Washington DFI Issues Guidance on State Credit Union Investments in Employee Benefit Trusts

An interpretive letter released recently by the Washington State Department of Financial Institutions (DFI) concluded that state-chartered credit unions may make certain investments that are otherwise impermissible as long as they are for the express purpose of funding employee benefit obligations.

DCU Interpretive Letter I-13-02 creates parity in this area between state and federal credit unions, giving both the same investment latitude in funding employee benefit obligations through an employee benefit trust.

Federal credit unions are bound by three specific limitations to this investment power that now also apply to state-chartered credit unions exercising the parity provision.

First, the investment must be for the purpose of funding “an employee benefit plan” obligation. The National Credit Union Administration (NCUA) regulation provides that the phrase “employee benefit plan” has the same meaning as set forth in the Employment Retirement Income Security Act (ERISA), which includes plans that are employee welfare benefit plans or employee pension benefit plans.

Second, the investment must be “directly related to” the credit union’s obligation or potential obligation—and the credit union must be able to explicitly demonstrate that relationship.

Third, the credit union may hold the investment only for the period during which it has an actual or potential obligation under the plan the investments are intended to fund. For example, a credit union has been holding an investment for the purpose of funding retirement benefits for a particular employee, the employee retires, and the obligation is paid, the credit union must divest of the investment unless it has incurred additional employee benefit obligations that would replace the original and take its place directly related to the investment in question.

For ease of administration and to effectively segregate employee benefit plan investments from investments made on the credit union’s own behalf, state-chartered credit unions should establish an employee benefit funding trustusing a trust agreement.

A proper trust agreement, in this context, must

  1. Establish the trust;
  2. Provide that trust funds will be invested and used exclusively to fund employee benefit plan obligations;
  3. Prohibit commingling or use of the funds for any reason other than funding employee benefit plan obligations;
  4. Appoint a trustee,
  5. Permit the credit union to change the trustee at any time; and
  6. Provide for the parties to adopt a policy regarding investment of the funds.


Questions? Contact the Compliance Hotline: 1.800.546.4465, compliance@nwcua.org.

Posted in Compliance News.