Section 20 vs. Section 21: What’s the Difference?

The National Credit Union Association (NCUA) regulates and requires credit unions to file a quarterly “call report,” which discloses all public information related to the credit union, in order to keep them more stable and to protect consumers.

Under Sections 20 and 21 of a call report, the NCUA allows credit unions to allocate funds to “otherwise impermissible investments.” This includes credit union-owned life insurance (“CUOLI” or “COLI”) for certain specialized and important purposes.

What do Sections 20 and 21 address?

Section 20

Section 20 of a call report addresses the types of assets a credit union may use to pre-fund employee benefits, such as health insurance and executive compensation plans. With the rising costs of employee benefits, using these safe and high-yield investment options to offset those costs allows more of the credit union’s assets to go to member initiatives such as improved fintech options. Most state regulators allow credit unions to allocate up to 25% of net worth to pre-fund employee benefit expenses in Section 20.*

Section 21

Section 21 addresses the types of assets a credit union may use to fund its charitable donation account (CDA). Credit unions can pre-fund their CDAs with up to 5% of net worth under Section 21, in most states.*

For many credit unions, giving back to the community is at the core of their mission. CDAs give your credit union the ability to give more effectively to the charities your credit union is so passionate about supporting.

What Assets Can Be Used to Fund Sections 20 and 21?

Generally, the types of assets that regulators consider “otherwise impermissible” but permitted under Sections 20 and 21 include:

Life insurance
Securities (mutual funds, stocks, ETFs, bonds)
Annuities

When looking at these assets, credit union-owned life insurance (“CUOLI”) can offer marked benefits over securities or annuities in an organization’s portfolio, including enhanced stability and higher yields.

For those who are not familiar with CUOLI, it’s very similar to what has been used by commercial banks for 40+ years. In fact, 86% of the top 50 banks in the United States have bank-owned life insurance (BOLI) as an asset to offset employee benefit costs.

In addition to pre-funding benefit expenses, commercial banks have primarily used these types of assets as an investment tool that offers a very competitive rate with strong levels of safety and liquidity.

Most state regulators* allow credit unions to place up to 25% of their net worths in Section 20 assets and up to 5% in Section 21 assets, with a number of specific caveats, one being that no more than 15% can be allocated to a single life insurance carrier when using CUOLI.

Funding employee benefit plans can allow your credit union to attract, reward, and retain its key employees. In this competitive market, offering the right incentives can be the difference between attracting the best of the best and losing them to other institutions with better-designed compensation offerings.

A Final Word

At Acumen Insurance, we believe that the use of CUOLI gives your credit union some of the best options for pre-funding employee benefit expenses and helping it make the most of its charitable giving.

CUOLI fulfills the “holy grail” of pre-funding these expenses in that it: