Section 79 Value Added Ideas to Share with

Section 79 Value Added Ideas to Share with Your Clients Presented by Economic Concepts, Inc. Scottsdale, AZ

SECTION 79 A tax-advantaged plan for business owners and professionals and their employees Presented by

Section 79 Benefits Allows a company to deduct contributions made to provide “group term insurance” on employees. • Tax deductible as business expense (IRC Sec. 162(a) • Cost of the first $50, 000 of coverage not taxable income to the employee. • (Cost of excess coverage taxable income to the employee)

Recent Rulings • Sanctioned use of Universal Life in 79 Plans • Established Accumulated Value as the Safe Harbor (assuming all charges are reasonable, actually charged and not returned) • Treas. Reg 1. 79 –establishes formula • Rev. Rul. – 2005 -25 defines safe harbor For agent/registered representative use only.

Tax Advantages Business Tax Deduction Personal Tax Reduction For agent/registered representative use only.

How is Group Term Insurance Defined by Section 79? 1. Provides a general death benefit excludable from gross income under IRS Section 101(a) 2. Provided to a group of employees 3. The policy is carried directly or indirectly by the employer 4. Benefit is computed under a formula that precludes individual selection

SECTION 79 – LEVEL 1 Group term insurance on all eligible employees Up to $50, 000 of coverage Cost 100% deductible to the corporation Premiums not taxable income to the employee • Often offered as part of medical insurance package • Enhances employee benefit package • Relieves the employer of potential “obligations”

SECTION 79 – LEVEL 2 Coverage above $50, 000 Voluntary participation Maximum coverage based on multiple of compensation set by employer

Yes 1. Part deemed to be group term must be designated in writing. 2. Employee must report as taxable income the cost of the permanent benefit as well as the cost of the deemed death benefit (over $50, 000) Can “Group Term Life” be provided with an Individual Permanent Insurance? Group Term Coverage * Treas. Reg. 1. 79

60% of Premium Cost of the Permanent Benefits Cost of the Deemed Death Benefits

20% - 40% of Contribution Exempt from personal taxes Accumulates tax-deferred “Convertible” to tax-free income Provides tax-free death benefits

62% 63% 65% 69% Annual Premium: $100, 000 Average income inclusion over 5 years 63. 8% of actual premium

Parameters for a 79 Plan • C Corp (for deduction of contributions made for more than 2% owners) • 10 or more employees • Group term coverage on all employees • Optional permanent coverage offered to employees • Based on a multiple of salary • Employee may decline or waive down coverage • Minimum contribution - $25, 000 on at least one participant • Maximum contribution – unlimited!

Equity Indexed Universal Life A product designed for today’s market • Market Returns • Downside Protection • Professionally Managed • Flexible Contributions

Attractive Equivalent Rate of Return 5 Year Payment Period Tax Free Retirement Income Stream 8% interest rate assumption On-Going Coverage to Age 120

Group Term Coverage for Very Small Groups In plan documentation, declare first $50, 000 of coverage to be deemed “group term”.

Groups of Less Than 10 Employees Medical underwriting not allowed. “Flat extra” added to premium. Limits on coverage.

Discriminatory Plans Permanent Coverage Offered Only to Selected Classes of Employees • Key Employees must report the cost of the first $50, 000 of coverage as taxable income. • Reportable Cost of the first $50, 000 of coverage will be based on actual term premiums or Table I, whichever is greater. Age $50, 000 cost/yr. 35 $50 45 $76 55 $410

Excludable Employees (in a non-discriminatory plan) Employees with less than 3 years of service 6 months if the plan covers less than 10 employees Employees who work less than 20 hours per week or seasonal (less than 5 months in a calendar year) Union employees covered by a collectively bargained life insurance benefit Certain non-resident aliens

Reporting Taxable Income 61, 175

Taxation �Tax-Deduction taken for fiscal year in which the contribution is actually made. �Group term life, regardless of the amount, is exempt from income tax withholding and FUTA taxes �Exempt from FICA only up to $50, 000 of coverage (for discriminatory plans all reportable income is subject to FICA) �Employers must compute inputed amount (if any) from excess coverage and report such on employee’s Form W-2 �Subject to Social Security and Medicare

Positioning Section 79 Plans

Executive Benefit Comparison Executive Bonus Qualified Plan SECTION 79 % Deductible by Business 100% % Reportable by Participant 100% 0% 60 -80% Tax-Deferred Growth Yes Yes Tax-Free Income Yes No Yes Better 2 ½ out of 3

Instead of a Qualified Plan SECTION 79 (permanent coverage) Group Term • • • Voluntary No maximum contribution Flexible contributions No minimum participation requirements Permanent, personal and portable Low employee cost (group term premiums) For agent/registered representative use only.

Stacking 79 on Top of Other Plans increasing principle benefits SECTION 79 401(k) A SELECT 79 plan can be stacked on top of a qualified and other plans without affecting contributions. It offers more flexibility than a DB/DC combination because it is not dependent on actual participation and not restricted by qualified plan limitations. DEFINED BENEFIT PLAN For agent/registered representative use only.

Stacking 79 on Top of Other Plans increasing principle benefits SECTION 79 Can be added to 401(k) to provide additional benefits for principals 401(k) For agent/registered representative use only.

DC Plans DB Plans Section 79 Max Contribution $51, 000 Approximately $150, 000* Unlimited Participation Requirements 410(b) and 401(a)(4) Group Term Coverage only Covered Compensation Limit $255, 000 $250, 000 None Are Contributions Tax. Deductible by Business Yes Yes Are Contributions Tax Income to Employee? No No Yes 60% – 80% Retirement Income 100% Taxable Tax-Free Business Structure Any C Corp (LLC taxed as C corp) only

10 Reasons Section 79 Plans are Utilized by Business Owners 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 100% Business Tax Deduction 20% - 40% Tax Exempt from Personal Income Tax Deferred Accumulation Tax -Free Income Source Tax-Free Death Benefit Personally Owned, Permanent, Portable Limits Market Risk Voluntary Participation Flexible Contributions Ease of Administration

Code Sections Applicable to Section 79 Plans Code Section Explanation 61 Life insurance premiums paid by an employer are taxable income to the employee, UNLESS part of a “plan of group life insurance. ” 79 The cost of a “plan of group life insurance” paid by an employer is not taxable income to the employee except for death benefits greater than $50, 000. For amounts over $50, 000, the charge to income is based on a Uniform Premium Table found in Reg. 1. 79 -3(d)(2). 79(d)(5) Non-discrimination requirements of a “plan of group life insurance. ” 83(e) Makes Section 83 not applicable to group life insurance. 83(h) Property transferred from an employer to an employee may result in taxable income to the employee. A conversion privilege in group insurance is not presently a taxable transfer. 101(a) Death benefits from a life insurance contract are income tax-free to the beneficiary. 162 404(a)(5) Authority for an employer to deduct the cost of group life insurance. This section deals with deferred compensation and when such costs are deductible to an employer and taxable to an employee and generally should not be applicable to group life insurance. 461 This determines in what tax year a deduction is taken. 7702 The definition of an “insurance contract. ” RR 55 -193 The right to convert group life does not cause a charge to employee income. For agent/registered representative use only.

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