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RPT

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Jenny Blackey

on 4 January 2013

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Transcript of RPT

Welfare Benefit Plan
-Enacted in 1928
-419 and 419A added to IRC in 1984
-Deductible Expenses Must Be Related to “welfare”:death, disease, and disability
-Deductions Must Not Exceed Current Year’s “Qualified Cost”. . . except . . . -419A(f)(5) is a Union Plan and has Over 70 Private Letter Rulings from the IRS (NFL)
-419A(f)(6) the Multiple Employer Plan
-IRS’s key target
-Abusive plans eliminated July 17, 2003, IRS notice
-The majority of early 419 abuses and bad press 419(e)
Single Employer Welfare Benefit Plans
-A separate “fund”/trust is set up for each employer
-Tax deductible contributions for welfare benefits:
death, disease, and disability
-Must comply with the account limits set forth in IRC
419 and 419A Mistakes Defining “Current Qualified Cost”
-Term-for-life/Term-to- Age 65
-Creates a reserve over the working life of an employee -IRC 419A(c)(2)
-Only includes key personnel/owners
-Does not comply with IRC 505(b)-IRC 419A(e)(1)
-Oops!! IRC 4976 - 100% excise tax
-Welfare benefit plans that ignore split dollar regulation (Table 2001)
-Cost basis not established on 83(b) election with a probative trace
-Individual ownership
-Deferred compensation is part of the welfare benefit plan
-What determines non-discriminatory? Playing By The Rules
-Term-for-life/Age 65 model must be non-discriminatory Comply with IRC 505(b)
-Must use IRC 83 to comply with split dollar regulation and distinguish death benefit trust from restricted property/deferred compensation (IRC 409A)
-Probative trace on 83(b) property to establish cost basis
-If you are deducting the Qualified cost it cannot be more than the Current cost of the Current death benefit.
-UL and VUL?
-Whole Life definition of base premium?
-Patent-Pending Method for defining qualified direct cost:
-Filing # 11/584,687
-Publication #US-2007-00949054-A1
-The Restricted Property Trust is designed to work within all IRS guidelines. October 2007 IRS Notices 2007-83 & 2007-84, Revenue Ruling 2007-65 -These Notices basically shut down all life insurance driven welfare benefit planning in the US.
-The IRS included ANY cash value life insurance in the notice.
-What now?
-File Plans with the IRS and wait for audit results. OCC Memorandum
7/31/2009-#200931049
Did the employer pay artificially high insurance premiums, in excess of the cost of the current life insurance protection? New IRS Guidelines
Provide a Road map for the RPT Plan
-Do the owner-employees report only a small amount of income with respect to the life insurance coverage?
-Can an employee get at the cash value in that policy?
-If the answers to one or more of the questions are yes, then it is likely the above arrangement is not a welfare benefit fund. Advantages
-Tax deductible contributions
-Asset protected wealth accumulation
-Discriminatory
-Accessible prior to age 59 1/2
-Death benefit
-Buy/sell agreements
-Estate planning Disadvantages
-5 year minimum commitment
-Contributions have low flexibility
-Cash is not accessible while participating
-Must qualify for coverage (health)
-Must use life insurance as funding vehicle Plan in Action
-Client age 52 in good health
-Contributes $100,000 annually
-Corporation receives 100% deduction under 162 and 83(h)
-$60,000 is currently non-taxable *Taxable to the employee as income. Table 2001 rate of $4,030 and the $40,000 will be taxable to the employee as income. Approximate income tax-free portion of the cash value: $786,183 ~ By: Crabb Financial, LLC. End Result Year 5
-$412,080 cash value
-$3,140,196 death benefit
-$300,000 net current deductions
-69% of CV in policy not taxable on transfer
-3.8% Rate of Return*
-Based on current dividend rates and using current assumptions.
-Compared to a fixed-income portfolio. End Result Year 10
-$1,094,471 accumulated cash
-$3,751,937 death benefit
-$600,000 net tax deductions
-71% of cash value income tax-free
-8.4% Rate of Return*
-Risk of Corporate bond
-Return is net of insurance costs
-Based on current dividend rates and current assumptions.
-This represents the gross rate of return needed in a fixed-income portfolio. The Set-up
-Trust Fees: $5,000 plus $1,000/participant
-Trustee Fees: $1,000 set up fee $500/yr. per policy Do You Meet the Criteria? Court Cases
-Cadwell v. Commissioner:
-This case specifically addressed what constitutes a substantial risk of forfeiture, PERC valuation, and mathematically combines the cost of current coverage plus administrative expenses.
-Curcio v. Commissioner:
-A landmark 2010 court case that determined the fate of the Benistar welfare benefit plan design.  Please request the RPT vs. Benistar comparison document.
-Wells Fargo v. Commissioner:
-Single employer 419 case.
-Post-retirement health insurance case.
-Neonatology v. Commissioner:
-419A(f)(6) case where term insurance was over funded by 400x.
-Square D. V. Commissioner:
-419 costs protected by 419A must relate to qualified direct costs.
-Lima surgical v. US:
-Termination for any reason, i.e. “Trigger”, can cause contribution to not be deductible.
-Booth v. Commissioner:
-419A(f)(6), to be protected under 419A, must be aggregate rather than separate, and cannot be experience rated.
-Parker-Hannifin v. Commissioner:
-How not to fund a 419A(f)(5).
-Moser v. Commissioner:
-The first big victory for 419 supporters after 1984.
-A single employer VEBA.
-Connecticut mutual life v. Commissioner:
-substantial future benefits prohibit contribution from being deductible.
-Schneider v. Commissioner:
-419A(f)(5) case allowing a $1.1million contribution as deductible to a 419-VEBA, 501(c)(9).
-Wellons v commissioner:
-Severance benefits show deferred compensation and is not allowed in 419.
-Greensboro pathology v. US:
-A proper 419 cannot offer deferred compensation.
-Grant-Jacoby v. Commissioner:
-Deferred compensation is not deductible when operating a 419 plan. IRS Codes & Regulations
-IRC
-61, 72, 83, 101, 105, 106, 162, 264, 401, 402, 404, 409A, 415, 419, 419A, 501, 505, 2035, 2042, 4975, 4976
-Treasury regulations:
-1.72-16, 1.79-3, 1.162-10(a), 1.61-22
-Department of Labor regulations:
-2520-104, 2520-104.20, 1-419-t
-General Counsel Memorandum:
-33940
-IRS Notices:-2007-83, 2007-84
-Revenue Ruling:
-2007-65-GCM # 200931049, UILC:-419.14-00, 419.12-02, 419.00-00, 419.03-00
Full transcript