By Allen Ross, Ph.D.

Because of the myriad client benefits available, you should strongly consider adding the revitalized multiple employer health and welfare benefit plan to the types of plans that you can offer to closely-held profitable business entities.

There is a program that, when properly designed, is perhaps one of the most flexible, but underutilized business and personal planning tools available today. It can reduce taxes for almost any type of business entity and when properly constructed, can provide millions of dollars in estate tax savings.

The program is a Section 419A(f)(6) plan qualifying as a Ten or More, Multiple Employer, Health and Welfare Plan. Employers can provide certain types of benefits for their employees, including the owner-employees.

This multiple employer trust must have an independent trustee, such as a bank. Furthermore, a third-party administrator usually handles the appropriate compliance filings.

Operations and advantages
The trust provides a number of significant tax, business and personal planning opportunities. The tax-deductible benefits include life (death benefits), sickness, accident and a variety of other benefits. However, the trust cannot provide retirement, deferred compensation, annuity payments or benefits. It cannot invest in an annuity. The contributions are deductible under Internal Revenue Code, Sections 162 and 461 as ordinary and necessary expenses and they must also be “reasonable” in amount. The single plan rule for the multiple employer plan requires that all assets be available to satisfy all claims at all times [IRS regulation 1.414(l)-1(b)(1)]. Thus, if there is a shortfall in assets to be paid by one employer, assets could be taken by the trustee from the assets of all the participating employers in the trust. Furthermore, there can be no “experience rating” factors within the program.

It can reduce taxes for almost any type of business entity. When properly constructed, it can provide millions of dollars in estate tax savings.

There is no vesting in a health and welfare plan. A benefit is paid only upon the occurrence of an unanticipated event that triggers the payment of that benefit to a participant in the plan or his beneficiaries. The only right a participating employee has on termination of employment is the opportunity to receive and convert his bare (no cash value) insurance contract to individual ownership.

Unlike pension or profit-sharing plans, the death benefit or survivor benefit payable from a properly designed plan is income tax and excise tax free when paid to beneficiaries and can be structured to be excluded from the participant’s estate, without gift tax consequences.

It is probably most appropriate for closely held business entities making substantial income and profit, and paying taxes on a regular basis. It is inappropriate for companies that have cash flow problems or pay little, if any, taxes. Programs for unions are available but are not the focus of this article.

Requirements
The plan has a number of specific design characteristics. There must be at least two participants in a plan (a spouse can qualify as an employee). Benefits are based on annual compensation and age, and should be funded over the working life of each participant.

Plan eligibility can be set to include only full-time employees (1,000 hours) who have completed at least one year of service and are at least 21 years of age, and to exclude employees who are represented by a collective bargaining unit.

A welfare benefit plan should comply with several provisions of the Employee Retirement Income Security Act (ERISA) and the nondiscrimination provisions of Section 505 of the Code that benefits cannot discriminate in favor of the highly compensated group. It should be noted that proportional benefits based on compensation are not considered to be discriminatory.

All trust assets must be held by an independent trustee, usually a bank, for the benefit of plan participants. Assets are not held in any participant’s name; instead, each employer’s plan assets are held in an unallocated reserve. The plan must prohibit the reversion of assets to a sponsoring employer. Once the employer contributes funds to the trust, the employer can never receive any assets back from the trust. The employer may amend or terminate the plan and determine the level of contributions and benefits.

Estate planning considerations
The trust is perhaps one of the most significant and least utilized estate planning tools available to advisors. One of its most attractive features is that the survivor benefits can be structured so that the death benefits will not be subject to income or estate taxes, because plan participants have no “incidents of ownership” in the assets. The trustee is the owner and beneficiary of all contracts. Because the trustee owns the contracts, each participating employee will sign a beneficiary form that is held by the trustee. To avoid the estate inclusion of the death benefit from the plan, it is recommended that a plan participant make an irrevocable designation of beneficiary, such as an irrevocable trust for the benefit of one’s family.

Who should participate?
The following types of business and business owners are good candidates for multiple employer plans:

• Individuals hoping to reduce, eliminate or provide liquidity for estate taxes.
  
• Profitable businesses that want to reduce their current tax liabilities.
  
• Businesses and individuals seeking to protect their assets from creditors.
  
• Those wishing to supplement or enhance their business-succession plans.
  

When you are satisfied that you have a qualified, well-organized sponsor and program, you can begin to explore the business and personal planning benefits of the program for your clients.

Allen F. Ross, Ph.D., is the chief business strategist for Pinnacle Wealth Group, Ltd. and Asset Accumulation, Inc. You can reach him at allen@pinnaclewealth.net or at 516-829-3000. For a comprehensive analysis of the rules and regulations of a multiple employer trust as well as due diligence and case studies, please visit www.pinnaclewealth.net.

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