Group Seeks Clarity for Credit Unions Under Deferred Comp Rules

On behalf of the National Association of Federal Credit Unions (NAFCU), the only national trade association focusing exclusively on federal issues affecting the nation's federally-insured credit unions, I am writing in regards to the Internal Revenue Service (IRS) proposal on deferred compensation plans of tax-exempt entities, which includes many credit unions. 81 FR 120 (June 20, 2016). NAFCU appreciates the IRS's effort to provide credit unions with much-needed additional formal guidance addressing Section 457(f) plans. However, while the proposed rule includes a number of positive components, NAFCU believes the IRS should pursue a final rule that guarantees credit unions can continue to maintain and offer deferred compensation plans. As a result, NAFCU recommends the IRS clarify whether pre-implementation deferred compensation plans would be grandfathered under the proposed rule, and set an implementation date that allows credit unions enough time to develop compliant systems.

General Comments

NAFCU strongly believes credit unions should have the ability to maintain and offer deferred compensation plans under Section 457(f). Credit unions are typically limited in their ability to offer competitive compensation packages to executives and senior staff members due to regulatory requirements and finite resources. As a result, deferred compensation plans under Section 457(f) are of significant importance to credit unions as they attempt to attract and retain the best executives and managers. While NAFCU is appreciative of the IRS's current draft of this proposed rule, which includes a number of concessions sought by the credit union industry, we offer the following additional recommendations that would ensure Section 457(f) plans remain a viable option as credit unions develop fair and attractive compensation packages for their employees.

Grandfathered Deferrals

The proposed rule's impact on deferrals that occur prior to the effective date is unclear. In fact, a number of law firms have expressed differing interpretations of this section. For example, while some tax attorneys believe that deferrals prior to the effective date are subject to the new rules, others have stated that a deferral made prior to the effective date of the new rule shall be subject to the "old rules" in effect at the time the deferral was made. NAFCU recommends the IRS address these differing viewpoints by amending its proposal to provide a clear standard for the treatment of pre-implementation deferrals. It may even be beneficial for the IRS to provide credit unions with examples of the interplay between the old regulations and new regulation in these situations.

Implementation Date

Credit unions have been offering Section 457(f) deferred compensation plans under the current regulatory regime for over ten years. Under the proposal, the new regulatory requirements would be slated to take effect on January 1st of the year following the final rule's issuance by the IRS. However, it is important that credit unions are given enough time to fully evaluate and modify their existing plans in order to comply with the new rules. In addition to any internal approval process, credit unions will need time to develop materials to communicate any planned changes to their employees. For this reason, NAFCU recommends that the IRS finalize the rule in the first quarter of 2017 in order to provide credit unions with, at minimum, nine months until the rules go into effect. However, the IRS should consider adopting an extended implementation period -- specifically, an implementation set for two years after finalization would be an appropriate period of time for credit unions to adjust their deferred compensation plans.

Conclusion

NAFCU appreciates the opportunity to provide our comments on the proposed rules related to Section 457(f) deferred compensation plans of tax-exempt entities. If you have any questions or concerns, please do not hesitate to contact me at amonterrubio@nafcu.org or (703) 842-2244.