retirement planning and employee benefits for financial planners

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© 2007 ME™ - Your Money Education Resource™

Retirement Planning and Employee Benefits for Financial Planners

Chapter 14: Employee Benefits: Group Benefits

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Group Benefits

Lower rates Better coverage Employer can deduct costs Employee excludes value from

taxable income

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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.

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Group Medical Plans Basic coverage

Hospital Limit on number of days?

Surgical Usual and customary fees

Major medical Deductible Copay Maximum out of pocket

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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

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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withdrawn

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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.

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“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

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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.

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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

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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.

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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.

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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.

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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

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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.

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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.

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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.

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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.

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VEBAs can provide VEBAs cannot provide

Life Insurance Savings

Other survivor benefits Retirement

Sickness and accident benefits Deferred Compensation

Other benefits including vacation and recreation benefits

Coverage of expenses such as commuting expenses

Severance benefits paid through severance pay plan

Accident or homeowners insurance covering damage to property

Unemployment and job training benefits Other items unrelated to

maintenance of the employee’s earning powerDisaster benefits

Legal service payment for credits

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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.

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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.

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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.

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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.

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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

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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.

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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.

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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.

retirement planning and employee benefits for financial planners

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