November 2007
The Welfare Benefit Plan
by James Cunningham, MCEP, RFC, CSA, Founder and CEO, Cunningham
Financial Group (CFG)
An IRS‑approved vehicle to minimize taxes legally, while providing
employee benefits
Because tax‑deferral
strategies are subject to intense scrutiny, chiropractic practices today are
challenged to find and implement legitimate employee benefit arrangements
that offer tax advantages. A practice's need to attract and retain quality
workers may be satisfied if it can offer prospective employees a solid
package of benefits. Congress and the
IRS
have provided specific rules for certain arrangements, which allow employers
to take advantage of the favorable tax treatments of such arrangements and
make use of the recruitment and retention advantages they provide.
The single‑employer
Welfare Benefit Plan (WBP) funded by a trust is a prime example of an
employee benefit plan that provides very favorable tax advantages. Internal
Revenue Code Sec. 419 governs deductions for contributions to such trusts. A
WBP funded by a trust can provide excellent non‑tax advantages for
recruiting and retaining employees and significant tax advantages for both
employers and employees. By focusing the WBT on life insurance ‑‑ for
instance, an Equity Index Life policy ‑‑ we can create a powerful tax
planning tool that offers these advantages:
*** Employer
contributions are tax deductible.
*** Assets
accumulate and compound on a tax‑deferred basis, if invested solely in life
** insurance.
*** Benefits are
tax‑free to employees.
*** Assets are
protected from all creditors‑‑no reversion to the employer.
*** A large
percentage of contributions are used to fund benefits for owner‑employees.
***
No need for costly compliance with complicated pension rules.
*** Survivor
benefits are income tax‑free and, if properly structured, can escape estate
taxes.
*** The employer
can provide for the life insurance needs of the participants.
*** No vesting in
the funds for employees who terminate prematurely.
*** No limits on
the amount of contribution, other than that which is reasonable, and
computed by the use of conservative actuarial concepts.
If you have heard
that "419 plans are in trouble with the
IRS,"
the speaker was either mistaken about single‑employer plans or was referring
to the fact that in recent years the
IRS
and Treasury Department have pursued various multi‑employer WBPs because of
aggressive sales practices and abuse of rules. But single‑employer WBPs are
subject to, and follow, a different set of well‑established rules.
Here are some
guidelines that can help you (and your financial adviser) decide whether and
how to use a WBP in your own practice.
A WBP provides
welfare benefits (e.g., health benefits) for active and retired employees,
life insurance, disability income insurance or payments, severance pay,
supplemental unemployment benefits, long‑term care benefits, and
post‑retirement medical or life insurance benefits. A WBP cannot provide
disguised deferred compensation and is not a qualified retirement plan.
Hence, a trust funding a WBP cannot be a source of retirement income or
deferred compensation benefits.
A doctor adopting a
WBP and funding a trust to provide current and retiree medical benefits
should be wary of plans that claim to offer deductions appearing to be
considerably in excess of the actual costs an employer would incur if the
benefits were insured through a commercial insurance company.
Benefits must
qualify as an ordinary and necessary business expense under the general
rules for deductible business expenses and thus, for an individual, must
constitute no more than an amount that, when combined with other salary and
benefits, is reasonable compensation.
Benefits paid from a
WBP trust are subject to the same income exclusion rules that apply to
benefits paid directly by an employer. Therefore, payment of health benefits
to retirees would be tax free, assuming all applicable nondiscrimination
rules are met. The ability to pay tax‑free benefits makes this arrangement
more tax beneficial than a qualified retirement plan. Assets set aside to
pay retiree medical benefits can only be used to fund those benefits,
although the WBP can be amended to provide for payment of "other" permitted
welfare benefits. Amounts would be taxable if, under the arrangement, the
employee can be paid those amounts regardless of whether they incur medical
expenses.
The accompanying
chart summarizes the advantage of the WBP over other, traditional plans.
Welfare Benefit Plan Comparison
