GBurns

So ac you have to decide where and how to get off. Is keeping the money in an account really regardable as funding the death benefit? Or does funding the DB need the life insurance? Does the PD allow any other method of funding the DB other than purchasing the LI? You might still have to pay the insurance premium, which would then remove all questions about deductibility. But, Is the life insurance even still in force? What happens if it is not in force? Is there now an operational failure of some sort? Would it cause any loss of assets or loss of benefits ?

If not for services rendered and the quality of those services, What would severance pay be for? Even if paid in installments conditioned by the terms of a NCA, it is still for services rendered while as an employee. That is why it usually appears as W2 Box 1 wages, salary etc and not as a 1099 payment which would be for non employee compensation. Also according to the IRS severance pay is subject tp payroll taxes including FICA. Employees are the only people paid by payroll and FICA is only taken from employees. FICA is not taken from 1099 compensation there is not even a box for it on a 1099. In any case the Plan should have treatment and a definition of compensation, bonus and severance payments. If not it would best be treated like you treat bonuses. Also there might be restrictions placed by the election agreement, which might state salary as the source.

You still miss the differences between the various items.

Blinky and SoCalActuary The question is not whether the assumptions are valid or not or the decisions are defendable. The question was: "Since the plan administrator did not purchase life insurance, is the mortality amount deductible?" What is your response? Is the amount deductible?

Most states prohibit the taking out of life insurance on a person without their knowledge and consent and some even require a signature. Even more prohibited if there is a salary reduction needed. Do a Google search on "janitor insurance" and "dead peasant insurance" and you shoul see much on the subjcet including lawsuits against and by companies like Wal-Mart, American Heritage and a number of other Fortune 500 companies. ***************** After posting I realized that you said that this was a Goverment Contractor. If so then DBRA should come into play. From my recollection the employer can make it mandatory if the program meets the DoL requiremenst that this be (using their terminology" a "bona fide" benefit. I do not recall life insurance as being acceptable. In any case, the employee must be notified and since state law regarding insurance applies, the employee's consent and signature should be needed. By the way, Who is the beneficiary? What type of Life Insurance?

A birth Certificate and the beneficiary's signature are not required to purchase an annuity or set up an IRA etc.

Don's problem is not being able to see the differences between what is the plan, what is the insurance coverage and what are benefits. As a result he cannot see at which point ERISA become applicable.

Timing and logistics are the usual reasons why this is difficult to do with an existing group of employees unless there is high turnover among the affected classes. Otherwise other issues including substance over form based challenges will arise. Attempting things similar to this years ago is 1 of the reasons for item 8 in Section 3.01 of Rev. Proc 2005-3 which has been there for almost 20 years.

The authority lies with the Federal Govt through the Social Securuty Act which allows the SSA to enter into section 218 agreements. It is up to the Federal Govt to allow, revoke or modify section 218, not up to the states. Section 218 is Federal Law which can only be modified by the Federal Govt. The action is only allowed as the Federal Govt sees fit and the alternative put into place by the states have to meet standards set by the Federal Govt. As an analogy, the State allows me to get a drivers license, I can decide not to get 1. If, however, the state does not allow me to get a drivers license, I cannot decide to issue myself a driver license. Substitute "Federal Govt" for "State" and "State" for "me" and "myself" and "Section 218" for "driver license" if that makes it easier for you to understand where the issuing authority lies.

It does not matter whether you use cash or accrual basis. Once the check is drawn the entry is made to the Cash account/Checking account. Balancing the accounts at the end of a period to recognize undeposited checks is a separate issue.

Yes but, the results of the assumption were never used for the purpose intended. So what happens now. The question was is the amount deductible? However, I have other concerns. I will assume that the term mortality cost is being used as synonymous to life insurance premiums although they are different things. Other than Yearly Renewable Term a life insurance contract usually requires continuing or on going premiums, the exception being Single Premium Life. YRT would not usually be used in these circumstances so it should be some longer durantion policy. If such a cash value policy was purchased in the past, it should have required that premiums be paid for 2003 which if not paid would have caused automatic premium loans for continuation or if there was insufficient cash value to pay such premiums, there would have been a lapse of coverage. If Term was used with no cash value a lapse should have occurred. So I have to wonder what has happened to the life insurance,. Maybe the premiums are being treated as delinquent and so the amount set aside could be paid to the insurance company. If so then I would think that it would be deductible for 2003 although paid in 2005 because it was "set aside" or contributed to the Plan in 2003.

It is probable that these employers that Steve72 refers to are using an interpretation taken from cases like Express Oil Change. Most of which are unpublished and so would require competent legal advice and research.

It would be taxable income.

Your post was "Certain governmental organizations are protected under state laws from a requirement for Social Security coverage". Thereby making it a state decision. I have never seen a state law that preempts Social Security coverage, but I know of Federal Law that allows states to "opt out". So the opting out is what is allowed by Federal Law not state law. So I was wondering where I had missed such state laws. The link that you have given alludes to Federal law allowing opting out of coverage I see no mention of state law. Although there is state law that explains what the state agency can do after the state takes the exemption given by Federal law.

Your second scenario has no successor employer, but I doubt that a wind down could be done that way.When management closes the door to employees, the company does not cease. Very few businesses can go away in that manner. There is still much reporting and closing of accounts and books that must be done, otherwise penalties etc will accrue with subsequent liens and llegal action that will eventually work their way to the Officers if not handled. So there has to be a wind down after the doors are closed and this needs employees even if only to outsource etc. How will the company be wound down as you stated originally? If it is wound down with either any of the old employees or with new employees, you still have either a successor employer or a continuing employer. Either way COBRA. You still have the time factor to contend with. Remember the "same desk" etc rules in qualified plans? Same principle, you need to plan the time lag between termination of plan and everything else. And as long as there are employees after either plan termination or employee layoff, that problem exists and it is more than a substance over form issue so you have to be aware and plan. If you lay off the employees, they are immediately eligible for COBRA notification etc. If you then terminate all health coverage for all employees, then you have solved the problem. No coverage no COBRA. Or as in your second scenarion terminate the employee plan before the lay off as you stated, then since there is nothing then no COBRA. However, when the employer terminates coverage might not be when the insurance company terminates coverage unless premiums are already in arrears. Premiums in arrears should present a very serious problem if there had been employee salary reductions which have not been sent to the insurance company. Misappropriation of employee funds and IRS misreporting are some of the problems that could arise. Going out of business does not remove the liability or consequences either.

In most employer sponsored plans the insurance premium is advanced by the company before the deductions from the employees and retiree payments. All insurance coverage has premiums due before the coverage even your car insurance. All in force insurance has a grace period so I do not see what your amendment will change for the self payors.

"I understand that the co will have lots of issues ... but in this scenario there is no successor plan, right? So no COBRA obligation?" Are you serious? Have you read the posts?

bufhal' You posted "thank you for the wonderful replys but BOY are you off the mark." How could we have been "off the mark"? The only person who had a comment regarding the use of LTCi was LEAPER and you do not even know his reasons why, as a person who was trained on the issue for his license, he does not believe in the product. He has more material at his disposal that you probably have found so far and he has more people to ask than you could possibly find. That is not to say that LEAPER is correct, but to say that you very likely do not know enough to criticize him or anyone for that matter. It appears that most of what you have is sales material and sales hype. Considering what WDIK posted about the statistics, it seems that you might not be getting the facts or you cannot understand the facts. If you cannot get this simple arithmetic correct, then chances are you did not understand much of the rest. By the way, 100% of people over age 65 will die. Does that mean that they should buy Whole Life insurance instead of Term to 95? NO, it depends on many other factors. So the fact that any % over age 65 will need long term care, does not mean that they need LTCi, added to the fact that there are many forms of LTCi. Do they need Nursing Home only, or Assisted Living Facility coverage only , or Adult Day Care coverage etc etc or What? That they will need long term care without knowing much more leaves you in a position where a rational decision cannot be made. So the Feds have a program for their employees, What is the participation rate? What sort of coverage is available? Having a program for employees does not mean anything by itself. The Feds have a Civil Service Commission for their employees, Does your employer have one? No, so it does not matter what someone else has. Not knowing anything about the Fed plan yet making reference to it makes it seem that you have been subjected to a lot of sales hype and have not been able to digest much relevant information.

Substance rule over form. This looks like a successor plan. There seems to be a timing problem. How much notice of plan termination did they give, anyhow? Do take note of Christine's warning. Look out for a qualified plan etc also.

Under the min wage requirements of FLSA if the employee is not in certain categories even though exempt from OT they might still be subject to min wage, which has to be paid in periods when there is no commission earned, that is why even waiters who work mainly on tips have also a min wage. Then there is the problem of making a deduction in a low earnings period when the deduction will reduce the earnings to below min wage. Some states yes, some no. I suggest that you find out what the job is and post your question on 1 of the HR/Payroll focused Boards.

SoCalActuary, Can you give any examples of "Certain governmental organizations are protected under state laws from a requirement for Social Security coverage"? Or, at least, any states that have such a law and which law it is?

Under fully insured coverage the termination date for nonpayment of premiums is as stated in the master policy. However, you now have a classic problem, If coverage is terminated can the salary reduction agreement also be terminated without termination of employment or open enrollment time? There might also be a problem with the sales reps not getting a paycheck. Have you checked to see if this meets the minimum wage requirements of FLSA and if these sales reps are exempt? I do not think that you can condition reentry on the payment of back premiums, aside from the fact that demands regarding premium should be done by the entity to whom the premiums are owed, the insurance company, unless the employer had advanced the premiums, but then you have the question of whether the employee requested or authorized the advance. In any case, if there are no earnings, How would the employee pay these back premiums, anyhow?

"The insurer must offer the policy forms which are approved by the state department of insurance for the group ERISA plan." Neither the policy form nor the DOI approval has anything to do with the group ERISA plan I think you misunderstand what a policy form is. A policy form is not the paper document, it is the structure, rates, coverage, limitations, exclusions, marketing material etc etc that comprise the particular offering. "neither the insurer nor the plan sponsor need get approval from the state for any amendments to the approved policy form" ANY amendment or change to an approved item MUST be resubmitted for approval. This no different from a Court Order, it stays as is and you cannot make a change, only the judge can. Aside from being so, which you can easily check with your state insurance dept, it is also logical, If the insure rcould unilaterally or arbitrarily change whatever whenever, the approval process would be meaningless. You also seem to be not able to differentiate between a plan, its benefits and ist coverage. Maybe reading Treaas Regs 1.105-5 might help you to understand the big differences. An accident or health plan is the arrangement made by the employer to provide benefits to the employee. It may be either insured or noninsured. That is why there are fully insured plans and there are self insured plans. An insured plan passes the risk to an insurer by purchasing an insurance policy. What the policy covers is whatever was approved by the state. If the employer wants custom coverage, the insurer will submit that custom design to the state DOI for approval. ERISA governs the arrangement which is referred to as the Plan. The state governs the insurance policy which is the coverage. Under certain circumstances ERISA can have some preemption on some issues. In a self funded plan where there is no insurance ERISA logically rules.

An HSA is different from the HDHP. HDHPs can come in 2 forms, individual coverage or employer sponsored coverage. Since individual HDHP policies are insurance policies they are all subject to state Insurance laws and are not preempted by ERISA. Employer sponsored coverage will most likely be a group insurance policy. Group insurance policies are insurance policies. Insurance policies are state regulated and not preempted by ERISA. However, the employer plan itself is an ERISA Plan even if the underlying component might not be. This leaves it to question ans to what and where ERISA preempts. A situation not to different from what has occurred with employer sponsored health plans that are fully insured, namely the Plan versus the coverage. It is not clear there and it should not be clear with this either. In addition, According to the DoL Field Assistance Bulletin HSAs are generally not subject to ERISA, even if employers contribute to them. Note that there are actions that employers could take that could make their HSAs subject to ERISA, but this should be rare. So even if the HDHP could be ERISA the HSA most likely is not. Even then, all HDHP are insurance policies and some Dept of Insurance has to approve it at least in the home state and it must be filed with the stae of residence of the applicant. The state of residence of the applicant does not have to allow the sale of that product to their residents or by their state licensed agents. This is no different treatment than that which ia afforded to all health insurance plans that are sold whether to individuals, small groups or large groups. Section 238 or whatever authorized HSAs does not change the law nor does it expand ERISA preemption in this area.

I did not see a page 18 that related to 1099-Misc. But note page 59 of 93 which is also page Misc-5 which contains the instructions for Box 6 and the bold faced "Caution" that states "Payments made under a flexible spending arrangement (as defined in section 106©(2) or a health reimbursement arrangement which is treated as employer-provided coverage under an accident and health plan for purposes of section 106 are exempt from the reporting requirements of section 6041." The instructions have to be taken in their entirety taking into consideration the facts and circumstances of the plan and payment etc.