Blog Series: Offering Bank-Owned Life Insurance to Key Employees
Posted on 09/16/2022 at 02:41 PM by Melissa Schilling
On July 1, the most significant change to the legal landscape for Iowa banks in a generation occurred when new amendments to Iowa Code Chapter 524 became effective. For the next several weeks, Dickinson Law will cover some of the most significant changes and how they affect Iowa banks.
Community Banks throughout Iowa have not been immune to the labor shortage impacting almost every industry in the country. Rural banks, in particular, are feeling the squeeze as top talent heads to metropolitan areas. As a result, Iowa banks are looking for new ways to attract and retain talented employees. One such way is offering bank-owned life insurance (“BOLI”) to key employees.
BOLI is bank owned life insurance purchased and owned by the Bank. It is also known as key person life insurance or a cash value life insurance contract. Subject to certain limitations, Iowa Code Section 524.901 authorizes Iowa banks to purchase this type of insurance. The cash value of the BOLI from any one company cannot exceed 15% of the Bank’s aggregate capital and it cannot exceed 25% of the Bank’s aggregate capital from all insurance companies unless the superintendent approves additional amounts. The Office of Comptroller of the Currency, Board of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of Thrift Supervision have also issued an interagency statement, which provides general guidance for banks on purchasing BOLI. This guidance can be found here: https://www.occ.treas.gov/topics/supervision-and-examination/capital-markets/balance-sheet-management/boli/index-boli.html
BOLI can be an attractive benefit for both banks and employees. For example, the benefit can help banks cover the transition costs associated with the death of a key employee. For employees, their families can receive a cash benefit upon their death should the bank agree to name the employee as a shared beneficiary.*
As of March 2022, 103 of Iowa’s 256 Banks do not offer this benefit. Banks should consult their accountants and counsel, and then perhaps consider whether offering BOLI, along with other generous benefits, could provide a competitive advantage when recruiting top talent.
* There is a cost to providing this kind of insurance to an employee, otherwise known as split-dollar life insurance. The plans are complex and may be subject to the strict IRC § 409A distribution rules. In some cases, premium payments are not deductible or they are taxable to the employee.
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