If you think the cost of compliance is high, try the cost of non-compliance. In the world of community banking, that isn’t just a catchy aphorism: it’s a reality that can show up on your doorstep during your next regulatory exam.
Bank-Owned Life Insurance (BOLI) is one of the most powerful tools available to help you offset the rising costs of employee benefits and "Restoring Alignment and Retention" within your executive team. But because it’s so effective, it’s also highly regulated. Whether you are a small community bank or a large regional institution, your BOLI program is under the microscope of the OCC, FDIC, and the IRS.
Are you confident that your board is steering the ship correctly, or are there hidden icebergs in your compliance reporting? Let’s look at the seven most common BOLI compliance mistakes boards make and, more importantly, how to fix them before the regulators do it for you.
1. Exceeding the 25% Tier 1 Capital Guideline
The interagency statement on BOLI (OCC 2004-56) is very clear: it is generally considered "imprudent" for a bank to hold BOLI with an aggregate Cash Surrender Value (CSV) that exceeds 25% of its Tier 1 Capital.
Many boards make the mistake of looking at this as a "one and done" calculation at the time of purchase. However, Tier 1 Capital fluctuates. If your bank experiences a capital hit or if your BOLI portfolio grows faster than your capital base, you could suddenly find yourself in a concentrated position.
The Fix: Your board should receive a quarterly "Capacity Analysis" that measures your BOLI holdings against current Tier 1 Capital levels. At Schiff Executive Benefits, we help banks reverse-engineer these calculations to ensure you have a "buffer" that accounts for both portfolio growth and potential capital volatility.
2. Ignoring the 1% Asset Concentration Limit
While the 25% rule covers your entire BOLI portfolio, there is a second, more granular rule: the 1% asset concentration guideline. This limits the amount of BOLI you can hold with a single insurance carrier to no more than 1% of your bank’s total assets.
Concentrating too much risk with one carrier is a red flag for regulators who are concerned about credit risk. If that carrier’s credit rating slips, your entire benefit-funding strategy could be compromised.
The Fix: Diversification is your best friend. If you are approaching that 1% threshold, any new BOLI purchases should be spread across a basket of highly-rated carriers. This not only keeps the regulators happy but also protects your bank from "putting all its eggs in one basket."
3. The "Silent Killer": IRC 101(j) Oversight
If there is one technicality that keeps bank CEOs up at night, it should be IRC Section 101(j). This IRS regulation requires that any employee whose life is being insured must provide written notice and consent before the policy is issued.
If you fail to get that signed consent: or if you can’t find the paperwork during an audit: the death benefit, which is normally tax-free, could become taxable income. For a bank, that is a catastrophic financial blow to a program designed for cost recovery.
The Fix: Conduct a "Notice and Consent Audit." Ensure every single file has a signed, dated consent form that precedes the policy effective date. If you're missing one, don't wait. Talk to your advisors about remediation immediately.
4. Failing to Conduct a Pre-Purchase Analysis (OCC 2004-56)
Some boards treat BOLI like a standard investment product: they look at the yield, the carrier rating, and pull the trigger. But the OCC 2004-56 guidelines require a much deeper dive. You must document that you’ve analyzed the risks: liquidity risk, transaction risk, reputation risk, and credit risk.
Regulators want to see that the board didn't just "buy a product" but instead "approved a strategy." If your board minutes don't reflect a robust discussion of these risks, you're failing the compliance test.
The Fix: Every BOLI purchase should be preceded by a formal Pre-Purchase Assessment. This document should outline exactly how the BOLI offsets specific benefit liabilities and why the chosen carriers were selected over others.
5. The "Set It and Forget It" Mentality
One of the most dangerous phrases in a boardroom is, "We already have BOLI; we're good." BOLI is not a static asset. As interest rates move and mortality tables change, the performance of your policies will shift.
The Interagency Statement mandates an annual post-purchase review. This isn't just a courtesy; it’s a requirement. You need to assess the creditworthiness of the carriers, the performance of the separate accounts (if applicable), and the continued need for the coverage.
The Fix: Schedule a formal annual BOLI review with your board. This review should be documented in the minutes and include an updated credit analysis of every carrier in your portfolio. If you haven't seen a performance report in over 12 months, you're officially behind.
6. Lack of Independent Vendor Due Diligence
Are you relying solely on the insurance carrier's marketing materials for your compliance data? Regulators expect the board to perform independent due diligence. You need to verify that the carrier's financial strength is being monitored by an objective third party and that the pricing of the product is competitive.
If your "advisor" only shows you one carrier or one product, you aren't doing due diligence: you're being sold.
The Fix: Work with a consulting firm that acts as a broker with access to the entire market. At Schiff Executive Benefits, we pride ourselves on being carrier-agnostic. We don't have a "favorite" carrier; we have a favorite solution that fits your bank's specific culture and risk appetite.
7. Misalignment with Executive Retention Goals
The ultimate goal of BOLI is to fund executive benefits that help you attract and keep your top talent. However, many banks have BOLI programs that are completely decoupled from their actual benefit liabilities.
If you have $10 million in BOLI but your Supplemental Executive Retirement Plan (SERP) is underfunded or non-existent, you are holding a tax-advantaged asset without the "purpose" that justifies it to regulators. This misalignment is a "What If" that often leads to top talent leaving for a competitor who offers a more structured retirement plan.
The Fix: This is where we excel. We use a process called "Goal-Oriented Reverse Engineering." We start with your goal: retaining your CEO or CFO: and work backward to design the benefit and the BOLI funding strategy that makes it cost-effective for the bank. This ensures your program is "Gospel-compliant" with your bank’s mission.
Building Your Perfect Plan®
Compliance doesn't have to be a burden that slows your bank down. When handled correctly, it becomes the foundation of a rock-solid executive benefit strategy that protects the bank’s capital and rewards its most valuable people.
Are you worried about your 25% Tier 1 limit? Are you unsure if your IRC 101(j) paperwork is in order? Don't wait for the regulators to point out the cracks in your foundation.
We invite you to sit back, grab your coffee, and join us for a deeper dive into these strategies. You can learn more about our philosophy by watching The Perfect Plan® where we break down complex technical topics into actionable advice for business owners and bank boards.
If you’re ready to ensure your BOLI program is fully compliant and optimized for cost recovery, reach out to our team today. Let’s make sure your board is making the right moves to protect your bank’s future.
Disclaimer: Schiff Executive Benefits does not provide legal or tax advice. Always consult with your qualified legal and tax advisors regarding your specific situation and compliance with IRC 101(j) and OCC guidelines.