Transcript Advanced Marketing

Bill Schatz, Regional Marketing Director
Life Insurance
in Split-Funded
Defined Benefit
Plans
For financial professional use only. Not for client presentation.
OLA 1902 0310
This material was not intended or written to be used,
and cannot be used, to avoid penalties imposed under
the Internal Revenue Code. This material was written to
support the promotion or marketing of the products,
services, and/or concepts addressed in this material.
Anyone to whom this material is promoted, marketed, or
recommended should be urged to consult with and rely
solely on their own independent advisors regarding their
particular situation and the concepts presented here.
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For financial professional use only. Not for client presentation.
What Is a Qualified Retirement Plan?
 Provides retirement benefits
 Must meet specific IRC requirements
 Qualifies for tax-favored treatment
 Deductible contributions
 Tax-deferred growth
 Plan cannot discriminate
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For financial professional use only. Not for client presentation.
Qualified Plan Comparison
Defined Benefit
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Defined Contribution
Retirement benefit
defined in advance
Retirement benefit
based on contributions
and performance of
plan investments
Employer bears
investment risk
Participant bears
investment risk
Life insurance as a
plan asset may
increase contributions
Life insurance as a
plan asset does not
increase contributions
For financial professional use only. Not for client presentation.
Why Are Defined Benefit Plans Popular Again?
 Favorable pension reform: EGTRRA 2001
 Compensation/contribution limit increases
 No family aggregation
 Pension Protection Act of 2006
 Deductibility limits for contributions to both defined
contribution and defined benefit plans (covered by the
PBGC) sponsored by the same employer repealed
effective 1/1/2008
 Transitional relief provided
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For financial professional use only. Not for client presentation.
EGTRRA Increases Compensation
and Benefit Limitations Defined Benefit Plan
IRC Section
401(a)(17)
Compensation
IRC Section
415 Annual
Benefit
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2005
2006
2007
2008
2009/2010
$210,000
$220,000
$225,000
$230,000
$245,000
100% of pay not
to exceed
$175,000.
Reduced if
benefit starts
before age 62.
100% of pay
not to exceed
$180,000.
Reduced if
benefit starts
before age 62.
100% of pay
not to exceed
$185,000.
Reduced if
benefit starts
before age 62.
100% of pay
not to exceed
$195,000.
Reduced if
benefit starts
before age 62.
100% of pay
not to exceed
$170,000.
Reduced if
benefit starts
before age 62.
For financial professional use only. Not for client presentation.
Traditional Defined Benefit Plans vs.
412(e)(3) Plans
 Both are defined benefit plans
 Similar client profiles
 Large tax-deductible contributions
 Differences:
 Investment flexibility vs. product guarantees
 Minimum funding standard
 “Actuarial Certification”
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For financial professional use only. Not for client presentation.
What is a "Split-Funded" Defined
Benefit Plan?
 A traditional defined benefit plan that includes both:
 Investments
 Life insurance
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For financial professional use only. Not for client presentation.
What About the Plan Benefit Options?
 Taken as retirement distributions
 IRA rollover
 Rollover to another qualified plan
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For financial professional use only. Not for client presentation.
Types of Investments
 Stocks
 Bonds
 Mutual funds
 Annuities (fixed or variable)
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For financial professional use only. Not for client presentation.
Types of Life Insurance Used
 Whole life
 Term
 Universal life
 Variable universal life
 No definite ruling on VUL use in DB plan
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For financial professional use only. Not for client presentation.
How Much Life Insurance Can Be Used?
 Incidental benefit limitations
 100 times test
 50% of annual contribution for whole life
 25% of annual contribution for universal life or term
 Defined contribution plans
 “Seasoned money”
 Potentially, all employer funds that have been in
the plan over two years can be used to purchase
life insurance
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For financial professional use only. Not for client presentation.
Why Buy Life Insurance Inside
Qualified Plan?
 Self-completion
 Pre-tax dollars
 Portability
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For financial professional use only. Not for client presentation.
What if Life Insurance
Is Still Needed at Retirement?
 Receive policy as plan distribution
 Purchase policy from the plan
 Roll policy to profit sharing plan
 New plan must allow for the purchase of life insurance
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For financial professional use only. Not for client presentation.
Tax Implications
 Employer contribution is tax-deductible
 Death benefit in excess of cash value is received
federal income tax–free
 Participant recognizes economic benefit
 Generally, policy proceeds are includable in the gross estate
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For financial professional use only. Not for client presentation.
Valuing the Life Insurance Policy
 Rev. Proc. 2005-25
 Guidance on fair market value
 Two safe harbor formulas
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For financial professional use only. Not for client presentation.
Who Might Benefit from a Split-funded
Defined Benefit Plan?
Ideal candidates include:
 Highly paid business owners
 Companies with few or no employees
 Companies with many employees and multiple
owners/partners
 Companies with existing 401(k)/profit sharing plans
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For financial professional use only. Not for client presentation.
Role of the Third-Party Administrator
 Develops suitable defined benefit plan proposal
 Assists in preparation of plan documents
 Performs annual administration
 Calculates plan contributions
(including Actuarial Certification)
 Prepares required reports
 Handles distributions
 Performs incidental benefits testing
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For financial professional use only. Not for client presentation.
Hypothetical Example #1: Surgical Practice
 Doctor – $700k salary
 Wife – $100k salary
 10 employees – $627k total salary
 Existing Profit Sharing Plan:
 Doctor – $45k contribution
 Wife – $25k contribution
 10 Employees – $151k contribution
 PROBLEM: The employee cost is twice that of the owner
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For financial professional use only. Not for client presentation.
Example #1 (continued)
 Solution:
 Layer “split-funded” defined benefit plan on top of
profit sharing plan
 New contributions:
 Doctor: $256k
 Wife: $92k
 10 Employees: $151k – NO CHANGE
 $125k of contribution used to purchase Life Insurance
Calculations provided by Pension Quote
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For financial professional use only. Not for client presentation.
Example #1 (continued)
 How?
 Comparability Testing
 Performed by TPA actuaries
 25% of salary for 10 employees was already
being contributed
 Percentage of salary required for contributions on behalf
of rank and file employees can be different within limits
Calculations provided by Pension Quote
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For financial professional use only. Not for client presentation.
Example #2: Legal Eagle
 Multi-partner law firm:
 24 partners
 30 associates
 108 staff
 Total contribution to existing profit sharing/401(k)
plan: $1,712,000
 Total contributions for associates/staff: $632,000
(8% of company’s associates/staff payroll)
 Total contributions for partners: $1,080,000
 63% of total contribution benefits the partners
Calculations provided by Pension Quote
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For financial professional use only. Not for client presentation.
Example # 2 (continued)
 Solution:
 Layer “split-funded” DB plan on existing plan
 New contributions:
 Partners: $3,552,000 . . . $2,472,000 increase
 Employee contribution $632,000 . . . no increase
Calculations provided by Pension Quote
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For financial professional use only. Not for client presentation.
Split-Funded DB Plans—Summary
 Retirement income
 Life insurance protection
 Large tax-deductible contributions
 Customizable
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For financial professional use only. Not for client presentation.
Transamerica Insurance & Investment Group (“Transamerica”) and its representatives do not
give tax or legal advice. This presentation is for informational purposes only and should not be
construed as tax or legal advice. Clients and other interested parties must be urged to consult
with and rely solely on their own independent advisors regarding the information and
interpretations contained herein.
The information presented here does not take into consideration the applicable state laws of
clients and prospects. Although care has been taken in preparing this material and presenting
it accurately, Transamerica disclaims any implied or actual warranties as to the accuracy of any
material contained herein and any liability with respect to it. The information in this presentation
is current as of March 2010.
Transamerica Insurance & Investment Group is registered with the National Association of
State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on
the National Registry of CPE Sponsors. State boards of accountancy have final authority on the
acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may
be addressed to the National Registry of CPE Sponsors, 150 Fourth Avenue North, Nashville, TN
37219-2417. Telephone: 615.880.4200. Web site: www.nasba.org.
In the state of New York, Transamerica Life Insurance Company is an approved provider of
continuing education courses (Provider Organization Approval Number NYPO-100366).
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For financial professional use only. Not for client presentation.
Life Insurance
in Split-Funded
Defined Benefit Plans
For financial professional use only. Not for client presentation.
OLA 1902 0310