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Deductibility of Contributions:
The most important change affecting retired lives reserve plans made by TRA ‘84 is the limitation on deductible corporate contributions to the reserve fund. Contributions to a welfare benefit fund, including an insurer’s retired lives reserve separate account, are deductible under §419 and §162 if not in excess of the fund’s qualified cost. The qualified cost of a funded welfare benefit plan for a taxable year may include an addition to the qualified asset account.
Separate Account for Key Employees:
In addition to the above requirements, a separate account must be maintained for any life insurance benefits provided to key employees after retirement. An excise tax is imposed on the employer of 100% of any disqualified benefit provided during a taxable year. Disqualified Benefit. Tax Deductions Guide and 20 Popular Breaks in 2021
How to claim tax deductions
Generally, there are two ways to claim tax deductions: Take the standard deduction or itemize deductions. You can’t do both.
The standard tax deduction for 2020 and 2021
The standard deduction basically is a flat-dollar, no-questions-asked reduction in your adjusted gross income (AGI). The amount you qualify for depends on your filing status.
Filing status
2020 tax year
2021 tax year
Single
$12,400
$12,550
Married, filing jointly
$24,800
$25,100
Married, filing separately
$12,400
$12,550
Head of household
$18,650
$18,800
People over age 65 or who are blind get a bigger standard deduction.
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A disqualified benefit includes:
(a) A life insurance benefit provided to a key employee other than from a separate account;
(b) Any life insurance provided to a retired employee unless the fund meets the nondiscrimination requirement; and
(c) Any portion of the fund reverting to the benefit of the employer (§4976).
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Effective Date:
The effective date of these funding restrictions applies to contributions paid or accrued after December 31, 1985, in taxable years ending after that date. There is a special transition rule for retired lives reserve funds that were in existence on June 22, 1984. Any fund reserves that exceed the new limits may be reduced by no more than 20% annually over a four-year period ending in 1990.
Important News: Some 2017 refunds won’t be released until after Mid-February
Revenue Procedure 93-3:
Internal Revenue Bulletin: 2021-1
For years the IRS has indicated that a comprehensive ruling would be issued covering various tax and insurance aspects of the retired lives reserve plans. Still we wait. The most current IRS announcement is contained in R.P. 93-3, which states that no ruling will be issued on whether life insurance provided for employees under a retired lives reserve plan is group term insurance. The rationale of the IRS is that the subject of retired lives reserve plans is under extensive study. IRS releases annual revenue procedures for 2021
Make sure that you are insured and covered.
Estate Planning Considerations:
Since key employees may require substantial amounts of life insurance protection, the estate planning implications should also be discussed. Key employees may wish to transfer the incidents of ownership of their group term life plan to another family member, in order to prevent its inclusion in their gross estates. R.R. 69-54 provides the details that the IRS requires for such a transfer to occur. Basically, the insured person must give up all incidents of ownership, excluding any conversion privilege (R.R. 84-130).
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Policy Assignments:
Assuming that state law does not prohibit such assignments, the group policy and individual certificates should delete the usual prohibition against assignment clauses. Thus far, the courts have not required that state law affirmatively permit such transfers, as long as there is no specific prohibition against them (Estate of Max J. Gorby, 53 T.C. no. 12 (1969); Landorf v. the United States, 408 F.2d 461 (Ct. Cl. 1969)). It has also been held that if the state law and group policy do not prohibit an assignment, a contrary clause in the certificate will not be given effect (See Gorby, cited above).
However, an assignment prohibition in the group policy itself will be given effect (Estate of Sidney F. Bartlett, 54 T.C. no. 153 (1970)). Since the issuance of R.R. 69-54, most states have enacted legislation expressly permitting the assignment of group life insurance. After the assignment of a group term life insurance certificate, the premiums are generally paid as before (i.e. either entirely by the employer, or on a contributory basis with the employee).
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