Civil/Commercial Litigation (Lawsuits)/life insurance...
lance wallach wrote at 2013-04-26 17:43:43
Small Business CAN Have Affordable “Great” Benefit Plans….. It Just Requires a Little Magic.
Question: How many of our customers are clinging to a dated concept of “Great” benefits by paying for their employees to have a low deductible-high benefit health plan, yet none of the employee families can afford to be on it? In other words, how many of our customers are throwing money away on expensive benefit plans that in the end cost too much and are not appreciated?
Answer: Too many!
There are some fantastic products entering the market place today that, when coupled with Congress’s recent Medical Loss Ratio (MLR) mandate can have a tremendous effect on the bottom line while maintaining high benefit levels. More importantly, these plans can be structured within the “affordability reach” of most employee families which helps everyone by bringing on the young and healthy to the plan.
How can this be you ask? There is a new twist on an old proven strategy demonstrated by proposal companies like www.benefithoudini.com where they utilize the money saving aspects of self funding while employing the use of a fully insured ultra high deductible group health plan as the “Umbrella” coverage to mitigate risk for the employer and the group. The interesting thing is that the gap between the base plan delivered to the employees and the fully insured HDHP that covers the group as the “Umbrella” is covered in large part by savings in premium alone and no “Laser” risks have to be endured by the employer.
Here is where it gets interesting. Before, when the year was done, a typical employer offering health benefits had 100% of the money budgeted toward health benefits spent... spent as premiums to be exact. With the Benefit Houdini Strategy there may very well be thousands if not tens of thousands of dollars left unspent in an HRA account that belongs to the business and can be carried forward to cover future risk, costs or both. Think of it as a “Group HSA” if you will.
AND even better…… Because the group health plan was an ultra high-HDHP (Typically $10K works best), most claims toward the umbrella plan deductible were never paid out by the insurance carrier. (One national carrier has shared that over 90% of claims are less than $3500.) To be specific, these types of accounts tend to be cash cows for the insurance carrier and renewals in many cases will trend better than a traditional type plan (even though the employees have actually enjoyed a high benefit traditional plan type). With 80 cents of every premium dollar mandated to go to pay claims on groups under 100 employees in size, and the carriers not paying very many claims, based solely on the statistics they HAVE to trend better.
Here is some of the magic alluded to in the title: As far as the carrier is concerned, they applied deductible credit to 100% of the costs (obviously the legal jargon applies, in-network, preauthorized, etc.) yet had very little man-hours involved in dealing with claim payouts and such. A good Third Party Administrator (TPA) handles these issues and provides a second layer of customer service as well.
lancewallach wrote at 2013-04-26 17:44:56
Be Wary of Abusive 419(e) Welfare Benefit Plans
BY Lance Wallach and Ronald H. Snyder
Life insurance agents and companies have always tried to find ways of making costs paid by business owners tax deductible.
The situation became ridiculous a few years ago with outrageous claims about how Sections 419A(f)(5) and (6) of the Internal Revenue Code exempted employers from any tax-deduction limitations. Finally, the Internal Revenue Service put a stop to such egregious misrepresentations in 2002 by issuing regulations and naming such plans as "potentially abusive tax shelters" (or "listed transactions") that needed to be registered and disclosed to the IRS.
And what happened to the providers that were peddling Sections 419A(f)(5) and (6) life insurance plans a few years ago? We recently found the answer: Most of them found a new life as promoters of so-called "419(e)" welfare benefit plans.
IRC Section 419(e) provides a definition of the term "welfare benefit fund" and provides that it includes a trust or "organization described in paragraph 7, 9, 17 or 20 of Section 501(c)" or any taxable trust that provides welfare benefits. Reference to IRC Section 419(e) is, therefore, unnecessary.
So, what are 419(e) plans?
We recently reviewed several so-called Section 419(e) plans. Many of them are nothing more than recycled Section 419A(f)(5) and (6) plans. Now, many of the same promoters simply claim that a life insurance policy is a welfare benefit plan and therefore tax-deductible because it uses a single-employer trust, rather than a "10-or-more-employer plan." Many plans incorrectly purport to be exempt from ERISA, from Code Sections 414, 105, 505, 79, 4975, etc.
What are the problems?
Vendors commonly claim that contributions to their plan are tax-deductible because they fall within the limitations imposed under IRC Section 419; however, Sec. 419 is simply a limitation on tax deductions. The deductions themselves must be claimed under enabling sections of the IRC. Many fail to do so. Others claim that the deductions are ordinary and necessary business expenses under Sec. 162, citing Regs. Sec. 1.162-10 in error: There is no mention in that section of life insurance or a death benefit as a welfare benefit.
Some plans claim to impute income for current protection under the PS 58 rules. However, PS 58 treatment is available only to qualified retirement plans and split-dollar plans. (None of the 419(e) plans claim to comply with the split-dollar regulations.)
Recently, many accountants have been calling us for help. The IRS is sending audit letters to participants in some of the 419 plans. It has identified many of the 419 promoters, and demanded a listing of the names of companies in the plans.
Here's the problem that most promoters ignore: On April 10, 2007, the IRS issued final regulations under Sec. 409A of the IRC that made it crystal-clear that most of the so-called "419(e)" plans are in violation of the law and subject to hefty penalties, because they provide deferred compensation without complying with Sec. 409A.
How this applies
Section 409A does not apply to welfare benefits. In fact, several forms of welfare benefits are specifically excluded under Sec. 409A. However, such excluded arrangements do not permit transfer of property to the participant except for death, disability and payments made upon retirement in accordance with the Section 409A rules.
Most of the existing Sec. 419(e) and 419A(f)(6) welfare benefit plans do not comply with the Sec. 409A rules relative to transfers of insurance policies or cash payments other than upon death.
What does this mean for advisors? Under Circular 230 standards, a CPA or attorney who advises their client about participating in a non-compliant welfare benefit plan may be liable for fines and other sanctions. We expect that opinion letters relative to such plans have either been withdrawn or will be shortly. We admonish professionals carefully to review all communications with clients relative to such plans. The IRS has recently been successful in imposing huge fines on several law firms for blessing questionable transactions.
Time is of the essence in making and implementing a decision as to what to do. We have only seen one or two plans that may be in compliance. We therefore recommend that employers waste no time in contacting a tax professional to review their welfare benefit plan participation to verify compliance with the new law and regulations. Do not take the promoter's word that his plan is in compliance; odds are it is not.
Lance Wallach, CLU, ChFC, speaks and writes extensively about financial planning, retirement plans and tax reduction strategies, and is the author of Bisk Education's CPAs' Guide to Life Insurance. Reach him at www.vebaplan.com or 516/938-5007.
Ronald H. Snyder, JD, EA, is an ERISA attorney and enrolled actuary specializing in employee benefit plans.
Information contained in this article is not intended as legal, accounting, financial or any other type of advice for any specific individual or entity. You should contact an appropriate professional for guidance.