO) PREFUNDING

By Dennis Child

RISING HEALTH INSURANCE PREMIUMS AND EMPLOYEE BENEFIT OBLIGATION (EBO) PREFUNDING

By Dennis Child, Research Specialist, TCT Risk Solutions, LLC

Whether you are a small, mid-size or large credit union, health insurance coverage remains the most valued ‘benefit’ for employees and their families.  There is reason to believe that premium increases in the ACA ‘Affordable Health Care Act’ marketplace will be higher in 2017 than in recent years.  So how does a credit union pay for, or offset rising costs for health care or other benefits that employees desire, and many credit unions are legally mandated to provide?

We know that insurers across our country have already filed premium requests with state insurance departments for next year.  Among major cities in 16 states, premiums for the lowest cost silver plan is increasing by a weighted average of 9% in 2017.  Premiums vary geographically from a decrease of 14% in Providence, Rhode Island, to an increase of 27% in Nashville, Tennessee.  Hartford, Connecticut shows an increase of 13%.  (source - Kaiser Family Foundation analysis of 2017 insurer rate filings)

Fortunately, the NCUA has expanded investment opportunities to both State & Federal credit unions per code section 701.19 to potentially increase portfolio yields and thus offer relief from mounting benefit costs.  What authority does NCUA Part 701.19 provide a credit union?

Code section 701.19 investment authority states, a federal credit union investing to fund an employee benefit plan obligation is not subject to the investment limitations of the Act and part 703 or, as applicable, part 704, of this chapter and may purchase an investment that would otherwise be impermissible if the investment is directly related to the federal credit union’s obligation or potential obligation under the employee benefit plan and the federal credit union holds the investment only for as long as it has an actual or potential obligation under the employee benefit plan.  Note, state credit unions are not left out provided they have or apply for and receive ‘federal parity’.

Employee Benefit Pre-Funding Investment Strategies can help offset the following employee benefit obligations (EBO’s):

·    Health Care Expenses including Post-Retirement Benefits

·    401(k) Matching Contributions

·    Long & Short Term Disability Premiums

·    Group Life & AD&D Insurance Premiums

·    Dental & Vision Premiums

·    457(f) Non-Qualified Deferred Compensation

·    Health Savings Account Contributions

·    Education

·    Day Care

·    Pre-Paid Legal

·    Vacation

·    Scholarships

·    and more

The pre-funding of employee benefit obligations (EBO’s) assures your valued employees and their families that benefits will be there when needed.  Once current and future EBO costs are determined, a percentage of a credit unions’ tier one capital or net worth may be redirected to investments offering potentially higher yields.

What are the ‘expanded’ investment vehicle types available to Credit Unions to help offset rising EBO expenses per NCUA code section 701.19?  Note, all of NCUA code section 703 traditional credit union investments remain viable plus the following:

Actively & Passively Managed Diversified Accounts to include:

·    Equities & Bonds

·    Mutual Funds & Exchange Traded Funds (ETF’s)

·    Split-dollar, Key Person, (COLI) Corporate Owned Life Insurance

·    Variable & Fixed Annuities

When selecting from the above EBO investment options, safety and soundness concerns should be addressed by your ALCO committees to include risk tolerance, investment time horizon, desired yield and liquidity needs.  Regulators require an investment policy reflecting the credit unions stated guidelines on EBO pre-funding be in place prior to implementation of the above investment option(s).  It is prudent for a credit union to request and confirm EBO investment guidance from their respective State or Federal regulator to assure compliance. 

In closing, let’s briefly explore ‘fixed annuities’ as one of the most conservative EBO pre-funding investment options listed above.  Similar to credit union CD’s and Treasury investments, fixed annuities offer a stable, fixed rate of return that is not subject to stock market performance.  Annuities are insurance products and can only be issued by insurance companies, which like banks and credit unions, are carefully regulated by state insurance commissioners and monitored by state insurance regulators.

Fixed annuities generally offer investment yields that are modestly higher than CD’s for example, and provide much greater liquidity than their CD cousins.  Standard annual annuity liquidity options include a 10% to 15% annual withdrawal privilege without incurring a penalty.  Unknown to many investors, is that a select number of insurance companies offer fixed annuities with a 100% return of principal provision which insures full liquidity of invested principal thru entire term of contract.

It is important that credit unions implement a ‘laddered’ annuity EBO investment strategy.  Laddering of fixed annuity investments (similar to CD or Bond investment ladders) allows for the staggering of investment contract maturity dates of typically 3 to 7 years.  Laddering allows a credit union to measure and control liquidity and interest rate risk while earning a higher overall portfolio rate of return. 

To successfully launch and support an EBO investment program, credit unions should have experienced   guidance and acquire cutting edge management tools.  Please consider the following experts in their respective fields. 

To address your EBO pre-funding questions, please contact Anthony Mosel, investment professional and independent insurance broker.  Eagle, Idaho office # (208)488-0274 or email - amosel@signatorfn.com.  For questions related to all CU management tools and services please contact CUSO strategic partner - TCT Risk Solutions, LLC - Dr. Randy Thompson CEO and capable team.   Eagle office # (208)939-8366 or tctrisk.com.

EBO Pre-Funding improves a credit unions’ profitability and is a prudent and proven investment strategy when used as described and approved by NCUA.

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About the Author
Dennis Child

Dennis Child is a 40 year veteran credit union CEO recently retired. He has been associated with TCT for 25 years. Today, Dennis enjoys providing solutions and training for credit union managers. He also uses his financial credentials and advisory skills to assist the Boomer generation plan and prepare for their retirement years. He and his wife, Geri, live in Logan, Utah. Dennis can be reached at dennis@tctconsult.com.