Retirement Planning and Employee Benefits for Financial Planners

1. Retirement Planning and Employee Benefits for Financial Planners Chapter 14: Employee Benefits: Group Benefits

2. Group Benefits • Lower rates • Better coverage • Employer can deduct costs • Employee excludes value from taxable income

3. Group Medical Plans • Arrangement that provides benefits for employees, their spouses, and their dependents in the event of personal injury or sickness. • Can discriminate • Premiums paid are deductible for employer, and excluded from the employee’s taxable income. • Does not apply to a 2% or greater shareholder of an S Corporation. • Self-insured plan – employer reimburses employees for expenses - no insurance policy, or only a high coverage insurance policy.

4. Group Medical Plans • Basic coverage • Hospital • Limit on number of days? • Surgical • Usual and customary fees • Major medical • Deductible • Copay • Maximum out of pocket

5. Group Medical Plans • HSAs • account owned by an individual used to pay for current and future medical expenses. • Must have a High Deductible Health Plan • Insurance that does not cover first dollar medical expenses (except for preventive care) • Minimum Deductible: $2,400 family • Max out of pocket: $11,900 family • Can be an HMO, PPO or indemnity plan

6. Group Medical Plans • HSAs • Tax trifecta • Deductible contributions • 2010: $3,050 individual; $6,150 family • Over 55: additional $1,000 • No tax on earnings • Invest in equities? • No tax on withdrawals for medical expenses • Funds left over when you die? • Spouse can use funds • No spouse: beneficiary will be taxed when funds withdrawn

7. COBRA Provisions • COBRA – Combined Omnibus Budget Reconciliation Act of 1986 • Requires an employer that maintains a group health plan to continue to provide coverage under the plan to covered employees and qualified beneficiaries. • The employer can pay the premiums or require the employee to pay the premiums.

8. “Health Care Reform”Patient Protection and Affordable Care Act 2009 • Cover dependent children up to age of 26 • In general, no cost for preventative care • Eliminate cap on lifetime benefits over time • In 2011 can have a $1,250,000 cap • FSA can’t be used for non-prescription drugs starting in 2011 • FSA limited to $2,500 beginning in 2013

9. Group Term Life Insurance • Pure insurance protection that pays a predetermined sum if the insured dies during a specified period of time. • Premiums paid by the employer on the first $50,000 of death benefit are deductible by the employer and are excluded from the employee’s gross income. • Premiums paid for coverage in excess of $50,000 of death benefit is taxable to the employee based on the Uniform Premium Table • Must be offered on a nondiscriminatory basis.

10. Group Disability Insurance • Periodic payments for an employee who is unable to work due to sickness or accidental injury. • May be short or long term coverage. • Employer paid premiums are deductible • Included in employee’s gross income. • Employee paid premiums not deductible • Benefits are not taxable

11. Cafeteria Plan • Written plan that allows employees to receive cash (as compensation) or defer receipt of the cash to purchase various tax-free fringe benefits. • Must offer at least one taxable and one non-taxable benefit • Deductible expense for employer. • Value of fringe benefits purchased are excluded from employee’s taxable income, and are not subject to payroll taxes. • Cash received by the employee is taxable income and is subject to payroll taxes. • Must be nondiscriminatory.

12. Uses and Applications of Cafeteria Plans • Employee benefit needs vary within the employee group. • Employee group is mixed. • Employees want to choose the benefit package most suited for themselves and their family. • Helps employer manage cost of fringe benefit plan. • Gives employees appreciation of the value of the benefits provided by their employer.

13. Flexible Spending Accounts • A type of cafeteria plan. • Employees can defer cash into the flexible spending account. • Deferred amounts are not subject to income tax or payroll tax. • Funds may be used towards the cost of certain employee selected benefits. • After-tax employee expenditures become pretax employee expenditures. • Unused funds are forfeited.

14. Uses and Applications of Flexible Spending Accounts • Dependent care expenses • Health related costs not covered by health insurance • Glasses, Contacts, Dental services • Beginning in 2011: can not use for over the counter drugs or medications • Medical insurance plan co-pays • Limited to $2,500 beginning in 2013

15. FSA v. Dependent Care Credit • FSA • Deferred amount is not subject to payroll tax or income tax. • Dependent Care Credit • Amount used to pay expenses is an after-tax credit. • Amount was subject to payroll taxes. • Credit percentage is based on AGI. • Evaluate each scenario to determine which is most beneficial.

16. Health Savings Accounts • Created by the Medicare Act of 2003. • Can be established by any individual with a high deductible health insurance plan. • See Exhibit 14.4 on page 688 for requirements. • Contributions to the plan are deductible for AGI if made by the employee, excludable from income if made by the employer. • Earnings within the account are not taxable.

17. Distributions from Health Savings Accounts • Distribution for medical expenses: • Completely tax-free. • Any other distribution: • Ordinary income and subject to 10% penalty if the owner of the account is younger than 65.

18. Voluntary Employees Beneficiary Association (VEBA) • Trust established by an employer. • General Motors established a VEBA to walk away from union health care liabilities • Hold funds that will be used to provide employee welfare benefits in the future. • Employer gets income tax deduction at the time of the contributions to the VEBA. • Accelerates a tax deduction for the employer. • Provides benefit security for employees. • Uses an actuarial funding determination.

20. Salary Continuation Plans • Unfunded arrangement between an employee and his employer. • Employer continues to pay employee after his retirement, or employee’s spouse if employee dies before retirement. • Employer may provide on a discriminatory basis. • Income is taxable to employee at time of payment. • Payment is deductible by employer at time of payment.

21. Group Long-Term Care Insurance • Premium payments are deductible by employer, and tax-free to the employee. • Lower rates. • Guaranteed coverage. • Increased eligibility. • Guaranteed renewal of coverage. • Employer may provide on a discriminatory basis. • Cannot be provided in a cafeteria plan or flexible spending account. • If employee paid premiums with after-tax dollars, the employee’s deduction may be limited.

22. Employer/Employee Insurance Arrangements • Business Continuation Plans • Provide a business with funds necessary to sustain business operations if a key employee/owner dies. • Buy-sell cross-purchase insurance plan. • Each partner/shareholder has a life insurance policy on each other partner/shareholder. • Buy-sell entity insurance plan. • The entity has a life insurance policy on each partner/shareholder.

23. Business Disability Plans • Disability Overhead Insurance • Covers the usual and necessary expenses of a business if a key employee becomes disabled. • Premiums are deductible business expenses. • Benefits payable from the plan are taxable income to the entity. • Disability Buyout Insurance • Covers the value of an owner’s interest in the business should the owner become disabled.

24. Split-Dollar Life Insurance • A life insurance policy paid for by the employee and the employer. • Used to provide executives with life insurance at a low cost. • Can be discriminatory. • May be structured in one of two ways: • The Endorsement Method • The Collateral Assignment Method

25. The Endorsement Method • Employer owns policy. • Employer pays premium. • Employer withholds right to be repaid for all premiums paid. • Any death benefit in excess of employer’s right is paid to beneficiaries income tax-free.

26. The Collateral Assignment Method • Employee owns policy. • Employer makes a loan to the employee to pay the premium of the policy. • Should have reasonable interest charge. • At the employee’s death, the loan is repaid with the death benefit proceeds. • Additional proceeds are payable to policy beneficiaries income tax-free.

27. Key Person Life Insurance • Entity purchases a life insurance policy on key employees whose death may cause a financial loss to the company. • Entity pays premiums and is the beneficiary of the policy. • Premiums are not deductible. • Death benefit is not taxable.