1 © 2007 ME™ - Your Money Education Resource™ Retirement Planning and Employee Benefits for Financial Planners Chapter 14: Employee Benefits: Group Benefits

2 © 2007 ME™ - Your Money Education Resource™ Group Benefits  Lower rates  Better coverage  Employer can deduct costs  Employee excludes value from taxable income

3 © 2007 ME™ - Your Money Education Resource™ 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 © 2007 ME™ - Your Money Education Resource™ 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 © 2007 ME™ - Your Money Education Resource™ 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 © 2007 ME™ - Your Money Education Resource™ 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  Spouse can use funds  No spouse: beneficiary will be taxed when funds withdrawn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 © 2007 ME™ - Your Money Education Resource™ 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 © 2007 ME™ - Your Money Education Resource™ “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 © 2007 ME™ - Your Money Education Resource™ 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 © 2007 ME™ - Your Money Education Resource™ 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 © 2007 ME™ - Your Money Education Resource™ 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 © 2007 ME™ - Your Money Education Resource™ 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 © 2007 ME™ - Your Money Education Resource™ 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 © 2007 ME™ - Your Money Education Resource™ 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 © 2007 ME™ - Your Money Education Resource™ 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 © 2007 ME™ - Your Money Education Resource™ Health Savings Accounts  Created by the Medicare Act of  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 © 2007 ME™ - Your Money Education Resource™ 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 © 2007 ME™ - Your Money Education Resource™ 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.

19 © 2007 ME™ - Your Money Education Resource™ VEBAs can provideVEBAs cannot provide Life InsuranceSavings Other survivor benefitsRetirement Sickness and accident benefitsDeferred 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 power Disaster benefits Legal service payment for credits

20 © 2007 ME™ - Your Money Education Resource™ 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 © 2007 ME™ - Your Money Education Resource™ 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 © 2007 ME™ - Your Money Education Resource™ 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 © 2007 ME™ - Your Money Education Resource™ 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 © 2007 ME™ - Your Money Education Resource™ 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 © 2007 ME™ - Your Money Education Resource™ 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 © 2007 ME™ - Your Money Education Resource™ 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 © 2007 ME™ - Your Money Education Resource™ 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.