June 13, 2005
Dear [ ]:
Your letter of February 17, 2005 has been referred to me for review and response. Let me begin by apologizing for the delay in responding to your letter. Your letter asks clarification of whether the New York Banking Law (the Banking Law") would bar a New York State chartered credit union from funding a deferred compensation plan (the "Plan") through the purchase of an insurance, annuity or mutual fund product. The Plan would benefit only a portion of the employees of the credit union.
By way of background, I had previously opined that Section 477(1) of the Banking Law would bar a credit union from offering a discriminatory pension plan that benefited only a portion of the employees of the credit union. Section 477(1) provides in relevant part that a credit union may provide pensions to employees pursuant to a nondiscriminatory plan. I previously opined that any pension plan available only to a portion of a credit union's employees would violate this restriction.
In your letter and subsequent e-mail dated March 28, 2005, you have indicated that in fact the Plan is not a pension plan but rather a deferred compensation plan. As I understand it, compensation otherwise payable to an employee is deferred by the employee under the Plan. It is then invested by the credit union in "an insurance, annuity or mutual fund product" and subsequently paid to the employee. This Plan is designed to provide compensation for continued service over a fixed period of time, and the timing of payment of such compensation is not tied to retirement or other termination of service. In my opinion, this type of plan is not a pension plan and, therefore, it would not be barred by Section 477(1).
To ensure that such plans are consistent with the Banking Law, I recommend that any credit union establishing a Plan have on file an opinion of its outside counsel to the effect that the Plan is a deferred compensation Plan and not a pension plan.
Your letter also asks whether credit unions investing in such plans are permitted to invest these monies in investments not otherwise permissible for credit unions under the Banking Law. You note in this regard that this approach is permitted by the National Credit Union Administration for federal credit unions. (See NCUA Regulations, Part 701.19(c).) As noted above, the deferred compensation contributed to the Plan is typically invested in an insurance product, annuity or mutual fund product.
This appears to be a question of first impression for the Department. While I see the merit of consistency with NCUA regulations, I do not see how we can avoid the requirements of the Banking Law in this regard. Specifically, it is my opinion that if the credit union remains responsible for any loses on the funds contributed to the deferred compensation plan or would be obligated to ensure a specific return on the funds for the employees covered by the Plan, there is no reason in my opinion not to limit the investments to those permissible for credit unions under the Banking Law. This is because the credit union is responsible for any loss as it would on any other monies invested by it.
However, if the risk of loss on the monies contributed to the deferred compensation plan by the credit union is to be borne entirely by the employee-beneficiaries of the credit union, then in my view the monies are no different than salaries paid to and used as determined by the employee. Such monies may be invested by the credit union without following the guidelines set forth in the Banking Law. Of course, such investments should be made on a prudent basis, after the exercise of appropriate due diligence so as to minimize any possible claims by the beneficiaries of the deferred compensation plan.
I trust this will be helpful. If you have any questions, please do not hesitate to contact me.
Very truly yours,
Gene C. Brooks