The Hazards of Reimbursing Branch Managers for Expenses
Many lenders still have relationships with branch managers where, in addition to normal W-2 compensation, they pay managers money via 1099s for various expenses.
This is particularly true where the manager owns the building or equipment in question. Of course, there are also scenarios where managers perform outside tasks for the branch, such as marketing, etc., and receive 1099 compensation related thereto.
Lenders should be aware that 1099 payments have become a focus for auditors due to the concern that they could be a vehicle for the payment of compensation that is no longer permissible under Dodd-Frank. Indeed, both federal and state regulators are paying close attention to such payments attempting to ascertain their legitimacy and basis.
Of course, given the mandate to report improper tax practices to the Internal Revenue Service, such payments are likely to be scrutinized from that perspective as well.
To be clear, all expenses should be paid directly by the lender whenever possible, thus minimizing the need for reimbursements. In those cases where the manager owns the property, a fair market value for the rent must be ascertained based upon a comparative analysis and the 1099 payment should be limited to the fair market range for the property in question.
Beyond that, generally speaking, no additional services or compensation should be payable outside the manager’s responsibility for the company. In other words, whatever services are performed by the manager should be considered part of their job and the compensation for such services paid as part of their employment-related wages.
Commonly, managers want to receive money via 1099 for tax reasons and write-offs. Unfortunately, with the increased regulation and scrutiny, the risks from a banking compliance perspective—both for the lender and the manager—have simply become too great. As such, lenders should re-examine such practices and discontinue them when necessary.