The Single Employer Welfare Benefit Plan

Since the enactment of the Deficit Reduction Act of 1984 ("DEFRA"), marketers of benefit programs to small business owners have sought to circumvent the limits on contributions and benefits imposed by that Act's addition to the Internal Revenue Code of §419 and 419A. Until recently, the primary vehi-cle for such intended circumvention was paragraph 419A(f)(6), which provided an exemption from the sections' limits. The so-called "§419A(f)(6) plans" focused on offering either life insurance or life insur-ance and severance benefits, and became enormously popular. But the IRS viewed virtually all of them as abusive of the law's intention, and after years of regulatory action and litigation, culminating with the publication of final Treasury Regulations in July of 2003, essentially shut down these plans.

In consequence, many promoters of the now-disqualified plans looked toward §§419 and 419A them-selves, and endeavored to structure new plans as single-employer plans. Several new plans have devel-oped, all claiming to comply with the limits specified in the Code sections, and most often relying on elaborate contrivance to establish their compliance. We judge that their hold on their claims to qualifica-tion is tenuous at best.

UFG has a better idea: Follow the Rules. And it is, indeed, that simple. IRC §§419 and 419A were es-tablished to codify welfare benefits under a single set of rules, and to set limits to the deductibility of em-ployer contributions to welfare benefit plans, and the size of accounts that could be maintained for the purpose of providing the benefits. The sections were designed to regulate single-employer plans. §419 governs contributions, with deductible limits set by the definition of "qualified cost" in §419(b) and "qualified direct cost" in §419(c). §419A established limits on the accounts noted above. And UFG has seen its task as establishing plans that actually meet the law's limits, rather than creating elaborate schemes to avoid them. Its mission: develop a plan that

• follows the rules without subterfuge or elaborate machination;
• provides substantial, meaningful benefits for participating employees;
• provides significant federal income tax deductions for contributing employers;
• is both legally nondiscriminatory and geared to the benefit of key personnel; and
• clearly and cleanly avoids "listed transaction" issues.

A tall order? Perhaps, but simple as well. The Plan relies on two principles:

1. that properly owned and administered death benefits funded on a level basis over the expected lives or working lives of participants are "current" benefits, and thus meet the Code's qualified cost limits; and
2. that employer and employee both benefit far more from an inclusive plan than an exclusive one. A plan that offers meaningful benefits to all employees may still take advantage of the natural dis-parity in income between key and non-key employees. Such a plan may not look quite as exciting to the business owner as so-called employee benefit plans that cover only owners, but it can still deliver highly attractive benefits and deductions, and is far more likely to withstand government scrutiny than plans that push the envelope well beyond the law's intent.

The Key to the Plan...

is UFG's commitment to the concept of Reality-Based Planning—that UFG's consultants seek the most favorable plan design consistent with the letter and intent of the law as it is, rather than as we might like it to be; and

is the belief that UFG's consultants and marketers serve the best interests of all concerned when they share both the strengths and limitations of any plan whose intention is to comply with the law—and trust informed consumers to make decisions that look beyond this year and next—into the future with a plan that continues to work for them.

Characteristics of the Plan:

• It is expected that a major focus of a small employer single-employer plan is on death benefits, because in most circumstances, the funding of a death benefit affords the employer the greatest opportunity to take advantage of the typical disproportion in income and difference in age between key and non-key personnel.
• All employees who are not statutorily excludable from coverage are provided plan benefits. Life benefits are provided in uniform relation to earned income.
• All employer contributions should be deductible for federal income tax purposes as "qualified costs" under §419 of the Internal Revenue Code, provided that they meet the "ordinary and necessary" standard of §162(a).
• Employees recognize income as provided by law. For health benefits in general, no income is cur-rently recognized with respect to employer contributions¹. For death benefits, employees recognize the "economic benefit" of the protection provided, as measured by the government's Table 2001 or the insurance company's lesser annual term insurance premium charge.
• Death benefits paid to employees' beneficiaries are generally income-tax free, and, if properly structured, may be excluded from the employees' estates for federal estate tax purposes.
• There are no "listed transaction" issues. Neither plan is the same as or "substantially similar to" any transaction noted by the IRS as reportable pursuant to Reg. §§1.6011-4(b)(2) and 301.6111-2(b)(2).
• Although the Single Employer plan is established as a welfare benefit plan for the purpose of pro-viding current benefits, the employer does have the authority to terminate the plan. At such time, and upon dissolution of the trust, assets formerly held for the payment of plan benefits are distrib-uted on a pro-rata basis to employees remaining in the plan at the time of such dissolution.

¹ If and when disability income benefits are paid to covered employees, such payments are taxable as ordinary income to the extent that they have been funded with employer contributions.