Corporate Executive Benefit Opportunities Using New Long Term Care Insurance Policies
Two new developments in Long Term Care Insurance (LTCI) can be of significant value to highly paid employees – and can be provided on a cost-neutral basis to the employer.
The SERP Exchange
Many corporations have Supplemental Executive Retirement Plans. These are nonqualified deferred compensation programs that promise to pay eligible employees supplemental retirement benefits. For example, the corporation could promise a group of executives that, when they retire, the corporation will pay each of them $100,000 a year for 10 years. Under these programs the corporation recognizes a current expense liability, but can deduct the retirement benefits only when they are actually paid. When the executives receive the benefit it is taxable income and some, or all, of it may be subject to the estate tax when they die.
An attractive alternative is to provide the executives with a corporate paid LTCI program. For example, the corporation could purchase a 10-payment LTCI policy – with a return of premium death benefit – for each executive and reduce the retirement benefit (as an example) to $80,000 a year. The reduction in benefit reduces the corporate funding liabilities that, in turn, can be used to pay the insurance premium. In this case, the premium is currently deductible to the employer but it is not taxable to the executive. Equally important, the long-term care insurance benefits payable to the executives are generally income tax-free. Further, if the executive should die without receiving any benefits, all of the premiums paid by the corporation will be paid to his or her beneficiaries. In addition, through the use of an irrevocable long term care trust, the survivorship benefits can be made estate tax-exempt.
The result: the corporation has exchanged a tax-deferred deduction for a current deduction and the executive has exchanged taxable benefits for tax-free benefits.
The 401k Exchange
An employer eliminates some or all of its 401k, 403b, and/or 457 retirement plan contributions for a group of highly compensated employees. In exchange, it purchases LTCI policies – with a return of premium death benefit – for the employees.
For example, the matching and profit sharing contributions to the highest compensated 25 employees of a corporation are $15,000 a year per employee. The contribution is currently deductible to the company and there is no tax to the employee until distributions are made.
The corporation terminates the $15,000 retirement contribution for the 25 employees and purchases LTCI policies for them. The $15,000 premium for each employee is currently deductible to the company and is not taxable to the employee.
However, if the employees need long-term care they have the potential of receiving millions of dollars of tax-free benefits – benefits that will far exceed the retirement plan assets that might have to be used to pay the cost of care. And should the employees die without receiving any benefits, their families’ net cash position will not be materially different than under the retirement plan because of the return of premium feature (at death, all of the insurance premiums which have been paid by the corporation are returned to the employees’ beneficiaries and can be made estate tax-exempt).
In addition – if desired – the corporation can replace the retirement plan contributions using a nonqualified deferred compensation plan approach. Unlike the qualified plan program, it can include substantial forfeiture provisions that can help the corporation in its ongoing efforts to attract and retain top talent.
