Presented by Paystrubmakr.com By John Wolf and Tom Cullen CPA
We at Paystubmaker keep sending you the best information for your Payroll and Human Resources management.
Retired Lives Reserve:
The retired lives reserve fund is generally an extension of a group term insurance plan. Under such a plan a reserve fund is set up, and actuarially determined contributions are made to the fund. At retirement, the reserve fund uses the accumulated contributions to buy term life insurance protection for the employee during retirement. These plans tend to benefit the principles of the corporation since they are most likely to remain with the company through retirement. Revenue Ruling 68-577 Under R.R. 68-577, for the company to be able to deduct the premiums, the following requirements must be met:
(1) There must be level annual payments to the fund that is an actuarial determined;
(2) The funds must be used exclusively to pay group term insurance premiums as long as any employee is alive;
(3) The estimated cost of funding such a plan must be allocated over each employee’s working life;
(4) The plan guarantees that no insurance benefits will ever be paid but only pays the premiums.
The employees are not taxed on the current contributions to the reserve fund since they realize no current benefit and are not assured of any benefit in the future. Formerly, §79 specifically excluded retired employees from the imputation of income rules. As a result, there was no imputation of income, and Table 1 did not apply. Effective for tax years beginning after 1983, the same rules that apply to active employees apply to retired employees. Thus, the cost of the first $50,000 of group term coverage is tax-free. However, the cost of coverage of more than $50,000 is taxable in the year coverage is received to the extent it exceeds any contribution made by the retired employee (§79(e)). Nevertheless, employer-paid premiums for group term insurance for retired disabled employees are still 100% tax-free even if coverage exceeds $50,000.
For a closely held corporation, the advantages of providing group term life insurance are that highly paid executives often need continual insurance benefits for purposes of maintaining estate liquidity or continuation of income. In other cases, the need for life insurance may continue even if the corporation
is liquidated. Since group term life insurance is seldom converted to permanent insurance at retirement because of the high cost, it is advantageous to the employees to have the corporation accumulate in advance, the funds necessary to continue the group term coverage.
At these old times, Payroll could be done in Cash and no Stubs. Today we need a faster and better way.
Comparison With Other Programs:
Before TRA ‘84, there was considerable disagreement between insurance agents and some financial planners as to the merits of retired lives reserve plans. One of the features of these plans that must be adequately communicated to an employer is that the funds are essentially locked in. They cannot be withdrawn during the employee’s lifetime. This is somewhat of a disadvantage since it deprives the employer of the use of the funds in case of financial need. Therefore, some advisors recommend the use of split-dollar life insurance or executive bonus whole life plans as a substitute for retired lives plans.
An executive bonus whole life plan involves a cash-value type policy that is owned by the executive, with premiums paid by the corporation on a tax-deductible basis. The executive must report the premiums as additional compensation. Executive bonus plans funded by universal life policies
permit the insured executive to make tax-free withdrawals up to the total cost basis to offset the income tax paid on the reported premiums.
Disclaimer: John Wolf and paystubmakr.com are making a total effort to offer accurate, competent, ethical HR management, employer, and workplace advice. We do not use the words of an attorney, and the content on the site is not given as legal advice. The website has readers from all US states, which all have different laws on these topics. The reader should look for legal advice before taking any action. The information presented on this website is offered as a general guide only.