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Executive Disability Income Plan

Executive Disability Income Plan. Qualified Sick Pay Plan from:. For: Ben Archer Health Center Prepared By Super Agent, CFP. Why Is Income Protection Necessary?. Is Group LTD Going to Cover You?.

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Executive Disability Income Plan

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  1. Executive Disability Income Plan Qualified Sick Pay Plan from: For: Ben Archer Health Center Prepared By Super Agent, CFP

  2. Why Is Income Protection Necessary?

  3. Is Group LTD Going to Cover You? Not likely. All Group LTD limits mental claims to 2 years or less and most likely limits self reported claims as well.While these cost saving plans might be okay for rank and file employees, it falls short for covering higher income earnings in the own occupation.

  4. Reverse DiscriminationDo you use Incentive Compensation to reward employee performance? • Group LTD plans adversely discriminate against the highly-compensated due to: • Plan caps • Definition of covered income • Marginal income tax brackets • After taxes, a 60% group LTD becomes a 41% replacement

  5. Reverse DiscriminationDo you use Incentive Compensation to reward employee performance? • 85% of group LTD plans are configured as 60% of salary to a monthly maximum of $5,000 • This means that income exceeding $8,334 or $100k annually is not covered at the 60% • Compensation above salary is not protected (i.e., Bonus, incentive compensation, retirement/deferred comp.)

  6. Executive EqualizationBenefit Duration: To Age 65, Age 67, or LifetimeWaiting Period: 30, 60, 90, 180, or 365 Days

  7. PROBLEM Your current plan provides 60% of your salary to a maximum of $6,000 per month. Your Current Situation: Gross Monthly Income: $15,000 Net Monthly Income: $10,200 (32% Tax Bracket) Gross Group LTD Benefit: $ 6,000 Net Group LTD Benefit: $ 4,080 40% of your monthly take-home pay SOLUTION OPTION #1 Employer Funded Non- Cancelable Own Occupation Supplemental Policy Employer purchases $5,230 per month of Individual Coverage to supplement your group LTD monthly benefit. Your Net Income would then be: $4,080 Net per month of LTD + $3,556 Net per month of individual $7,636 TOTAL 75% of your take home pay Does Your Group LTD Plan discriminate against your most productive employees?

  8. PROBLEM Your current plan provides 60% of your salary to a maximum of $6,000 per month. Your Current Situation: Gross Monthly Income: $15,000 Net Monthly Income: $10,200 (32% Tax Bracket) Gross Group LTD Benefit: $ 6,000 Net Group LTD Benefit: $ 4,080 40% of your monthly take-home pay SOLUTION OPTION #2 Voluntary Program Non- Cancelable Own Occupation Supplemental Policy Purchase $3,500 per month of Individual Coverage to supplement your group LTD monthly benefit. Since the individual coverage will be paid by you after-tax dollars the $1,800 per month benefit would be a tax-free to you. Your Net Income would then be: $4,080 per month of LTD + $3,500 per month of individual $7,580 TOTAL 74% of your take home pay Will “Uncle Sam” leave enough LTD benefit for your disabled employees?

  9. PROBLEM Your current plan provides 60% of your salary to a maximum of $6,000 per month. Your Current Situation: Gross Monthly Income: $15,000 Net Monthly Income: $10,200 (32% Tax Bracket) Gross Group LTD Benefit: $ 6,000 Net Group LTD Benefit: $ 4,080 40% of your monthly take-home pay SOLUTION OPTION #3 Shared Cost Split Dollar Funded Non- Cancelable Own Occupation Supplemental Policy Split Dollar Disability Business/Employee Shares/Splits Costs Example: Class/Group 1 = Employer Paid Class/Group 2= ER/EE Paid Class/Group 3 = Employee Paid How Would Your EmployerPaid Group LTD PlanProvide Enough Income to Meet Your Expenses?

  10. Key Features Group LTD DI Combination Lower Initial Rates Yes Yes Yes Yes Meets income protection needs of majority of employees Professional, specialized claims Yes Yes Yes services including claims management Own Occupation Coverage ? Yes Yes No Limits on Mental Nervous or Yes Yes Self Reported Claims Potential for higher level of Yes Yes coverage Guaranteed Rates Yes Yes Yes Yes Portability, i.e. employee can take coverage with them

  11. The Impact of Chisolm vs. Commissioner1963 • Ad Hoc Payments • Gifts that are limited to $25 per year • Taxable to employee • Non Deductible as a business expense • Planned Payments • Legal Obligation “Not a Gift” • Taxable to employee • Deducted as a business expense • Exempt from FICA (after 6 months)

  12. The Impact of FASB 112December 15, 1993 FASB 112 *** Liability Projection $750,000 * Assumes a 34% corporate tax rate ** Typical annual premium on an individual policy for a 35 year old employee. *** Assumes the benefit period in both the self-funded and the insured plan is to age 65. Assumes the executive becomes disabled at age 40. Assigned Claims Reserve = Present Value of Future Benefit On December 15, 1993 Sick pay went from Cash to Accrual Basis

  13. Disability… Problems for your business • Disruption to the business – and some troublesome questions… • Continue income from the business? • How long could you afford to pay a salary? • Would payments be deductible?

  14. The funding solution: Disability Income Insurance • Solves the time problem • Shifts the financial burden from business to insurer • Low predictable costs • Benefits are clearly defined in contract

  15. The Planning Solution:Qualified Sick Pay Plan (Salary Continuation) A Qualified Sick Pay plan... • Assures favorable tax treatment of employer contributions • Gives the owner control over participants, level of benefits, and cost to the business • Using disability insurance, benefits are securely funded • For 3 or more participants, a discount on cost of coverage

  16. Qualified Sick Pay Plan 3 Tax Shelters... • Plan is a business expense (IRS code 162) • Premiums are not reportable on employee’s W-2 so really a tax free raise (IRS code 106) • Proceeds are exempt from FICA (after 6 months) NO QSPP no FICA Exemption Plus although no longer contributing to FICA “NO REDUCTION IN BENEFITS”

  17. Qualified Sick Pay Plan Impact of IRS Sec 105... • Allows for discrimination in benefits. • Choices of: • No coverage, full coverage, or partial coverage. • Employer Pay All, Employee Pay All, or Shared Costs • When benefits start • When benefits end

  18. Qualified Sick Pay Plan: What’s Required? To gain the tax advantages, a plan... • Must be established prior to a disability • Must be supported by written evidence • Must be communicated to all covered employees • Must show intent to fulfill a promise of benefits • No need to file with the IRS

  19. The Berkshire System The Berkshire system makes setting up a Qualified Sick Pay Plan easy. We take care of all the details… • Plan documents • Employee notices • Automatic annual reviews, plus • The industry’s finest disability income contract

  20. Berkshire Qualified Sick Pay Plan A plan restores financial stability, and… • Assures the tax deduction • Boosts employee loyalty • Rewards key people • Gives you peace of mind It’s your business..

  21. Group Plan Analysis

  22. Income Replacement Analysis

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