Transcript Family Limited Partnership

Single Employer
Welfare Benefit Plans
This training material has been prepared by the Marketing Staff of Prudential
Financial to assist our licensed financial professionals. It is designed to provided
general information in regard to the subject matter covered. It should be used with
the understanding that Prudential Financial is not rendering legal, accounting or tax
services. Such services should be provided by the client’s own advisors.
Prudential’s sole role with regard to any 419 arrangement is that of a product
provider. Prudential is not providing the 419 concept. Prudential shall not have
any involvement, not even as a product provider only, with regard to multiemployer 419A(f)(6) plans. Additionally, Prudential is neither endorsing the use of
the 419 strategy nor the use of any 419 concept sponsor.
Prudential Financial and the Rock logo are registered service marks of
The Prudential Insurance Company of America and its affiliates.
The Prudential Insurance Company of America,
751 Broad Street, Newark, NJ, 07102-3777
IFS – A087341 Ed. 02/04 Exp. 08/05
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For the education of producers/brokers only. Not for use with the public.
1
What It Is Not …
 A retirement income plan
 A 419A(f)(6) ten or more …
Multiple Employer
Welfare Benefit Trust
For the education of producers/brokers only. Not for use with the public.
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What it Is …
 A single employer plan under IRC §§ 419
and 419A used to provide welfare benefits
to employees and their dependents
 Governed by different tax rules than the
multiple employer plan
 A welfare benefit plan subject to ERISA
rules
For the education of producers/brokers only. Not for use with the public.
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What it Can Provide …
 Welfare benefits: such as disability, medical
expenses, severance, supplemental
unemployment benefits (SUB) and life
insurance
 For the plan sponsor: current tax
deductions (within limits)
 For participants: Tax favored or tax-free
benefits when received under
IRC §§ 79, 101(a), 105, 106
For the education of producers/brokers only. Not for use with the public.
4
The Need …
Post Retirement Medical Costs
 Employee Benefit Research Institute
Issues Brief, February 2003
Medical costs are escalating
Individual w/o access to employmentbased health benefits who have
Medigap coverage will need to have
saved between $47,000 - $1,458,000, to
retire at age 65 in 2003.
For the education of producers/brokers only. Not for use with the public.
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What Benefits Are Most Popular?
 Retirement medical benefits
Medical co-pays, deductibles, etc.
Prescriptions & “over the counter” meds
Nursing home & home health care costs
Etc.
 Life insurance
Single life
Survivorship
For the education of producers/brokers only. Not for use with the public.
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“Where’s The Beef”
What’s In It For The Producer?
 For income tax reasons the funding of the
reserve to provide for post retirement life
and health care benefits is often done with
a combination of life insurance and other
investment products
For the education of producers/brokers only. Not for use with the public.
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In This Presentation …
 Income tax rules
 Identifying the market
 Funding the liabilities
 Plan administration
For the education of producers/brokers only. Not for use with the public.
8
Employer Tax Treatment …
 IRC §§ 419 and 419A: deductible employer
contributions for any tax year is limited to
the plans “qualified cost”
 The annual Qualified Cost for the year,
has three components:
Qualified direct cost PLUS
The amount that may be added to the
qualified asset account MINUS
The after-tax income of the fund.
For the education of producers/brokers only. Not for use with the public.
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Employer Tax Treatment
Qualified Direct Cost …
 The total amount (including administrative
expenses)
which would have been allowed as a
deduction to the employer if such
benefits were provided directly by the
employer and
the cash method of accounting was used
For the education of producers/brokers only. Not for use with the public.
10
Employer Tax Treatment
Qualified Asset Account (QAA)…
 A reserve set aside to fund for claims for
certain types of benefits that were incurred,
but not paid for the tax year
 Reserves may be set aside for: disability,
medical benefits, supplemental
unemployment benefits, severance pay, or
life insurance
 Additions to the qualified asset account are
not deductible to the extent they exceed the
“Account Limit” under IRC § 419A
For the education of producers/brokers only. Not for use with the public.
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Employer Tax Treatment
Qualified Asset Account Limit …
 The amount that is“reasonable and
actuarially necessary” to fund claims
incurred but unpaid plus any related
administration expenses as of the close of
the tax year
 The account limit may include an additional
reserve to provide covered employees post
retirement medical and life insurance
benefits.
For the education of producers/brokers only. Not for use with the public.
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Employer Tax Treatment
Post Retirement Medical & Life
 Must be funded over the working lives of the
covered employees and must be actuarially
determined on a level basis using reasonable
assumptions i.e. the reserve with respect to
an employee can be fully funded no earlier
than upon retirement of that employee
 This favors older and married employees
 Must be nondiscriminatory (IRC § 505(b))
 Separate accounts required for each key
employee
For the education of producers/brokers only. Not for use with the public.
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Employer Tax Treatment
Post Retirement Medical & Life
 No discrimination: IRC §505(b)
Neither the classification of employees
covered under the plan nor
The benefits provided can discriminate
in favor of highly compensated
individuals
For the education of producers/brokers only. Not for use with the public.
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Employer Tax Treatment
Post Retirement Medical & Life
 Separate accounts required for each key
employee; benefits provided with respect to that
key employee must be paid from this account
 Amounts attributable to medical benefits
allocated to a key employee’s account are treated
as an annual addition to a qualified defined
contribution plan for purposes of the dollar
limitation
 100% penalty applies if post retirement medical or
life insurance benefits are discriminatory or not
made from separate accounts maintained for key
employees
For the education of producers/brokers only. Not for use with the public.
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Employer Tax Treatment
Post Retirement Medical & Life
 Key Employee Definition IRC § 416(i)
 A present or former employee who at anytime during the plan year or any 4 preceding
years, is or was:
 An Officer earning more than $130,000
 A more-than-5% owner
 A more-than-1% owner earning over $150,000
 One of ten largest owners whose compensation
exceeds the annual addition limit for defined
contribution plans
For the education of producers/brokers only. Not for use with the public.
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Employer Tax Treatment
Reduction For After-Tax Income …
 Any after-tax income reduces the qualified
direct costs and additions to the qualified
asset account (deductible contributions)
 After-tax income is the gross income of the
fund reduced by the sum of the
 Deductions allowed by the Code connected to the
production of such income, and
 The income tax imposed on the fund
 Reason to fund the reserve with tax-free or
tax-deferred assets such as life insurance.
For the education of producers/brokers only. Not for use with the public.
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Employer Tax Treatment
Excess Contributions
 If the employer’s contributions exceed the
qualified costs for the fund’s year:
 Excess contributions are carried forward to
successive years until deductible
 Non-exempt Trusts: Excess is considered
gross income which reduces contributions and
treated and taxed as “deemed” UBIT
 Exempt trusts: excess is subject to unrelated
business income taxation (UBIT)
For the education of producers/brokers only. Not for use with the public.
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Tax Treatment of Participants …
 Income tax treatment is dependent on the
type of benefit received
 Medical Benefits
IRC §§ 105,106: Employer contributions to
the plan are not taxable to the employee
when made
IRC §§ 105,106: Post retirement medical
benefits are received income tax free when
paid from the plan
For the education of producers/brokers only. Not for use with the public.
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Tax Treatment of Participants …
 Income tax treatment is dependent on the
type of benefit received
 Life Insurance
Employer contributions to the plan are taxed
under IRC § 79
No taxable income for the first $50,000
Coverage in excess of $50,000 results in
taxable income using Table 2001 values
Death benefits are generally excluded from the
beneficiary’s income under IRC § 101(a)
For the education of producers/brokers only. Not for use with the public.
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Eligible Business Entities
 Most employers, except sole proprietors
(Sole proprietors with W-2 employees may
be eligible)
 Tax treatment of benefits may vary
depending on the type of employer entity
For the education of producers/brokers only. Not for use with the public.
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Must All Employees Participate?
 Normal ERISA employee exclusion rules
apply
70% of employees must be covered
Exclude: employees with less than 36
months of service
Exclude: employees younger than 25
Exclude: employees working less than 35
hrs per week
For the education of producers/brokers only. Not for use with the public.
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Vesting of Benefits
Will All Employees Benefit?
 Employer must establish an entitlement date
which must apply equally to all employees;
However
No required minimum vesting schedule
Result: entitlement dates often require a
number of years of service
Result: employee who terminates
employment prior to entitlement date does
not acquire a benefit
Result: effective golden handcuff
For the education of producers/brokers only. Not for use with the public.
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Case Study: Facts
 Annual contribution of $100,000 for 5 years
in a combination of life insurance and
annuities.
Benefit Marital
Participants
Age
Age
Status
Orthodontist - Denny
55
60
M
Hygienist – Jane
45
60
M
Hygienist – Julie
40
60
S
Hygienist – Marie
30 *
61*
M
Bookkeeper – Brook
43
68*
M
* 3 years of service required before participation begins; 33 years of service required before postretirement benefits are payable.
For the education of producers/brokers only. Not for use with the public.
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Case Study: Summary Results
 Result: Most of the contribution will legally
favor employees who are older have higher
incomes and dependent status
Benefits: Contribution% Benefit Fund* Ins Face Amt.
Denny
85
$304,000
$ 2,000,000
Jane
9
$204,000
600,000
Julie
2
$102,000
149,890
Marie
0
$
0
0
Brook
4
$204,000
350,000
* The benefit fund represents the amount available to pay post retirement medical benefits after
5 years and represents the cash value of the life insurance and other investments.
For the education of producers/brokers only. Not for use with the public.
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Prospects
Who Should Be Interested?
 Employers who see the need for additional
retirement benefits for themselves, their employees
and any dependents
 Employers who desire to purchase life insurance
with pre-tax dollars
 Employers who seek protection from claims of
business creditors
 Profitable business seeking tax deductions
 Businesses with strong reoccurring revenue
 An employer looking for “golden handcuffs”
For the education of producers/brokers only. Not for use with the public.
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Funding the Benefit ….
 Promised benefits create liabilities
 Life insurance is an attractive funding vehicle
because:
 Makes it possible for an employer to create a large
pool of money with relatively small contributions
 Welfare benefit fund avoids income tax (that
reduce plan contributions) through the
combination of tax-deferred internal cash value
build up, tax-free access and tax-free proceeds*
 Avoids UBIT problems
* Withdrawals and loans reduce policy cash values and death benefit, may affect any policy guarantees against
lapse, and may have tax consequences.
For the education of producers/brokers only. Not for use with the public.
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Funding the Benefit
Using Life Insurance
 Can use individual or survivorship life insurance
policies - typically universal life policies are used
 Where employee turnover is a problem, can fund
with a combination of term life insurance and other
investments
 Welfare benefit trust is the owner and beneficiary
 Cash value of policies is accessed to fund post
retirement medical and other selected benefits*
 Policies can be portable if permitted under terms of
the plan
* Withdrawals and loans reduce policy cash values and death benefit, may affect any policy guarantees against
lapse, and may have tax consequences.
For the education of producers/brokers only. Not for use with the public.
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What Happens if the Plan is
Terminated?
 Accrued benefits are “frozen” in the plan
 Any remaining assets may remain in the
plan for future benefits
 If assets are distributed, they may not
revert to the employer, but must be
distributed to all the participants in a nondiscriminatory manner following IRS
guidelines
For the education of producers/brokers only. Not for use with the public.
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Administrative Needs …
 Contribution Calculations
 Employee eligibility
 Review of emerging liabilities
 Communication with employees
 Disbursement tracking
 Reporting Requirements: IRS, ERISA, etc.
A specialized independent third party
administrator (TPA) must be use
For the education of producers/brokers only. Not for use with the public.
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Prudential’s Tools …
 Producer Marketing Guide
 CE Approved Producer Seminar
 Market Teaser
 Producer Sales Idea
 Customer Brochure
 Answers to Frequently Asked Questions
For the education of producers/brokers only. Not for use with the public.
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For the education of producers/brokers only. Not for use with the public.
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