Transcript Employee Benefits: Group Benefits

1
Retirement Planning and
Employee Benefits for
Financial Planners
Chapter 14: Employee Benefits:
Group Benefits
© 2007 ME™ - Your Money Education Resource™
2
Group Benefits




Lower rates
Better coverage
Employer can deduct costs
Employee excludes value from
taxable income
© 2007 ME™ - Your Money Education Resource™
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.
© 2007 ME™ - Your Money Education Resource™
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
© 2007 ME™ - Your Money Education Resource™
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
© 2007 ME™ - Your Money Education Resource™
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withdrawn
© 2007 ME™ - Your Money Education Resource™
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.
© 2007 ME™ - Your Money Education Resource™
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
© 2007 ME™ - Your Money Education Resource™
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.
© 2007 ME™ - Your Money Education Resource™
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
© 2007 ME™ - Your Money Education Resource™
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.
© 2007 ME™ - Your Money Education Resource™
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.
© 2007 ME™ - Your Money Education Resource™
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.
© 2007 ME™ - Your Money Education Resource™
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
© 2007 ME™ - Your Money Education Resource™
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.
© 2007 ME™ - Your Money Education Resource™
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.
© 2007 ME™ - Your Money Education Resource™
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.
© 2007 ME™ - Your Money Education Resource™
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.
© 2007 ME™ - Your Money Education Resource™
19
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
Disaster benefits
Other items unrelated to
maintenance of the employee’s
earning power
Legal service payment for credits
© 2007 ME™ - Your Money Education Resource™
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.
© 2007 ME™ - Your Money Education Resource™
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.
© 2007 ME™ - Your Money Education Resource™
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.
© 2007 ME™ - Your Money Education Resource™
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.
© 2007 ME™ - Your Money Education Resource™
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
© 2007 ME™ - Your Money Education Resource™
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.
© 2007 ME™ - Your Money Education Resource™
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.
© 2007 ME™ - Your Money Education Resource™
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.
© 2007 ME™ - Your Money Education Resource™