Incentive versus Compensation: What Constitutes Prohibited Payments to Board Members?

By Matthew M. Young, Esq.

It is well known that only one board officer of a federal credit union may be compensated for their duties as such and no other official is allowed to receive compensation.[1]  Many states’ regulations are very similar to the federal prohibitions, subjecting state charters to the same sort of restrictions.

Under the National Credit Union Association (NCUA) Rules and Regulations (Rules) several exceptions to this prohibition exist, including, “[p]ayment for reasonable and proper costs incurred by an official in carrying out the responsibilities of the position to which that person has been elected or appointed…includ[ing] the payment of travel costs….”  Also excepted are certain provisions for “reasonable health, accident and related types of personal insurance protection…” and certain indemnification for legally related matters.[2]

While this prohibition and its related exceptions seem straightforward enough, I am often asked for clarification about how far these exceptions extend.  Among the most common questions: Are gifts/rewards considered compensation?  And, what are deemed “reasonable and proper costs” which can be reimbursed without running afoul of the compensation prohibition?

Until most recently, the NCUA held that gifts or awards of “nominal value” to board or committee members were permissible, with emphasis placed on the notion that these gifts must be small or nominal.[3]  Of course, the nominal nature of such gifts was a subjective consideration, leaving questions about what amount may or may not be permissible.  This year, the NCUA has clarified its position regarding what it considers a nominal award, taking away the previous uncertainty of its position.  In responding to a credit union’s inquiry about the permissibility of providing a volunteer service award of $250 to board members serving 5 years, the NCUA determined such an award was nominal and thus, permissible.  In its review, the NCUA noted that such an award was “an incentive to volunteerism” rather than “compensation” prohibited by the Rules.[4]  To further clarify its position on the point it laid out exactly what dollar amount is permissible: $50 per year of service, adjustable for inflation, of course!

As it relates to the compensation exception for “reasonable and proper expenses,” board members can take advantage of benefits in certain circumstances without violating the prohibition against compensation generally.  In particular, reasonable travel expenses are reimbursable for the board volunteer so long as those expenses are incurred by the board member in order to carry out the official business of the credit union and in accordance with credit union policy.[5]  The nice part about this exception is that it allows for travel compensation for not only the board volunteer but also his or her guest, not a bad perk when having to travel to those conferences and seminars in Florida and Vegas!  However, you should be aware that there are limits to this exception.  For example, the NCUA previously advised the reimbursement for expenses such as paying for baby-sitting expenses while the director is performing credit union business and reimbursement for used vacation time to attend special credit union matters and neither “reasonable nor proper.”[6]

Matthew Young is an associate in the Credit Union Practice Group at Weltman, Weinberg & Reis Co., LPA. He can be reached at 216.739.5726 and myoung@weltman.com.
Footnotes:
[1] 12 C.F.R. 701.33 (b)(1)
[2] 12 C.F.R. 701.33 (b)(2)(i-iii)
[3] See NCUA Opinion Letter 93-0233, March 12, 1993
[4] See NCUA Opinion Letter 11-0805, August 18, 2011
[5] 12. C.F.R. 701.33 (b)(2)(i)
[6] See NCUA Opinion Letter 92-0507, June 10, 1992

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