Overview

Welfare benefit plans are employer sponsored employee benefit programs. Niche offers a complete package for the implementation of single employer welfare benefit plans, designed primarily for small to medium sized businesses. These benefit programs are very useful for businesses looking for ways to reward employees, recruit and retain qualified personnel, and provide additional financial security against future medical care costs, estate or other ‘death’ taxes, and other unanticipated hardships.

Escalating medical care costs are a concern for most Americans, especially those whose retirement years are eminent. Prior financial planning to assure that lifestyles and independence can be maintained has been eroded by the uncontrolled rising costs of health care coverage, the huge demand on government programs expected as baby boomers reach retirement age and the difficult fluctuations in the securities markets during the last six years.

Business owners are solving this dilemma by implementing and funding welfare benefits for themselves and their employees. For instance, a business can make reasonable, actuarially determined contributions to fund retiree medical costs on a deductible basis. Then, during retirement, the employees’ health care costs are paid from the fund on a tax-free basis for qualifying medical expenses. These expenses can include physician fees, medical facility fees, prescription drugs, co-pays and deductibles, experimental procedures and other out-of-pocket medical expenses. Long term care costs are also covered.

Life insurance to provide the stated death benefits of the plans can be used for simple income replacement to heirs, for funding of buy and sell agreements, as part of an estate plan, for charitable giving programs and other family needs. Employees are taxed annually on the “economic value” of the benefit, but the death proceeds are paid without income tax to the named beneficiary. With proper planning, the death proceeds may also be paid outside the insured participant’s taxable estate.

Welfare benefits are not deferred compensation benefits, and care should be taken that the benefits are not misrepresented in the sales process as a type of deferred compensation or tax scheme.

I. Benefits

A. Death benefits can be insured using several types of insurance policies, including term, VUL, UL and whole life, with individual, group or multi-life contracts. Generally, full medical and financial underwriting of individual life applications is necessary for all participants.

Death Benefits are not limited in amount other than the financial underwriting requirements of the insurer(s). Employees are taxed on the economic value of the benefit using valid alternative term rate or Table 2001 annually.

Insurance proceeds paid at the death of the employee are paid to whomever the employee designates as beneficiary (which cannot be the employer entity) income tax free.

If an employee irrevocably names the beneficiary, such as an irrevocable life insurance trust, the proceeds will be received both income tax free and not includable in the employee’s estate. There is a present interest gift annually if an irrevocable beneficiary is made equal to the economic value of the life insurance.

Employees are taxed annually on the economic value of the death benefits provided by the employer sponsored plan. Economic value is based upon the insurance company’s valid alternative term rates or Table 2001.

Life insurance provided through the plan can be used for most planning, including income replacement needs, buy and sell funding, and estate settlement needs. Because contributions cannot revert to the company sponsoring the benefit program, the life insurance policy cannot be used for a typical key man arrangement, where the company is named the beneficiary of the policy.

B. Post retirement medical benefits are payable during retirement years to pay the costs of most medical and dental expenses, including physician fees, facility fees, experimental treatments, insurance premiums, medications, vision and dental care, nursing home or long term care expenses, etc. Employees must reach the stated retirement age in the plan in order to be eligible for benefits. Any funding of benefits for employees who terminate prior to eligibility will become a gain to the plan for the benefit of the remaining participants.

An employer may elect to include spousal coverage for post retirement medical, which permits current funding of their future medical costs. If spouses are not included as plan participants, they are still eligible to use any remaining assets in their spouse’s account after the death of the employee, if the employee dies after reaching retirement age.

Post retirement benefits can be pre-funded only if the benefits do not discriminate in favor of the highly compensated and if they are actuarially determined. Generally, employees with less than 3 years of service, or under age 25, or working less than 1000 hours annually can be excluded if these requirements are satisfied, the contributions are deductible to the business, and distributions are tax-free to the participants for eligible medical costs.

Assets held for future post retirement medical benefits are typically invested in cash value life insurance policies, including UL, VUL, Index and other cash accumulation policies. Often, the policy used to provide the insured death benefit is also the policy used to invest the post retirement contributions.

II. Differences Between Multiple Employer Plans and Single Employer Plans

Single employer welfare plans are not the same as multiple employer welfare plans, although there are similarities in the overall structure and types of benefits offered. The following brief summary of the differences between the two types of welfare plans is included to help you recognize the advantages and the limitations to single employer plans. We do not sponsor or approve promotion of multiple employer welfare benefit plans.

Deduction Limits Differ

Single employer welfare plans, such as those provided using the National Benefit Trust, are subject to the deduction limits of §§ 419 and 419A. Deductions are limited to the qualified costs of the benefits provided for the year.

Multiple employer welfare plans (§419A(f)(6)) are not limited to the qualified costs of the benefits, but deductions are only permissible if the costs are the same for all participants of all employers, if the cost does not reflect more than the current year expense for the benefits provided, and most importantly, if the costs do not reflect the benefits experience or the overall experience of the employer group separately from the plan as a whole.

Benefits Available Differ

Single employer plans can provide virtually any welfare benefit, including post retirement medical benefits, long term care benefits, other health benefits, death benefits, severance benefits and disability income benefits.

Multiple employer plans, because of restrictions against any separate accounting of assets or benefits by employer or employee, cannot provide post retirement medical benefits, which must be separately accounted for highly compensated employees. Also, insured benefits that have levelized cost structure, such as whole life or level term products, are not practical in a multiple employer plan.

Plan Accounting Differs

Assets held in single employer welfare plans are not co-mingled with other employer contributions or assets. Investment gains (or losses), forfeitures, expenses, and other plan experience are accounted for separately from any other employer groups. Benefits are limited to the available assets of the individual plan. Employers can select the policy type or investment options.

Assets held in a multiple employer plan must be co-mingled, with no separate accounting of assets or contributions by employer. Investment gains (or losses), forfeitures, expenses and other plan experience must be shared amongst all employers and not allocated or accounted for by employer. Benefits are payable from the pooled account and not limited by the assets of the employer. Co-mingled assets require a like investment pool, so employers do not direct the Trustee on investment options.

Reporting Requirements Differ

For single employer plans, each employer has its own separate plan, with separate reporting of plan assets, benefits payable, etc. Each employer will file its own Form 5500, receive its own Annual Report and employees receive a Summary Plan Description specific to their employer’s plan. Multiple employer plans file on Form 5500 for all employer participants, and Annual Reports are not specific to any separate employers. Additionally, some multiple employer plan participants may have additional disclosure requirements under the tax shelter disclosure rules, which are not applicable to single employer plans under 419(e).

III. Plan Usages

Welfare benefit plans, sponsored by employers, are an excellent planning tool for baby boomers and others concerned with the escalating costs of medical care, the size of the population relying upon Medicare and other government subsidized programs and the instability of their existing retirement plan after many years of poor investment performance. The ability to make tax deductible contributions to a plan now, and the ability to use the post retirement account on a tax-free basis for eligible medical care costs, offers significant financial security to the employees of small business.

Death benefits in a plan can be used to fund a cross-purchase buy and sell agreement, simplifying the structure of a very common business use of life insurance. Because the plan is the owner of the policies and because each employee can designate one or more beneficiaries, a welfare plan can eliminate the need for multiple policies on each shareholder; and because the business pays for the coverage, disparity due to age, sex and health variances are borne by the company, not by the individuals.

IV. Plan Advantages

V. The Process

Employers wishing to offer post retirement medical care coverage and death benefits to its employees determine the amount of budget available, the benefit levels needed, and the types of policies to be used to hold assets and provide death benefits. A plan proposal is prepared demonstrating the funding levels, benefits levels and participant provisions.

Plan documents, including an Adoption Agreement, Corporate Resolution, Census Verification and Summary Plan Description are executed by the employer. Life insurance applications are taken and processed, and a contribution for the actuarially determined cost of the benefits is made payable to the Plan Trustee. Once the policies are issued, the Trustee sends the funds to the life insurance company to be applied to the policies. The employer can select the sub-accounts if the policy type is a variable life product.