Salary continuation planning DI1304 8-13 For Producer use only. Not for use with clients.

salary continuation planning

DI1304 8-13 For Producer use only. Not for use with clients.

disclosures

• In approved states, Disability Income insurance (forms 4501NC, 4502GR and 4503BOE) is issued by Ameritas Life Insurance Corp. located at 5900 O Street, Lincoln, NE 68510. In New York, Disability Income insurance (forms 5501-NC, 5502-GR and 5503-BOE) is issued by Ameritas Life Insurance Corp. of New York located at 1350 Broadway, Suite 2201, New York, NY 10018. Policy and riders may vary and may not be available in all states.

• This information is provided by Ameritas®, which is a marketing name for subsidiaries of Ameritas Mutual Holding Company, including, but not limited to, Ameritas Life Insurance Corp., Ameritas Life Insurance Corp. of New York and Ameritas Investment Corp., member FINRA/SIPC. Ameritas Life Insurance Corp. is not licensed in New York. Each company is solely responsible for its own financial condition and contractual obligations. For more information about Ameritas®, visit ameritas.com.

• Neither Ameritas nor any of its affiliates nor their agents are authorized to give tax or other legal advice. For specific information applying to this strategy, clients should be encouraged to consult an attorney.

Ameritas® and the bison design are registered service marks of Ameritas Life Insurance Corp. Fulfilling life® is a registered service mark of Ameritas Holding Company. © 2013 Ameritas Mutual Holding Company

DI 1304 8-13 For Producer use only. Not for use with clients.

what is a salary continuation plan?

• A tax-favored means for a business or business owner to continue paying an employee who becomes sick or hurt and unable to work

• A plan that is in place prior to any period of disability. While it is not necessary that it be in writing, it must be known by the covered employees

• It can be self-insured or insured

• ERISA considerations

For Producer use only. Not for use with clients.DI1304 8-13

what is a salary continuation plan?

• A Salary Continuation Plan defines:

• Who receives benefits;

• How much;

• For how long; and

• Under what conditions those benefits are payable during a period of disability.


why establish a salary continuation plan?

Chism Ice Cream Company

T.C. Memo 1962-6 ; Affirmed, 322 F.2nd 956 (9th Cir.1963)

The Chism Ice Cream Company paid what it claimed was disability salary continuation to a disabled shareholder-employee for some five years before he died. The Tax Court found that there was no plan and noted the absence of anything detailed in writing. The Tax Court decided the payments were not qualified disability salary continuation benefits, but were, in the eyes of the Court, classified as informal dividends. In addition, the Company was not allowed the deduction of payments to the executive.



Chesapeake Mfg. Co. Inc. v. Comm TC Memo 1964-214; Affirmed, 347 F.2d 507 (4th Cir. 1965)

In the Chesapeake Manufacturing Company , Inc. v. Commissioner case, there had been a history of shareholder-employee withdrawals that were carried on the books of the corporation as employee advances. One of the shareholders was disabled. During this period of disability, the company took a deduction for the advances as compensation payments. However, the Court felt that these amounts could not be considered salary but were mere nondeductible “informal dividends.” There was no showing that at any time the stockholders, directors, or officers of Chesapeake established a health, pension, or retirement plan. “In our opinion the officer -stockholders in making the withdrawals here in controversy took the money of Chesapeake for their personal and permanent use and without thought or intent at that time of making repayment to Chesapeake. Consequently we have concluded and found as a fact that the withdrawals in issue constituted informal dividends to the officer-stockholders for the respective years involved.”



John C. Lang

41 T.C. 352 (1963)

In a situation similar to that of the Chism Ice Cream Company, no evidence of a plan was found when Sales Manager John Lang suffered a heart attack. Salary was continued solely at the discretion of the management, and no formal guidelines were in place. Mr. Lang incurred additional personal income taxes as a result of the court’s finding.



• The regulation under Section 105 of the Internal Revenue Code describes an accident or health wage plan as “ . . . an arrangement for the payment of amounts to employees in the event of personal injuries or sickness.”

• Plans must be for the protection of employees of the firm . . . not shareholders

• Various tax court rulings highlight the need to have the plan, in place, and in writing, or known by the covered employees, prior to the disability



• You should have a plan, preferably in writing. Without one, payments made to a disabled ‘employee’ may be challenged as to their character.

• Ameritas can provide sample documents that you can provide to your clients.

• See Salary Continuation Plan Guide - ADV 1057



• Under an insured Salary Continuation Plan, employers can be selective as to who can and can’t be covered.



• The plan can be set up for a particular class of employees, allowing the employer flexibility in covering those employees he/she wants

• Benefits can vary by class, allowing the employer flexibility in the amount of benefit to be provided to each class


what are the advantages of a salary continuation plan?• Clarifies that the continued salaries are tax-deductible payments to

the disabled employee, which is good for the employer

• Requires payments to the disabled employee, which is good for the employee

• Provides stronger “likelihood” of payments by establishment of the plan


funding the plan

• To fund a Salary Continuation Plan, a company can choose to:

• Establish cash reserves;

• Use current cash flow; or

• Buy insurance


funding the plan

Financial Issues of Self-Funding a Salary Continuation Plan:

• A company may not have the cash immediately available; and

• Current cash flow goes toward paying employees plus replacement for the disabled employee.

What happens though when revenue is down?


funding the plan


• A company can either:

• Self-fund the Salary Continuation Plan; or

• Fund it through insurance policies

BusinessBusiness Disability Income Insurance Premiums

Insurance Company

Insurance Company

Salary Continuation Agreement

Disability Benefits

Plan Participant

Plan Participant

why insure the plan?

• The most cost-effective solution is to buy insurance.


funding the plan


Annual Employer Cost for One Disabled Employee*

No Plan Self-Funded Insured

Revenue $100,000

Sick Pay - 30,000

Pre-Tax 70,000

Income Tax* - 22,400

Retained Earnings

$46,200

Revenue $100,000

Premium - 1,000

Pre-Tax 99,000

Income Tax* - 33,660

Retained Earnings

$65,340 plus

DI Benefits

$30,000*Approximate annual cost of insuring a 35-year old employee with $30,000 annual benefit to age 65.

**Assumes a 34% Corporate tax rate.

Revenue $100,000

Income Tax** - 34,000

Net Profit 66,000

Sick Pay - 30,000

Retained Earnings

$36,000

buy insurance

• Financial Accounting Standard 112

• With a self-funded plan:

• Payments for employee sick pay must come from company cash funds;

• In addition, the company must estimate the future cost of sick pay payments and record these as a business liability in the year the disabling accident or sickness occurs; and

• The employer must make the claims decisions.


buy insurance

Which would an employer rather do:

• Take on the responsibility him/herself; or

• Shift the burden to an insurance company?


buy insurance


The decision is made to buy insurance.

• What is next?

government requirements for salary continuation plans (IRS Code 105)

• The plan should be in writing, although other forms of notice may suffice;

• The plan must be in effect before a disability occurs;

• The plan must be communicated to participating employees;

• The plan must be set up solely for employees (not shareholders, unless also employees); and

• The benefits cannot be considered excessive.


ERISA issues

• Plan should be in writing, regardless of whether the coverage is employer-paid or voluntary

• Participants should receive a summary plan description

• If a noncontributory salary continuation plan is used to provide benefits for a select group of less than 100 highly compensated key employees, the program is exempt from most of ERISA’s Reporting and Disclosure requirements

• Limits the employer’s exposure to punitive damage awards

Neither Ameritas nor any of its affiliates nor their agents are authorized to give tax or other legal advice. For specific information applying to this strategy, clients should be encouraged to consult an attorney.


buy insurance

What kind of insurance to buy:

• Group Long-Term Disability (LTD)

• Individual DI Insurance (IDI)

• Combination – Group LTD and IDI


buy insurance

Group LTD

• Many companies already provide Group LTD to employees

• There can be limitations to many Group LTD plans


buy insurance

Limitations to Group LTD

• Typically only protects 60% of income;

• Often employer-paid, resulting in taxable benefits to the insured;

• Often has a cap on benefits, such as $5,000/month;

• Typically can be canceled by the insurance company or the; employer

• May have contractual limitations:• i.e. definition of earned income, etc.

• Designed for a group of individuals and does not allow each individual to tailor his/her coverage; and

• Often does not cover certain types of income (i.e., commissions)• Bonuses are typically averaged over two or three years.


buy insurance

Supplement with Individual DI Insurance

• Key Advantages:

• Excellent policy provisions

• Noncancelable policies available (Guaranteed Renewable policies often available as well)

• Insured owns the policy

• Customer design, extreme flexibility

• Portable

• Best of both worlds

DI1304 8-13 For Producer use only. Not for use with clients.

IRS revenue ruling 2004-55

• Discusses character of premium payments

• Waives three-year look back in determining character of premium payments

Neither Ameritas nor any of its affiliates nor their agents are authorized to give tax or other legal advice. For specific information applying to this strategy, clients should be encouraged to consult an attorney.


great opportunity to utilize Guaranteed Standard Issue (GSI) program


Employer-Paid and Voluntary Plan Specifications

*Except for approved medical residency programs

Employer-Paid Voluntary Core/Buy Up

(ER-pd base, EE-pd excess)

Minimum

Participants

5

(100% participation)

Greater of 10 lives or 25% participation

10 lives on ER-paid core; Buy-up minimum varies

Occ Class 6A-3A

Medical occupations not eligible*

6A-3A

Medical occupations not eligible

6A-3A

Medical occupations not eligible

Discounts 5-9 lives: 15%

10-49 lives: 20%

50-99 lives: 25%

100+ lives: 30%

10-49 eligible: 15%

50-149 eligible: 20%

150-299 eligible: 25%

300+ eligible: 30%

10-49 lives: 20%

50-99 lives: 25%

100+ lives: 30%

(discounts apply to core and

buy-ups)

Max GSI

Issue Limits

5-9 lives: Up to $2500

10+ lives: To $8000, based on group size and demographics

Up to $5000,

based on group size and demographics

Up to $8000,

based on group size and demographics

questions?


key contacts

• Your GSI regional director

• Your agency or brokerage manager

• Your Ameritas® sales development team

• The DI product management team


Date post:	14-Jan-2016
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Salary continuation planning DI1304 8-13 For Producer use only. Not for use with clients.

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