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IZALE Financial Group

Blog

Financial Flash: Timely & Technical Tools for CFOs

3/3/2017

1 Comment

 

by Joe Tripalin, Senior Consultant, IZALE Financial Group

Concept:  Credit unions today can choose to pre-fund all or part of their future employee benefit obligations by reallocating a portion of the credit union’s investment portfolio into an investment(s) that would normally be impermissible and use the earnings from this investment to offset their future employee benefit cost obligations. These types of investments are deemed appropriate because they are tied to future employee benefit costs. This concept does not impact where the employee benefits are purchased or the cost of the underlying benefits.

Background:  Credit unions have been pre-funding certain employee benefits for many years. Examples include supplemental executive retirement programs (executive benefit plans), pre-funding of defined benefit pension plans, and post-retirement health care programs. In these programs, credit unions have used a variety of investment vehicles to serve as the funding source, most of which would not be available for credit union investments except for the fact they are tied to future employee benefit obligations.

In 2006, the NCUA was asked if other ERISA employee benefits could be pre-funded under NCUA Rule 701.19(c). NCUA answered in the affirmative that any ERISA based future employee benefit obligation could be pre-funded using what would normally be impermissible investments as long as the credit union exercised prudence regarding the safety and soundness of the investment along with the amount invested. The NCUA did not issue an Opinion Letter ruling on this concept, but indicated that previous NCUA Opinion Letters dealing with the use of impermissible investments tied to employee benefits including Opinion Letter 06-0817, gave guidance this issue.

Program Goals: There are a number of goals often associated with utilizing a pre- funding program:
  1. Normally at the top of a credit union’s list of goals is the desire for investment yields higher than the credit union is experiencing in its standard investment portfolio.
  2. Credit unions desire to better manage the growing employee benefit expenses, which are often driven by health care cost increases. While pre-funding doesn’t impact the cost of the employee benefits, higher yields from pre-funding investments can help soften the financial impact of these cost increases.
  3. Closely tied to the second goal above, is the desire to either add additional employee benefits or lessen/hold steady the financial impact of benefit cost increases on employees of the credit union.
  4. Pre-funding helps fulfill a credit union goal to diversify their overall investment portfolio.
  5. Depending on the type of investment, credit unions may seek investment portfolio appreciation in addition to the increased yields mentioned in number one above.
  6. Credit union goals include limiting their risk exposure in these arrangements.
  7. Credit unions want a pre-funding program with open access to their invested
    funds and have those funds held by an independent custodian.

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Death Benefit Only Plans – Not Dead Yet!

3/5/2015

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MARKET TREND: As income tax rates rise, death benefit only plans can be an appealing way to attract or retain selected key employees. 

SYNOPSIS: As the name implies, death benefit only plans generally provide death benefits to a current employee’s surviving beneficiaries. These plans typically are: (1) subject to less complex tax rules and ERISA regulations than other nonqualified deferred compensation plans that provide lifetime benefits to the employee and (2) can be relatively easily and informally funded using life insurance. 

TAKE AWAYS: Death benefit only plans may make sense for employers looking to attract and retain younger talent whose commitment to the company is untested, as key employee carve-outs from group-term life insurance programs, or as an alternative to split-dollar life insurance plans where premium or economic benefit costs to the employee may not make economic sense. The employee should not be subject to income tax on the value of the current life insurance protection and, with proper structuring, should not incur estate taxes on the death benefit paid to his or her beneficiaries (although they will pay income tax on those benefits). The employer generally cannot take a current deduction for the life insurance premiums but should receive the death benefits without income tax (if it complies with employer-owned life insurance (“EOLI”) tax rules) and should be able to deduct the payments made to the surviving beneficiaries.

RELATED REPORTS: 12-23; 11-16; 11-11; 10-56; 10-43; 07-108; 07-91; 05-04; 03-72; 02-99; 00-72; 95-50.


Click to download the printable pdf.

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Court and IRS Limit Short-Term Access to IRA Funds Through Rollovers

4/15/2014

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MARKET TREND:  Despite explicit prohibitions on taking loans from IRAs, some IRA holders have used rules applicable to tax-free rollovers to effectively “borrow” amounts held in their IRAs for short periods – generally, up to 60 days. A recent Tax Court decision and follow-on guidance from the IRS, however, will now limit this method of access to IRA funds. 

SYNOPSIS:  In Bobrow v. Commissioner, the Tax Court recently concluded that the rollover treatment that allows taxpayers to take money out of, and repay money to, IRAs on a tax-free basis is limited to one rollover per 12-month period per taxpayer, regardless of the number of IRAs held by the taxpayer. This ruling differs significantly from the previous IRS position, which applied the tax-free rollover rules on an IRA-by-IRA basis. After the Tax Court’s decision, however, the IRS issued Announcement 2014-15, indicating that it now will follow Bobrow’s interpretation of the IRA rollover rules. 

TAKE AWAY:  The Bobrow decision and the IRS’s revised position have significantly restricted an IRA holder’s ability to access his or her IRA funds on a short-term, tax-free basis. This, combined with the recent proposal to eliminate “stretch” IRAs found in both the draft “Tax Reform Act of 2014” and the President’s FY2015 Budget (see discussion in WRMarketplace#14-10), evidence that additional changes to the tax treatment of IRAs may be possible. Regardless, these savings vehicles currently remain important and popular tools for retirement planning. Thus, clients maintaining IRAs (and their advisors) must be aware of the IRS’s change in position to avoid inadvertent violations of the rollover rules, which could cause unexpected current taxation of amounts purportedly rolled over after December 31, 2014. 

MAJOR REFERENCES: Bobrow v. Commissioner, T.C. Memo. 2013-21 (2014);Internal Revenue Service Announcement 2014-15. 

Click here to download a printable pdf.

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Selecting a Qualified Retirement Plan – The Basics

3/7/2014

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MARKET TREND: Compensation planning has become the “hot topic” among executives and employers, with wealth preservation and employee retention as the main focus. A tax-qualified retirement plan remains a key vehicle to accomplishing both of these objectives. These plans are available to a broader participant population than are nonqualified deferred compensation plans, and they provide greater security against loss that could result from an employer’s financial difficulties.

SYNOPSIS: Tax-qualified retirement plans generally come in two forms – “defined contribution” plans and “defined benefit” plan – with varying plan types within each category. Differences among plans include how the benefits for participants are determined, whether the employer or the employee has an obligation to make contributions, whether the employer or the employee bears the investment risk with respect to plan assets, the maximum benefit the plan can provide to the participant, the amount the employer can deduct in connection with the plan contributions, and when benefits can be paid. The table set forth below highlights the salient features for the most common types of plans.

TAKE AWAY: Combining an understanding of the conceptual and practical differences among plans, as described herein, with the technical aspects of the plan types will be valuable in advising executives and their organizations in the selection and implementation of an effective compensation plan that will appeal to both parties. To assist, see the attached table summarizing the key differences among the various types of retirement plans from the perspective of the tax-qualification requirements and restrictions.

Click here to download a printable pdf.

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United States Supreme Court Decides that a Period of Limitation for Filing Suit on Benefit Claims May Be Set Forth in the Applicable Plan Document

2/4/2014

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MARKET TREND:  Increasingly, for the purpose of potentially limiting their exposure, sponsors of benefit plans subject to ERISA have been incorporating into the governing plan documents periods of limitations within which a participant or beneficiary must bring suit to enforce a claim for benefits.

SYNOPSIS:  In Heimeshoff v. Hartford Life & Accident Insurance Co., the U.S. Supreme Court resolved a split among circuits and upheld a plan provision requiring a suit to recover benefits to be brought within three years from the date that written “proof of loss” was required to be furnished.  The Court reasoned that the provision at issue was valid because (1) it did not contradict any applicable statute (i.e., ERISA), (2) the plan was required to be administered in accordance with its terms, and (3) the period during which the suit was required to be brought was not unreasonably short.

TAKE AWAYS:  Consultants to employers maintaining any type of ERISA-covered benefit plan – including retirement plans, death benefit plans, disability plans and others – should help ensure that the relevant plan documents contain provisions setting forth appropriately limited periods during which a lawsuit must be brought to enforce a benefits claim.  This approach will help limit the company’s exposure to open-ended claims.

MAJOR REFERENCES:  Heimeshoff v. Hartford Life & Accident Insurance Co., 571 U.S. ____, (2013).

Click here to download a printable pdf.

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​Effective June 9, 2017, all individuals who provide advice to retirement plans, including Individual Retirement Accounts (IRAs), must abide by the fiduciary standard.  What does the fiduciary standard mean?  This means that your advisor must put your interests first before their own or that of the firm, make prudent recommendations, charge reasonable compensation and make no misrepresentations to you regarding recommended investments.  The recommendations made by your advisor must be based upon your specific investment needs and objectives.  The fiduciary standard is applicable to any recommendations that your advisor makes to you, the client, for your retirement account.
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