Navy Federal Credit Union 2005 Annual Report Download - page 44

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Note 11: Loan Protection Life and Life
Savings Insurance
Navy Federal purchases loan protection and life savings insurance
on the lives of its qualifying members. Navy Federal pays the
premium for the group policies with no charge to its members for
the insurance. Premiums paid to the insurer, CUNA Mutual Insurance
Society, are based on a premium rate per thousand dollars on
insurable account balances and are adjusted semiannually based on
actual claims experience. Total premiums paid were approximately
$7,561,000 and $11,051,000 in the years ended December 31, 2005
and 2004, respectively.
To provide more options to its members regarding credit life
insurance, Navy Federal implemented Payment Protection Plans
in November 2004. These plans offer members the opportunity
to purchase an insurance plan that will pay their loan in full or
will cancel their loan payments during specific “life events.” All
new consumer and credit card loans that are made after the
implementation of the new plan are no longer covered by Loan
Protection Insurance, but members are eligible to enroll for a
Payment Protection Plan. Existing loans covered by Loan Protection
Insurance will continue to be covered by the same insurance plan
until the loan is paid off or refinanced.
Note 12: Retirement Benefits
Navy Federal Credit Union Employees’ Retirement Plan
This is a defined benefit retirement plan which means that benefits
are based on a set formula. Navy Federal’s plan converted to a
Cash Balance Plan design as of 1 January 2001, but still retains
the Traditional Plan design for those employees who opted to
remain in the Traditional Plan. The following describes how the
benefits are calculated:
• Cash Balance Plan – This plan provides either a single sum
payment upon retirement or a monthly annuity option depend-
ing on the amount of the accrued benefit.
• Traditional Plan – This plan is designed to provide a lifetime of
monthly retirement benefits, determined by a set formula, to
vested employees. The formula is based on the final average
earnings (average from the three highest consecutive years of
income) multiplied by 2% multiplied by the length of service.
Navy Federal 401(k) Savings Plan
This is a defined contribution plan where employees can contribute
pre-tax money to a 401(k) retirement account and receive employer
matching contributions. The matching contributions are based
on participation in a defined benefit retirement plan. Employees
participating in the Cash Balance Plan receive a 100% employer
match on the first 6% of pay they contribute to their 401(k)
account, and employees participating in the Traditional Plan
receive an employer match of 50% on the first 6% of pay they
contribute to their 401(k) account.
The cost recognized for the 401(k) Plan including matching
contributions and administrative costs was $6,894,000 and
$6,026,000 for the years ended December 31, 2005 and
2004, respectively.
Deferred Compensation Plan (457)
This is a non-qualified deferred compensation plan as allowed
under Internal Revenue Code Section 457(b). This plan offers a
before-tax savings opportunity to highly compensated employees in
the Executive and Professional compensation programs. The annual
deferral amount allowed mirrors the 401(k) plan and contributions
are held by Navy Federal and earn monthly interest based on Navy
Federal’s gross income for the month divided by the average earn-
ings on assets (loans and investments) for the month.
Non-Qualified Supplemental Retirement Plan (SERP)
This non-qualified plan is designed to “make up” for benefits
not paid through the defined benefit retirement plan as a result of
limitations imposed by the IRS. The Internal Revenue Code Section
401(a)(17) limits the amount of compensation that can be used
in the defined benefit retirement plan’s annuity calculation and
Internal Revenue Code Section 415 limits the amount of monthly
annuity that can be paid by the defined benefit retirement plan.
All benefits are paid from the plan trust. Navy Federal makes all
contributions to the trust in accordance with the company’s funding
policy and in compliance with all federal laws and regulations.
Navy Federal accrued $1,440,000 and $1,935,000 to cover this
expense at December 31, 2005 and 2004, respectively.
Retiree Medical Plan
Navy Federal provides postretirement benefits to retired employees
in the form of a contributory group medical plan and supplemental
retirement income to offset the cost of medical insurance premi-
ums or out-of-pocket medical expenses (Medical Plan). Under the
provisions of the Medical Plan, the retirees are responsible for the
full payment of the medical insurance premiums. The supplemental
retirement income benefit is an annual benefit of $75 multiplied by
the number of years of continuous service the retiree had with
Navy Federal. There are no assets set aside to pre-fund the liability
associated with the Medical Plan.