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What follows is a list of "Questions & Answers" which explains, in great detail, the ins-and-outs of §419(e) Plans. Accutek Solutions, and our associates, have over 20 years combined experience with these Single Employer Welfare Benefit Plans, and are more than prepared to take care of your every need. If you have any further questions, or would simply like to learn more about the great advantages of these plans, along with how Accutek Solutions can help you organize one for your company, please E-mail us at info@accuteksolutions.com, or call (714) 719-3657. ---------------------
--------------------- 1. What is a Single Employer Welfare Benefit Plan?A single employer welfare benefit plan is a welfare benefit plan that has been established by one employer for the benefit of its employees. A welfare benefit plan can provide for the payment of life, sickness, accident or other benefits to its members or their dependents or designated beneficiaries. A welfare benefit plan is formed as a trust, generally having as its trustee a bank or trust company, and is administered by a common plan administrator. ----------------------- 2. How Does a Single Employer Plan Differ from a Multi-Employer Trust?A Multiple Employer Welfare Benefit Plan is a welfare benefit plan which is part of a 10-or-more employer plan and which qualifies for special treatment under I.R.C. §419A(f)(6). In order for a welfare benefit plan to qualify as a Multiple Employer Welfare Benefit Plan, it must be a plan to which at least 10 employers contribute, and to which no single employer contributes more than 10% of the total contributions made by all employers, and in addition is not "experience-rated". The "Insured Security Plan" (the Plan) described in this Tax Guide is a welfare benefit plan but is not a Multiple Employer Plan, and therefore is not subject to these special rules. ----------------------- 3. What Sections of the Internal Revenue Code Permit Favorable Tax Treatment of a Single Employer Plan?
----------------------- 4. Is the Plan Subject to the New IRS Final Regulations Covering Welfare Benefit Plans under §419A(f)(6)?No. The IRS final regulations released on July 16, 2003 apply only to multiple employer welfare benefit plans that seek exemption from certain restrictions of §419 and §419A. Since the Plan is a single employer plan, compliance with the Final Regulations are inapplicable. ----------------------- 5. Is a Welfare Benefit Plan Subject to the IRS Rules for Qualified Retirement Plans?No. A welfare benefit plan is not a qualified retirement plan subject to the rules of I.R.C. §401, which is the governing law for that type of plan. A welfare benefit plan will not file a request for determination with the IRS under IRC section 401 It is not subject to the voluminous body of law governing retirement plans, and is not subject to the restrictive rules under which those plans must operate. For example, welfare benefit plan distributions are not subject to the rules for qualified pension plans, including those for premature withdrawal penalties (prior to age 59 ½) nor are they subject to the minimum distribution rules for late withdrawals (beginning at age 70 ½). Nor is a Plan subject to the maximum contribution limitation under I.R.C. Sec. 415 i.e., the lesser of $40,000 or 100% of compensation. A properly structured welfare benefit plan does not have to be concerned with compliance with the pension rules, and with constant updating of plans as the tax law continually changes in that area. A welfare benefit plan is also not generally subject to the current $200,000 salary cap for benefit computations, nor the affiliated service company or controlled group rules. ----------------------- 6. Is a Welfare Benefit Plan Subject to the Rules of ERISA?Yes. A welfare benefit plan that receives employer contributions is subject to Title 1 of ERISA (the Employee Retirement Income Security Act of 1974) except for parts 2 and 3 and in particular to those rules that apply to employee welfare benefit plans. Under these rules, the employer must prepare a Summary Plan Description, to be filed with the Department of Labor and distributed to the plan participants. Additionally, the trustee must generally file IRS Forms 5500 annually, to report on the financial aspects of a plan. The trustee of a welfare benefit plan is subject to all of the fiduciary, disclosure and reporting rules of ERISA. ----------------------- 7. What Type of Business Should Consider Adopting a Plan?1. A profitable business (C Corporation, S Corporation, partnership, or LLC), that is seeking a way to provide benefits to its employees, including owner-employees, on a tax-deductible basis. 2. Companies that have excess cash beyond that needed to make contributions to their qualified retirement plans. 3. Companies that have pension plans which no longer adequately reward the business owners, due to the $200,000 indexed cap on compensation. ----------------------- 8. Can a Sole Proprietorship Adopt a Plan?No. A sole proprietor cannot adopt a plan for himself or herself - only for true employees. ----------------------- 9. Must There Be More Than One Employee Participating in the Plan?No, as long as the participant is named as part of a select group of management or highly compensated employees. ----------------------- 10. How is a Welfare Benefit Plan Organized?A welfare benefit plan is generally organized as a trust. In most instances a bank or trust company serves as the trustee. In many cases, the employer establishes its participation in a plan by adopting an existing trust that has been organized by a sponsoring organization, where the individual Trusts are under common administration and held by a common trustee. In the case of the Plan each employer adopts its own trust. ----------------------- 11. Who Can Qualify to Join the Plan?Participants must consist of individuals who become entitled to participate by reason of their being employees. The employer members who have adopted the Trust do not require any particular attributes, other than being corporations (C or S type), LLC's, or partnerships. ----------------------- 12. Are There Any Geographic Restrictions on the Plan?No. The IRS Regulations relating to VEBA's are not applicable to the Plan, and therefore the geographic restrictions for VEBA's do not apply. ----------------------- 13. Do All of the Participants of the Plan Have to Be Employees?Yes. The IRS regulations relating to VEBA's are not applicable to the Plan and therefore those provisions that allow some VEBA participants to be non-employees are not applicable to the Plan. ----------------------- 14. Can Non-Employees Be Participants of the Plan?No, a participant must receive W-2 compensation to be eligible for plan benefits. ----------------------- 15. Can Retirees and Other Former Employees Be Plan Participants?No, only active employees can participate. ----------------------- 16. Can Spouses and Dependents Be Plan Participants?No. Spouses and dependents of active employees cannot be Plan participants, although they can participate in the Plan's death benefits, in the instance of survivorship or second-to-die life insurance. ----------------------- 17. Is There Any Requirement that Plan Membership Must be Voluntary?Yes, this is a Contributory Plan pursuant to Paragraph 6, option B of the Plan Adoption Agreement. ----------------------- 18. Who May Control the Insured Security Plan?The Plan must be controlled by any of the following: (1) an independent trustee, such as a bank; or (2) trustees. As a general rule, in order to operate conservatively, an independent bank trustee should be appointed in all cases. The tax requirement of control by an independent trustee is deemed satisfied if the Plan is an employee welfare benefit plan subject to ERISA. The employer cannot exercise substantial control, as a fiduciary, under the Plan. ----------------------- 19. What is the Tax Status of a Plan?The Plan’s trust is not exempt from income tax, since it does not request nor does it receive an IRS exemption letter under I.R.C. §501(c)(9). Further, employer contributions to the plan are subject to the deductible contribution limits under I.R.C. §419(b) and §419A, and not the greater limits of a multiple employer plan under I.R.C. §419A(f)(6). The employer will be taxed on the “deemed unrelated income” of the Plan’s trust under sec. §419A(g). ----------------------- 20. What Benefits Does the Plan Provide?The Plan provides life, health, accident insurance and other employee benefits. The death benefit is provided through life insurance. Pensions, annuities and similar benefits cannot be included in the Plan. If any post-retirement death benefits are provided, the plan must be non-discriminatory under I.R.C. Sec. 505(b). Post retirement death benefits require the plan to be setup and operated in a non- discriminatory manner. Otherwise, the payment of a life benefit to a retired employee might be a “disqualified benefit” subject to a 100% excise tax under §4976. The IRS has established additional rules in the VEBA Regulations as well as in case law, dealing with the concept of “prohibited insurement”. It is possible that this concept could apply to a Plan. The Plan’s governing document must provide that no assets remaining will be returned to the employer that contributed to it; otherwise, the employer may be subject to a 100% excise tax on any reversion. ----------------------- 21. May a Plan Discriminate in Favor of Highly Compensated Employees?Yes. The Plan may be designed to avoid the restrictive non-discriminatory rules under I.R.C. §505(b). If a Plan is designed to be discriminatory, the benefits must be carefully selected. For example, a plan that is designed as a “Top Hat” plan only covering a “select group of management or highly compensated employees” should not provide post-retirement benefits. ----------------------- 22. What is the Maximum Compensation that may be Used as a Base for Plan Benefits?There is no compensation limit, such as the current $200,000 restriction in a VEBA, if the rules of IRC § 505(b) are not applicable to a Plan. This means that all reasonable compensation can be used as a base for benefits in a Plan, without the need to limit compensation to $200,000 or any other figure. ----------------------- 23. Can a Plan Secure an IRS Approval Letter of Tax-Exempt Status?No. A Plan is not a tax-exempt organization, and is therefore not entitled to receive a determination letter of tax-exempt status from the IRS. ----------------------- 24. What is the Latest Date for an Annual Plan Contribution to be Made so that it is Tax Deductible?A Plan contribution that is made by the last day of the calendar year, or the last day of the employer’s fiscal year if other than the calendar year, is deductible in that year. This result assumes that the employer reports its income on the cash basis. In the event that the employer reports on the accrual basis, the contribution is deductible provided all necessary documentation is completed by the last day of the year, and the Plan contribution is made no later that 75 days after the end of the fiscal year (plus extensions). In order to secure the deduction in either case, the adoption agreement and all other ancillary documents must be completed, executed and forwarded to the Plan trustee by the last day of the employer’s year. ----------------------- 25. Do the Participants in a Plan Realize Current Taxable Income?Yes, although employee contributions toward the term cost of the death benefit may reduce this otherwise taxable income. ----------------------- 26. How are the Participants Taxed Upon the Receipt of their Plan Benefits?There should be no tax on receipt of the death benefits. ----------------------- 27. What is the Funding Method for the Death Benefit?The death benefit is generally funded by permanent or ordinary life insurance. The type of insurance contract that is used is flexible, and it may consist of a fixed, variable, universal or any other type of life insurance. The Plan may require employer contributions amounting to 60% of the annual premiums, intended to constitute “qualified direct costs”, as defined in §419(c)(1). Finally, there can be a classification of employees, so that certain “rank and file” employees may purchase term insurance policies on their lives. The cost for these term policies is normally only a fraction of the cost of ordinary life insurance policies for the key persons. ----------------------- 28. What Happens Upon the Death of a Participant?The death benefit from the insurance policy on the deceased participant’s life is paid to the WBP trustee who, in turn, distributes the proceeds to the beneficiary or beneficiaries designated by the participant. ----------------------- 29. Are There Any Income Tax Consequences to a Participant's Beneficiary when the Proceeds of the Policy are Received?No. I.R.C. §101(a) provides an income tax exclusion for benefits payable under a life insurance contract because of the death of the insured. In the case of a Plan death benefit, the benefit is payable because of the death of the insured. ----------------------- 30. Are There Any Estate Tax Consequences to a Participant Upon Death and Payment of the Proceeds of the Policy?Yes. Insurance is taxable for estate tax purposes, provided that the insured possessed any incidents of ownership, or had the right to designate the beneficiary of the policy. Under ordinary circumstances, all life insurance is includable in the estate unless some action is taken to insulate it from taxation. ----------------------- 31. Upon Termination of the Plan, are Funds Paid Out to the Participants?The collateral assignments are released and the participants retain their policies unencumbered. The trust does not distribute plan assets to participants, except at the death of a participant. ----------------------- 32. How Safe are the Plan Assets Against Claims of Creditors of the Employer or the Participants?The employer has no ownership or other interest in assets that may be in the Plan trust and under the terms of the Plan the employer has no right to have any assets revert to it. Therefore, any assets of the Plan should not be subject to the employer’s creditors. Similarly, the participants have no current interest in any funds in the hands of the Plan’s trust. Therefore, the Plan assets should not be subject to claims of creditors of any of the parties to the Plan , although the laws of the relevant states should be consulted. ----------------------- 33. Can an Employer Maintain Both a Plan and a Qualified Retirement Plan and Make Deductible Contributions to Both?Yes. There is no reason why both plans cannot operate in tandem in the same company, because each accomplishes its own separate purpose. One is for providing life insurance benefits, whereas the other is aimed at providing for retirement benefits. A Plan should not be considered as a replacement for a qualified plan, but rather as a separate plan to accomplish another goal. If an employer maintains an existing qualified retirement plan, that plan should be continued after adoption of a Plan, so that it is clear that the purpose of installing the Plan is not to supplant or replace the retirement plan. If the retirement plan has life insurance as one of its investments, consideration may be given to terminating the insurance portion of the retirement plan, once the life benefit in the Plan becomes effective. ----------------------- 34. What are the Distinctions Between a Plan and a VEBA?A VEBA is a tax-exempt organization that receives a favorable determination letter from the IRS, in which the IRS determines that the organization is exempt from current income tax under I.R.C. §501(c)(9). A Plan does not fall within this exemption of the Code, and therefore does not request a §501(c)(9) exemption letter. The following are the differences between the two plans, other than the tax treatment of income within the trust. (1) A VEBA is subject to the $200,000 compensation limit for the computation of multiple of compensation benefits. A Plan may have no limitation on compensation that can be utilized in computing that multiple. (2) A VEBA must comply with the employment-related affiliation rules and the geographic limitation rules (3-state safe harbor); a Plan can be installed for any type of business located in any geographic area, with no particular relationships. (3) A VEBA is subject to the controlled group rules and affiliated service group rules, and must cover all employees of all such related groups; a Plan must cover only employees of its own business entity, and need not cover controlled groups of affiliated service groups. A VEBA is subject to the non-discriminatory rules of §505; the Plan may be designed to meet the rules of §505 and thus be non discriminatory or the plan may be designed to be discriminatory. Other than the above distinctions, both the VEBA and the Plan are of the same generic derivation, both being employee welfare benefit plans, both established for the purpose of providing lifetime benefits to employees and both having similar operating rules and regulations under §419 and §419A of the Code. ----------------------- 35. In Summary, What are the Tax and Economic Advantages of Adopting a Plan?(1) Tax Advantages: (a) The employer obtains a current income tax deduction within limits of the tax code for the contributions made to the Plan to provide for the costs of furnishing the benefits for its employees who are participants; Employer contributions are intended to be qualified direct costs of the life insurance; (b) The participants are required to pay tax on the current economic benefit they receive from the plan each year although that should be lower than the total life insurance premiums paid by the employer; (c) The benefits of the Plan may be structured by appropriate estate planning so as to escape estate taxation at the death of the participant. (2) Economic Benefits: (a) Any assets of the Plan should be exempt from creditors of both the employer and the participants, since they do not possess title or ownership interests in the funds; (b) The employer can provide for the life insurance needs of the participants; (c) The investments of the Plan can be limited to policies issued by major insurance companies that are highly rated; (d) There are no specific limits on the amount of contribution, other than those limitations provided by sound and conservative actuarial concepts; (e) The plan prohibits any reversion of assets to the employer and all funds must be utilized for the benefit of employees. ----------------------- Special Note:Clients and other interested parties must be urged to consult with and rely solely upon the advice of qualified advisors regarding their particular situation and the concepts presented here. This material relates to a welfare benefit plan. These plans are subject to various ERISA and tax rules as to which there are varying degrees of guidance or interpretation from the IRS or other regulators. Tax and ERISA laws are subject to interpretation and change, and there is absolutely no guarantee that the relevant tax or other authorities will accept these views or comments on legal, tax, ERISA or other issues noted in this material. Although care is taken in preparing this material, Accutek Solutions disclaims any express or implied warranty as to the accuracy of any material contained herein and any liability with respect to it. This information is current as of February 1, 2005. |
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