The Business of Benefits: Compliance Considerations for Offering Employee Incentives
In this hyper-competitive talent market as of late, cash (salary) is not always king. A nice benefits package can be as much of a draw to a certain position or employer as a big fat paycheck. In addition to health insurance, vision insurance, and a 401(k) match, credit unions also have the unique opportunity to offer employee incentives on banking products, such as loans and deposit accounts. Since the Compliance Team periodically receives questions about what is permissible, and with open enrollment coming up, now seemed like the perfect time to address some compliance considerations for offering employee perks on credit union products.
So, what kind of perks are we talking about, exactly? As your HR department knows, there are many options out there for employee perks and incentives, all which may come with their own potential compliance concerns. However, this post will focus on interest rate discounts for employee loans, and higher APY offerings on deposit accounts opened by employees
In general, section 701.21(d)(5) of NCUA’s regulations prohibits preferential treatment for officials, their immediate family members, and certain individuals with related interests:
(5) Nonpreferential treatment. The rates, terms and conditions on any loan or line of credit either made to, or endorsed or guaranteed by -
i. An official,
ii. An immediate family member of an official, or
iii. Any individual having a common ownership, investment or other pecuniary interest in a business enterprise with an official or with an immediate family member of an official shall not be more favorable than the rates, terms and conditions for comparable loans or lines of credit to other credit union members. “Immediate family member” means a spouse or other family member living in the same household.
Section 701.21(d)(2) defines an official as “any member of the board of directors, credit committee or supervisory committee.” Based on this definition, and supported in this previous NAFCU Compliance Blog post, it appears that there is no prohibition against offering discounts on loan products to employees, as they are not considered officials. However, as this NAFCU Q&A notes, Regulation Z may require the credit union to provide disclosures regarding the effect of an employee’s preferred rate in the event that employment ends during the term of the loan, if the rate will be increased upon the employee’s resignation or termination.
For deposit account incentives, NCUA’s Truth in Savings regulation applies. Section 707.4 provides for required account disclosures, including the rate information. Section 707.4(b)(1) requires credit unions to disclose the annual percentage yield and the dividend rate as well as “the period of time the interest (dividend) rate will be in effect,” for fixed rate accounts. Likewise, section 707.4(b)(4) requires credit unions to disclose “[t]he amount of any fee that may be imposed in connection with the account (or an explanation of how the fee will be determined) and the conditions under which the fee may be imposed.” While neither of these requirements explicitly mention preferential rates or fees, both of these provisions appear to require the credit union to disclose the actual rate or fee that it contemplates providing or charging the employee at the time of account opening (i.e., the promotional rate or fee).
Section 707.5 provides for subsequent disclosures, such as when there is a change in terms that would reduce the annual percentage yield or adversely affect the member. These changes require advance notice of at least 30 calendar days. However, the Official Staff Interpretations for Section 707.5(a)(1) states:
3. Terms that change upon the occurrence of an event. A credit union offering terms that will automatically change upon the occurrence of a stated event need not send an advance notice of the change provided the credit union fully describes the conditions of the change in the account opening disclosures (and sends any change-in-term notices regardless of whether the changed term affects that member's account at that time).
4. Examples. Examples of changes not requiring an advance change-in-terms notice are:
i. The termination of employment for employee-members for whom account maintenance or activity fees were waived during their employment by the credit union.
We can see then, that NCUA does appear to contemplate that credit unions will provide some sort of account perks for employees. The TISA impacts here lie in the account disclosures, and whether subsequent disclosures would be required upon the employment ending. The commentary suggests that whether an advance change-in-terms notice is required may depend on whether the credit union discloses in the initial disclosures whether the employee preferential rates will change upon separation of employment.
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About the Author
Rebecca Tetreau joined NAFCU as regulatory compliance counsel in February 2021 and was promoted to senior regulatory compliance counsel in August 2022. In this role, Rebecca helps credit unions with a variety of federal regulatory compliance issues.