Self Insured Life Insurance

[oriecat]

As a cost saving measure, my company is pondering canceling our company paid life insurance policy and perhaps doing something like a self insured arrangement. What things do we need to consider to do this in accordance with ERISA and IRS regs?

[leevena]

First, check your medical plan benefits for Mental Health benefits, just kidding...partially. Let me start be saying two things; 1) I am guessing that your employer is not a mega-size, and 2) I am a strong component of self-funding.

Hard to imagine why any employer would want to self-fund this benefit. It is cheap, budgetable and easy to obtain. If you were to self-fund you would need to find a way to fund benefits immediatly should something happen and a few claims come in unexpectedly. But to answer your question more directly, you would need a few things; 1) actuarial assumptions/costs, 2) documents, 3) administration services, 4) probably a IRS determination, but ask an attorney, and 5) adoption within your organization/HR/Board. This is the best I can think of. Good luck.

[GBurns]

oriecat

Are you sure that it is life insurance that they intend to self-fund in order to save??

I thought that was a typo.

[oriecat]

Unfortunately no, not a type. We are in a serious budget crunch and they are looking for any and every expense that can be cut and are viewing the life insurance as a wasted 10k each year because it is rarely used. Well that's a good thing with life insurance! So they thought of keeping the money and paying the benefit directly if it happened, but like leevena mentioned, I brought up how we would need to be prepared for the possibility of multiple claims, since our last claims, while 4+ years ago, we had 75k within a year. Frankly I think it's stupid that they are making such a big deal out of this when it's barely over $800 a month now after all the layoffs we'd had this year. But it's my job, I have to look into it, even if I disagree with it, and hope that in the meantime I can talk them into doing something else.

[masteff]

If you have employee premiums (ie, not entirely company paid), then you're probably looking at a VEBA.

[leevena]

after reading your last post regarding layoffs, now I am even more against your idea. From an arms length analysis, I look at a few things for a self-funded account (medical that is) and those are; 1) positive cash flow, 2) stable company (not layoffs), 3) internal staff that understands self-funded, 4) cash reserves. It does not sound like this group meets any of this, especially the "understanding of self-funded" piece.

Also, you said the premium is $800 per month. Is your mgt lacking basic business skills? If your company is laying off people, presumably because there is a money issue, even if you get free life insurance, your savings is minimal. After you take your tax deduction how much is the true cost.

Man, do I feel sorry for you.

[oriecat]

Me too!

Thanks for all your thoughts.

[Guest Sieve]

Besides, are you sure you can self-fund life insurance without running afoul of state insurance laws?

[david rigby]

after reading your last post regarding layoffs, now I am even more against your idea.

Agree. Very strongly.

[masteff]

Added thought: Knowing how check signers look at dollars and not details, be sure in discussions that you're subtracting out anything paid by employees (such as supplemental and dependent coverage); that accounts for 20% of my company's bill.

Also, you might be better served by shopping your rates. I know when we shop health rates and they provide life rates, they can vary by 10 to 20% from each other.

[oriecat]

Yes, I have only been providing them the company paid cost. Luckily changing the basic life won't affect our supplemental at all, I was afraid that employees would lose all of it if we canceled the basic.

I got a good reply from our broker saying much of the same stuff and I forwarded it to the VP with a thought about how if we are trying to save money we shouldn't put the company in an unknown financial situation, compared to the known, budgetable expense of the insurance. I also provided the cost if we were to just reduce the amount (which is already a pittance but if they want to save money...) Haven't heard back from her yet.

[Guest BobMartins]

If your company has taken such a drastic step then it must have also taken some solution sto solve out the issues that may arise as in such kind of matters you should contact your the insurance company which dealing with as they may help better and necessary actions that you take into...

[pr2222]

I am not positive, but I am under the impression that the proceeds from a self funded life insurance plan are fully taxable whereas, benefits from an insured policy are tax free to the beneficiary. I would check that out if possible. I think it is under Code Section 101 or 105.

[leevena]

I am not positive, but I am under the impression that the proceeds from a self funded life insurance plan are fully taxable whereas, benefits from an insured policy are tax free to the beneficiary. I would check that out if possible. I think it is under Code Section 101 or 105.

To be tax free, it needs to meet Section 7702 of the IRS code cash value accumulation test, shifting of risk, and pooling. If done it would meet the test for no tax. If you did not structure this properly, it would become income.

[Guest CimarronConsulting]

masteff is right. It is impossible to pool on self-insured plan when you are trying to cut cost. What if four or five employees are into an accident? What if you need to cover them at once? These are questions you need to answer before proceeding to self-insurance. Do you have contingency coverage?