Ever since the Department of Treasury issued Proposed Regulations in September 2010, there has been increased awareness and “hype” surrounding the use of Series LLCs and their accompanying Special Business Units (“SBUs”) for the formation of captive insurance companies. It seems that many captive providers think this new structure is “better than sliced bread.” In our view, it is just bread.
A Series LLC is a Special Purpose Captive allowed under the captive insurance statutes of a few states, most notably Delaware. The Special Purpose Captive acts as a “core” company under which are created SBUs, with each SBU insuring a different company (or each insuring different risks of one company). Although each SBU is managed by the core company, for tax and legal purposes, each SBU is “owned” by the persons who bear the “economic benefits and burdens of ownership” in the SBU.
The Proposed IRS Regulations, for the first time, contemplates recognizing cells and SBUs as “stand alone” corporate entities for tax purposes, allowing each of them to make elections such as those available under section 831(b) of the Code. (Although the Service has not yet issued Final Regulations, every indication is that they will do so soon with few changes, if any from the Proposed Regs). This has created some of the hype about SBUs.
Section 831(b) of the Code allows an insurance company with no more than $1,200,000 in annual premiums to exclude those premiums (and thus the net underwriting profits) from taxation. An insurance company choosing to take advantage of this section must attach a written election to its first tax return (an1120-PC). Section 831(b)(2)(B) of the Code sets forth complex “attribution rules” that must be carefully followed so that two or more captives (or SBUs) are not deemed to be owned together, thus adding their gross premiums together and perhaps violating the annual $1,200,000 limit for electing insurance companies.
So, do SBUs work for section 831(b) captives? The answer is “yes,” but using the Series LLC structure does not offer as many advantages as some providers would like you to believe.
As of January 1, 2010, there is a new way to pay your long term care premiums with tax-free withdrawals from Non-Qualified Annuities. The Pension Protection Act went into effect 1/1/2010 and provides yet another incentive from the government to encourage citizens to protect themselves against the devastating effects of a long term care situation.
Typical Funding Strategies For Long Term Care Insurance
I have many clients who have used funds from a dedicated investment to fund their long term care insurance premiums. The logic is certainly there in using this strategy. We work our whole lives to accumulate our nest egg which serves two primary purposes. First and foremost we save our whole lives so that we can have money to support our lifestyle. For many, this means we use the money to supplement our income and for such things as home improvements, travel, and spoiling grandkids. In other words, we save money so that some day we have the money to use for whatever we would like to use it for.
But secondly, we save for things we don't want to spend money on but may have to because of an unexpected emergency. So our nest egg also represents "security." Water heaters blow up, dental bills appear out of nowhere, and cars need repairs.
The greatest threat to our security is a long term care situation. Suddenly, the emergency changes from thousands of dollars to hundreds of thousands of dollars. So instead of using the entire nest egg to protect ourselves, why not take a small amount of the interest or dividends that the investments generate to fund long term care insurance? Up until now, the use of this money has typically been subject to taxation, but for some, there is a new tax-free option available.
As the author of this article I have an honest confession to make. In doing so, it is my hope that you will read its content with greater receptivity as you realize how near and dear this issue is to me.
It's been ten years since the day I straddled two medical-quality scales and discovered the monumental 467-pound challenge that lay ahead of me. Ten years ago I turned my very existence in a completely new direction as I began my journey into a state of rediscovered health and well-being. You see, I'd been living a life of profound hypocrisy. My personal health and public career as a physician didn’t jibe. Daily I gave medical advice while constantly having to qualify my own overweight, out-of-shape body with the words "Do as I say, not as I do."
It's not that I didn't recognize I was severely overweight — there were daily reminders. A 60-inch waist makes for a very limited wardrobe. I couldn't fit into an airplane seat, wear shorts, or climb a flight of stairs without becoming winded. I dreaded going to an unfamiliar restaurant, worrying I might not fit into the booth or chairs. Diabetes and high blood pressure were lurking around the corner and were inevitable consequences that I would soon have to deal with. I needed to make a change, but I kept making excuses and rationalizing the error of my ways. Until a bout with testicular cancer forced me to deal with the consequences of my poor health decisions. Though the cancer was unrelated to my excess weight, it caused me to confront head-on my own mortality for the first time in my life. As a result, I suddenly saw my physical health as a precious gift that I could no longer take for granted and a gift that I was now eager to take much better care of. When I recovered from the cancer, I decided I could no longer go on killing myself with an avalanche of calories and a lack of physical activity.
In early 2001 I stepped off the scales with a newfound inspiration and determination and set out for a whole new way of life. After much reflection and personal inventory taking, I decided to take an unconventional approach — I’d combine doing something good for my health — diet and exercise — with something I loved — baseball. It would be my "radical sabbatical." Over the course of the next year, I traveled over 38,000 miles in an old RV, visiting every state in the continental U.S.A. and every Major League ballpark. I enjoyed over 110 games, but rather than feasting on junk foods, I stuck to an aggressive, medically supervised meal plan that still provided me the basic and essential nutrition I needed. Through that diet, coupled with consistent and intense daily exercise, I lost a total of 270 pounds. And it's not about losing the weight. It's about losing and never finding it again that really matters. Today, exercise and healthy eating are a major part of my life. I'm enjoying focusing on my personal fitness and encouraged by the slow but steady improvement in my body's shape and composition. Whatever pleasure I lost from overeating has been replaced many times over by the blessings and opportunities that result from my transformation. The old saying really is true: "Nothing tastes as good as healthy feels."
There are two primary areas of concern for Employee Stock Ownership Plan (ESOP) fiduciaries:
- Department of Labor (DOL) investigations and enforcement actions; and
- Civil litigation
The Employee Retirement Income Security Act of 1974, as amended (ERISA) provides that each plan must have two types of fiduciaries. Each plan must have a trustee for the plan's assets and each plan must have an administrator. The administrator is often referred to as the plan administrator and may be the committee appointed by the company or may be the company itself if the employer hasn't appointed a committee or individual to serve this function. Some of our comments below provide some insight into who should be serving in these capacities and how they should comport themselves to minimize exposure in these areas.
Department of Labor (DOL) Investigations And Enforcement Actions
Contrary to a common misperception, the DOL does not "audit" retirement plans. The IRS audits plans. The DOL investigates plans. This distinction is important because a DOL investigation is the front line action for the DOL's regional offices of its Employee Benefits Security Administration (EBSA). The DOL's regional offices investigate plans to determine whether there are ERISA violations. In brief, the DOL:
- Can compel compliance with the statute to cause ESOP fiduciaries to correct fiduciary breaches, prohibited transactions, or to improve their plan operations to prevent potential problems.
- Does not unilaterally "impose" penalties for noncompliance, such as the IRS may impose taxes, penalties and interest for Internal Revenue Code violations.
- Derives its ultimate enforcement ability from litigation it may bring to enforce ERISA provisions. In such actions, the DOL is represented by the Department of Justice Office of the Solicitor (Solicitor). After investigations have closed without a satisfactory result in the DOL's view, the Solicitor's regional office in the given DOL region will be called upon to represent the DOL in litigation.
Although litigation may be brought to enforce the provisions of ERISA, the DOL looks for or demands voluntary compliance in the overwhelming majority of situations. In fact, only a limited number of cases are referred to the Solicitor's office each year. However, the DOL may request assistance from the Solicitor's office where certain legal issues are involved in an investigation or where the Regional Director wishes to negotiate forcefully from a posture that suggests litigation may be imminent if the DOL does not achieve the results it seeks.
As long term care insurance gains more traction as a critical component of everyone’s retirement planning, more and more employers and associations are offering group long term care insurance to their employees and members. Unfortunately, most people just assume a group plan is better than an individual plan. This is rooted in the concept that the more people who subscribe to a benefit, the lower the premium should be for the group. Also, we tend to have somewhat of a blind allegiance that our employer is looking out for our best interests when they shop the market for an insurance product to offer their employees. So let's look at the differences in benefits and premiums between a group and individual plan.
The People Who Benefit From Group Plans Are People In Bad Health
First off, the idea that long term care insurance should be lower in premiums for a group is a fallacy. As Kiplinger's Finance states: “group plans have very limited underwriting, which means that healthy people end up paying the same price as less-healthy people. If you have medical conditions, this could be a wonderful deal. But, if you're healthy, you can do better with an individual policy that's tougher on medical issues.” Most group plans have what is referred to as "Modified Underwriting" which means that anyone within the group is guaranteed coverage if they can answer a few "knock-out" questions. The "knock-out" questions are questions designed to identify the worst of the worst in terms of medical conditions such as: have you been diagnosed or treated for Alzheimer's, Parkinson's, or are you HIV Positive. The group policies typically do not check medical records nor conduct personal telephone interviews. As the Kiplinger's Article also states: “most group plans do not offer special rates for people in particularly good health nor discounts for couples." With individual plans, there is always an additional 10% to 15% discount for people who would qualify for the "Preferred" rate and between a 20% to 30% discount for any couples who sign up together.
Disgusted by physicians' misapplication of the AMA Guides for fun and profit? Angered by the flippant manner in which many doctors regularly find a "more accurate" impairment percentage and cover their tracks by citing Almaraz/Guzman? Outraged by the fact that every time you turn around you're hearing from a so-called "DFEC expert" who wants to rebut the DFEC on your dime?
Think you've seen enough PD shenanigans for a lifetime of adjusting?
The PD times are a'changing1, and they're getting worse!
The WCAB has paved the way for Applicants to get 100 percent PD awards:
- without being 100 percent per the AMA Guides and 2005 Permanent Disability Rating Schedule,
- without rebutting the AMA Guides via Almaraz/Guzman, and
- without retaining the services of a "DFEC expert." And, via this novel approach, once the 100 percent is awarded, you do not get Labor Code §4664 apportionment ... even if there was a prior PD award for the very same body part(s)!
The Labor Code
Where does all this trouble come from?
Labor Code §4662!2
Most of us think of Labor Code §4662 as that "statutory exception" law that provides for 100 percent PD in four-and only four-scenarios:
- Loss of both eyes or the sight thereof.
- Loss of both hands or the use thereof.
- An injury resulting in a practically total paralysis.
- An injury to the brain resulting in incurable mental incapacity or insanity.
If limited to these four scenarios, LC §4662's applicability is limited to a very small number of cases. But the WCAB has recently expanded LC §4662's conclusive presumption of total disability to far more cases than most of us had foreseen.
The workers' comp claim you're handling is accepted and, as you conduct your discovery, you learn that the injured worker cannot demonstrate that he/she is legally entitled to work in the U.S., or — at deposition — refuses to answer questions pertaining to "legal status." Are these facts relevant in terms of vouchers and the 15 percent PD "bump down"?
If handled correctly, you should not be liable for a voucher! If handled correctly, you should be able to obtain a 15 percent PD "bump down."
Statutes & Regs
The relevant codes and regulations (always exciting reading) are:
Labor Code § 4658(d)(1) This subdivision shall apply to injuries occurring on or after the effective date of the revised permanent disability schedule adopted by the administrative director pursuant to Section 46 ...
(3) (A) If, within 60 days of a disability becoming permanent and stationary, an employer offers the injured employee regular work, modified work, or alternative work, in the form and manner prescribed by the administrative director, for a period of at least 12 months, and regardless of whether the injured employee accepts or rejects the offer, each disability payment remaining to be paid to the injured employee from the date the offer was made shall be paid in accordance with paragraph (1) and decreased by 15 percent ...
Regulation 10117. Offer of Work; Adjustment of Permanent Disability Payments. (a)(3)>
... "employer shall use form DWC-AD 10133.53 (Section 10133.53) to offer modified or alternative work, or form DWC-AD 10118 (Section 10118) to offer regular work.
Labor Code 4658.6. The employer shall not be liable for the supplemental job displacement benefit if the employer meets either of the following conditions:
(a) Within 30 days of the termination of temporary disability indemnity payments, the employer offers, and the employee rejects, or fails to accept, in the form and manner prescribed by the administrative director, modified work, accommodating the employee's work restrictions, lasting at least 12 months.
(b) Within 30 days of the termination of temporary disability indemnity payments, the employer offers, and the employee rejects, or fails to accept, in the form and manner prescribed by the administrative director, alternative work meeting all of the following conditions ...