Tax Effects on BOLI & Nonqualified Plans in Bank Mergers & Acquisitions

R. David Fritz Jr., CLU- Managing Partner and Patric J. Marget, JD, CPA, CFP, CLU- Managing Director, Executive Benefits Network; Melaine D. Brandt, CPA- Partner, Wipfli, LLP

We have not seen the bombardment of mergers that was predicted quite yet. It seems that small banks with under $250 million in assets will be the primary target of the mergers due to their higher cost of doing business and their desire to step away from the fray.

Banks involved in a merger or acquisition should ask themselves the following questions:

  • What is the status of the Bank Owned Life Insurance (BOLI) and Nonqualified Benefits in the case of both the buyer and the seller?
  • What happens to BOLI in a stock vs. asset acquisition/sale?
  • What are the differences between S corporation and C corporation mergers?
  • What should the buying and selling bank look at when purchasing or selling a bank?

Bank Owned Life Insurance (BOLI)
The acquiring bank should be looking at the BOLI from a risk assessment standpoint. If the transaction involves BOLI, it is handled differently depending on whether a Stock Acquisition/Sale or Asset Acquisition/Sale is involved.

Split Dollar Plans
The split dollar plans give a portion of the death benefit proceeds to those that are insured under the BOLI plan. There are two types of split dollar plans that we see in banks: pre-retirement plans and post-retirement plans. The benefit associated with these plans is affected different by a merger and acquisition transaction.

Nonqualified Benefit Plans
Nonqualified plans are those that are regulated by ERISA and IRC 409(A). They may be deferred income plans, defined benefit plans or defined contribution plans. These plans have a variety of structures when it comes to change of control. In addition, there is a wide range of benefits, provisions and penalties that can be associated with when a change of control is triggered.