2. For Producer Use Only – Not for Use with General Public
Successful
Innovative
Experienced
CJA is a national employee benefits company
CJA specializes in the design and marketing of innovative
insurance products and employee benefit plans for the small
business and estate planning markets.
CJA has over thirty years of experience working with leading
insurance companies. Our actuarial, marketing, legal and
administrative offer expert support and expertise to help you in
the field.
We help our partners become more successful with complex
employee benefit programs.
About Us
3. For Producer Use Only – Not for Use with General Public
Where are we today?
• State of economy
– Concern for retirement and
income in a down market
– Concern with discretionary
income
– Cost of living rising
– Inflation on the rise
– Housing market
– Fuel costs
– Uncertainty
4. For Producer Use Only – Not for Use with General Public
Where are we today?
So what does that mean for us as planners?
Different motivations for clients
Time to re-evaluate
Additional tax burden
5. For Producer Use Only – Not for Use with General Public
Qualified Retirement Plan
• Take monthly pension income (taxable)
• Plan can provide monthly benefit
• Roll assets to an IRA
Tax-leveraged Medical Account for retirement
• Titanium Plan-Single employer welfare benefit plan
• Tax deductible and Tax deferred
• Tax free reimbursements for medical expense at
retirement
Section 79 –Ultimate 79
• Tax deductible
• Addition/alternative to qualified plans
We have solutions to help your clients
6. For Producer Use Only – Not for Use with General Public
Section 79– How it works at a glance
7. For Producer Use Only – Not for Use with General Public
Section 79– How it works at a glance
Section 79 is not just group insurance
Regulation say that plan can provide “permanent benefits” as well
What is a permanent benefit:
“…an economic value extending beyond
one policy year (for example, a paid-up or
cash surrender value) that is provided
under a life insurance policy.”
Simply stated:
The plan may use cash value life
insurance contracts
8. For Producer Use Only – Not for Use with General Public
Section 79-Ultimate planning tool
How it works
Death
Benefit and
Tax-free
withdrawals
Pre-tax
dollars
Offers non-discriminatory benefits to employees
Typically only key employees/owners opt for
Permanent benefit
Indexed Universal
Life permanent
policy
Corporation sets up a Group Section 79 Plan
5 Year commitment*
*when using certain products designed for Section 79.
9. For Producer Use Only – Not for Use with General Public
Section 79– How it works at a glance
• Not another retirement plan
– Tax deductible contribution for corporation
– 5 year commitment
– Tax free income
– Permanent life insurance
– Competitive product with guarantees
– flexibility
• Not a “new” financial planning tool
10. For Producer Use Only – Not for Use with General Public
Section 79– How it works at a glance
Can only be adopted by a C Corporation
11. For Producer Use Only – Not for Use with General Public
Section 79– How it works at a glance
•100% deductible to Employer under §162*
•Employee excludes value of up to $50,000
of pure insurance protection (IRS Table I Term Cost)
•Employee must include
Value of Permanent Benefit
Value of Insurance protection > $50,000
•Bottom line: Employee gets to exclude
35-40% of premium
•Plan is terminated after 5 years
Key Planning Points:
12. For Producer Use Only – Not for Use with General Public
Section 79
Section 79 Group Life Insurance
[Providing Permanent Benefits for Key Employees]
PROGRAM CENSUS AND BENEFIT SUMMARY
For Program Year 10/18/2008 through 10/17/2009
OWNER
INITIAL DEATH
BENEFIT
FIRST YEAR
PREMIUMEMPLOYEE AGE SEX RATING SALARY
Valued Client 45 Male Preferred Yes $208,381 $2,083,810 $100,000
Employee 35 Male Preferred No 40,000 400,000 13,554
13. For Producer Use Only – Not for Use with General Public
Section 79
Section 79 Group Life Insurance
[Providing Permanent Benefits for Key Employees]
SUMMARY OF PROGRAM BENEFIT OPTIONS
For Program Year 10/18/2008 through 10/17/2009
OPTION A OPTION B OPTION C
PERMANENT INSURANCE TERM INSURANCE $50,000 TERM
Premium
Assumed
Taxable
Income to
Employee*
Guaranteed
Value
Taxable
Table I
Cost
Premium
Taxable
Table I
Cost
Premium
Taxable
Table I
Cost
EMPLOYEE
Valued Client $100,000 $57,453 $50,754 $3,377 $2,236 $3,661 $159 $0
Employee 13,554 7,647 6,995 347 182 378 75 0
14. For Producer Use Only – Not for Use with General Public
Section 79
Section 79 Group Life Insurance
[Providing Permanent Benefits for Key Employees]
FIRST YEAR SUMMARY OF COST FOR CORPORATION
(Assumes employees waive benefits in excess of $50,000 minimum)
For Program Year 10/18/2008 through 10/17/2009
Annual Insurance
Premium: $100,159
1st. Year Trust Fee: 500
Total Annual Contribution: $100,659
Tax Savings @ 40.00%:* $40,264
1st
YEAR AFTER TAX COSTS:* $60,395
15. For Producer Use Only – Not for Use with General Public
Section 79
Total after tax contributions: 301,975
Total tax due from W-2: 135,466
Net cost to owner: 437,441
Total tax free withdrawals: $3,557,380
OPTION A
PREPARED FOR: Valued Client
Annual Premium: $100,000
Assumed Tax Rate: 40.00%
Death Benefit: $2,083,810
Policy
Year
Age
Planned
Premium
Assumed
Employee
Taxable
Income1
Employee
Net Tax on
Income1
Tax to
Employee1
Cash
Surrender
Value
Policy
Loans2
1 45 100,000 60,831 24,332 24,332 0 0
2 46 100,000 63,823 25,529 49,861 69,547 0
3 47 100,000 67,272 26,909 76,770 157,227 0
4 48 100,000 71,175 28,470 105,240 251,759 0
5 49 100,000 75,566 30,227 135,466 353,779 0
10 55 0 0 0 0 539,703 0
20 65 0 0 0 0 1,257,012 177,869
40 85 0 0 0 0 199,177 3,557,380
16. For Producer Use Only – Not for Use with General Public
Section 79
This is the equivalent of
8,893,450*
of income from a retirement plan.
*Assuming a tax rate of 40%
17. For Producer Use Only – Not for Use with General Public
Section 79- practical applications & case studies
• Business transition
• Family business
• Physician Groups
• Multiple Business Owners
• Use Section 79 to create segregated funds
for buy-out of business
• Allow tax leverage and flexibility
• Defined benefit plan too costly
Business transition
Challenges:
Cost of the plan design with employees too high for current employer
Both owners wanted additional future income
Needed to equalize benefits to both owners.
18. For Producer Use Only – Not for Use with General Public
Section 79- practical applications & case studies
BENEFITS AT AGE 65
DEATH
BENEFIT PREMIUM
ANNUAL
LOAN
TOTAL
LOANS
REMAINING
BENEFITAGE SALARY
Wiley 48 $200,000 $2,000,000 $53,058 $157,071 $3,141,420 $498,072
Bird 34 $100,000 $1,000,000 $32,728 $70,519 $1,410,380 $223,272
$85,786
After tax cost at 5
years $257,358
Total tax free loans $4,551,800
% to Owners
Defined Benefit Plan 81.7%
Section 79 Plan 97.6%
Business transition
19. For Producer Use Only – Not for Use with General Public
Section 79- practical applications & case studies
• Numerous Highly compensated
employees
• Employee cost too high for company
• Use Section 79 to create plan utilizing class system
• Provided key employees with benefits at reasonable
cost
20. For Producer Use Only – Not for Use with General Public
.
Section 79-practical application & case studies
Class system solution
Challenge:
Older employees drove the cost of the plan too high for current employer to implement
21. For Producer Use Only – Not for Use with General Public
Section 79- practical applications & case studies
• Implemented Section 79 Program
Owners premium $279,000 – 93.6% of benefits
Rank and file cost $19,000
Total Program cost $298,000
• Owners each received over $2,000,000 in Death
benefits
• Provided key employees with benefits based on their
functions and positions at reasonable cost—allowed
important employees to receive greater benefits
(bonus for Table I)
Class system solution
22. For Producer Use Only – Not for Use with General Public
Must be adopted by a C Corporation
•Section 79 is for “employees”
•The following are not “employees”
Self-employed individuals
Partners
2% owners of S corporations
•Owner must have W-2 income
from a C corporation to
be a participant
Section 79- Key considerations
23. For Producer Use Only – Not for Use with General Public
Who do you know….
• Owns a small profitable business
• Complains about paying
income tax
• Incomplete Estate Planning
• Interested in wealth transfer and flexibility
24. For Producer Use Only – Not for Use with General Public
Contacts
Regional VP List
Tom Bacharach, New England Region
800-256-0164
tbacharach@cjamarketing.com
David Jones, West Coast Region
800-476-7964
djones@cjamarketing.com
Ken Shapero, Mid-Atlantic and Southeast Region
954-688-4063
kshapero@cjamarketing.com
Mike Seltzer, Mid-West Region
800-685-8317
mseltzer@cjamarketing.com
25. For Producer Use Only – Not for Use with General Public
Resources
www.cjamarketing.com
www.plangen.com
Due diligence materials
Brochures
Sample Illustrations
Q & A’s
Webcast replays
Websites
CJA is a national employee benefits company. We specialize in the design and marketing of employee benefit plans for the small business and estate planning market. We have over thirty years of experience in the pension planning market and partnering with leading insurance companies. Our actuarial, marketing, legal and administrative experts help our partners become more successful with complex employee benefit programs. Our home office is in Chicago and in addition we have offices and sales VP’s throughout the nation to help you.
We are all here as financial planners. Most of us have a history of working with successful business owners, clients that have a high net worth, for the most part the are financially savvy and are well-educated. In the past, we’ve been able to help our clients enjoy their success and protect their hard earned assets as best we could. But the recent past has been a bit different. All over the place, we hear the state of the economy is horrible and uncertain, are we in a recession?, the list goes on and on.
What does that mean for us as planners and how is that affecting our sales? It used to be that our sales were typically “greed” sales—motivated by tax deductions. Now we’ve seen our clients operating from a place of fear-or uncertainty. They want to limit their risk in the market and have SECURITY in their future. Many clients are contacting us and asking us about the plans that they didn’t want to adopt before because they didn’t appreciate the guarantees that we were offering. We are re-evaluating their situation and current retirement plans and making necessary adjustments. Not only are clients fearful of the losses they are worried that the money they are making will be taxed at a higher rate depending on what happens with the election.
With this in mind, first and foremost, we help our clients re-evaluate their current retirement plan. This includes qualified pension plans, their estate plan, and ongoing life insurance needs. We have over 35 year history in qualified plan administration and employee benefits and know how important a well-rounded planning is.
Section 79 of the Internal Revenue Code permits a corporation to provide group term life insurance for full time employees. This cost is fully deductible to the corporation. U.S. Treasury Regulation under IRC Section 79 also states that group term insurance can include a “permanent benefit.”
Section 79 is not just group insurance. U.S. Treasury Regulation under IRC Section 79 also states that group term insurance can include a “permanent benefit.” simply stated. We can use a permanent cash value contract.
Lots of companies already have a group insurance plan set up—they just don’t know it. A death benefit attached to group heath insurance, etc., but they aren’t taking advantage of the full benefits allowed in the section of the Code. The “permanent benefit” is where our Ultimate Section 79 plan comes into play. There are many benefits, to name a few: Pre tax dollars, tax-deferred growth, and tax-free income (At any point after plan completion—subject to the needs of your clients– not 591/2) and a 5 year commitment.
Why consider Section 79 as a planning tool:
Tax deductible contribution for corporation
5 year commitment
Can access tax free income prior to age 591/2
Permanent life insurance
Competitive product with guarantees
I
Lets take a look at how the plan usually plays out: The company has to offer non-discriminatory benefits to all employees. In practice, there a basically 3 levels of benefits in shown to employees and they have the option to elect what works best for them: First, the Code permits a corporation to provide up to $50,000 of group term life insurance for full time employees at no cost to the employee. This is what most of the employees choose through the plan. Second, they could choose a full face amount of benefit, but with term insurance—they have to pay tax on the Table I costs. Or Third they could choose the permanent benefit. The cost of this permanent benefit that is paid by the corporation will appear on the employee’s W-2 as “other compensation.” This amount that is includable in taxable income to the employee is typically equal to 60-65% of the premium. Therefore, the net result is tax leverage on 35-40% of the contribution. Although all employees have the right to choose the type of coverage they desire, in most plans, rank and file employees opt for non-permanent coverage to minimize their tax liability and key employees and owners elect the permanent benefits. This allows key employees and owners to reap the benefits of the plan with minimal cost associated with rank and file employees.
So to recap: Plan is 100% tax deductible to the corporation, plan is terminated after 5 years and owner has numerous planning opportunities:
Tax free income, wealth transfer, estate planning, and the living benefit options of the product.
Let’s take a quick look at a sample group. 2 employees-one owner.
On our proposal, we can show the 3 options available to the employees. You can see the difference in benefits and tax consequences of the 3 options we discussed before and why the rank and file employees often choose the $50k benefit.
Assuming the rank and file chooses the free benefit, the life insurance contribution is $100, 159. Including fees, the after-tax contribution for the corporation is $60,395.
So we’ve put in a little less than $60,500 per year for 5 years. Which totals 301,975. The owner had to pay tax on the economic benefit of roughly $25,000 for 5 years for a total of $135,466. The real net cost then is $437,441. He’s received a paid up permanent policy of $2,083,810 and the opportunity for tax-fee income. If he starts withdrawals at age 65, he get almost $180,000 of tax free income for 20 years for a total of $3,557,380.
We began with the original census that was provided to us and created a plan spending approximately $500,000.
In presenting the plan to the client and discussing some overall objective of the owners, we learned some valuable information that helped us meet their specific goals.
During the conversations with the agent, they indicated some key points:
One of the owners was considering the sale of the business to other partner within 5-7 years as he was approaching retirement soon
Partner wanted to continue in the business upon his retirement
Interested in any options to assist with buying the business upon his retirement
Need for funds for buy out was more eminent than funding retirement right now.
They also had monetary constraints as they were still continuing to invest in the growth of the company.
Bird reduced his salary from $200k down to $100k and contributed the $100k to the Section 79 program for the company. They had agreed that the value of the business was roughly $1 Mil currently but projected the business worth to be closer to $2 Mill in the 17 years at Wiley’s retirement. They had an separate agreement of that in case of death prior to age 65 in regard to transition and proceeds. At 65, when Wiley retired he would receive 1.7 million more than Bird would receive at retirement. That plus the 265k that was contributed for Wiley would equal a payment of approx $2Million for the business. There was minimal cost for the employees to implement this plan and within 5 years of funding the section 79 and re-evaluating they could make adjustments to their qualified plan if they wanted.
When looking at original census, we knew that a defined benefit plan would be too costly for the highly compensated employees.
Our Regional Vice Presidents would like to meet each one of you to continue this discussion. We travel frequently throughout our regions and would appreciate the opportunity to introduce ourselves. Please call us and let us make 2006 a great year end. Our contact information is listed above and we will be following up with you as well. You can also go to our website at www.cjamarketing.com to learn more about who we are.
Thanks for joining us for this presentation. We know your time is valuable and we hope that this was beneficial for you.
